mml - an investors view!

I note the recent plethora of technical analysis posts, but given the daily volume due to short-term trading, it is hardly surprising that this should be so!

However, I suggest that a fundamental view should be given equal weighting, particularly when there has been a significant underlying reason that is likely to impact the stock price going forward.

As we know, the Co-O mine has spent 12 months under significant development activity as the company expands capacity to reach it's 200kozpa target. This has meant serious inward investment at the processing plant, a new shaft down to 350m to the East of the mine and even an uplift to the Baguio shaft following the unfortunate fire.

But what has been equally significant has been the investment in underground development (ie strike drives, raises, etc) necessary to open new stoping areas ready for mining.

Much of this new development has been in ore and expensed by processing through the mill. However, such development ore, by definition, is more heavily diluted by waste than normal stope ore. Hence, overall head grade has been lower with commensurate lower Au oz produced.

But all this has changed from this current quarter and we can now look forward to a ramp-up in both ore tonnage and grade as the new stopes are opened up and the additional lifting capacity of the Saga shaft comes into play.

In simple terms, mining economics is largely about total ore costs per tonne relative to revenue per tonne. This boils down to a simple function of gold price, costs/t, and recovery%.

For Co-O the costs/t have been as follows:
FY10 c. $92/t, FY11 c. $72/t, FY12 c. $62/t
Given the economics of scale it would appear to me to be reasonable to assume that costs/t will remain relatively static at (say) $64/t for the near future.

Recovery was consistently at 94% over FY10-11 but dropped to 92.5% over FY12 as lower grade development material was processed through the mill. I assume that with fresh stope ore recovery will return to circa 94%.

So, with gold at US$1684/oz, Recovery at 94% and costs/t at US$64/t, the break-even grade at Co-O is only c. 1.25g/t.

Average grade over FY12 was 8.1g/t because of dilution due to development ore and represented a profit per tonne of c. US$343/t (ie cost/oz of c. US$249/oz).

Average grade in FY10 was 17g/t and in FY11 it was 12.6g/t. Taking a conservative view of a return to fresh ore grades of 10g/t (or better) the profit/t ore moves up to US$445/t (cost/oz of c. US$199/oz).

Resultant is: rising tonnage of fresh stope ore at a rising grade and with an improving recovery% - ie all positive!

I therefore estimate FY13 EPS may rise to A$72c/share and to A$134c/share by the end of FY14.

So speaking as an unabashed fundamentalist, value hunter, I am increasing my core holding in advance of rising earnings given the high probability of execution success by a company that tends to under-promise and over-deliver.

I wish all holders the best for 2013.
AIMHO of course.
CPDLC