MZI : a turnaround investment opportunity

MZI : a turnaround investment opportunity

Hi guys,

I consider MZI as a great turnaorund investment opportunity. Before explaining my rationale, first of all, what is a turnaround investment/business ? some interesting definitions :

What is turnaround investing

https://internationalbanker.com/brokerage/what-is-turnaround-investing/

Quote :
"One of the main facets of value investing is turnaround investing. This involves taking a position in a stock that has fallen out of favour—often due to bad news initially associated with the company—and is therefore not perceived by the majority of investors to be a worthwhile consideration. Profound financial and operational issues are likely to have severely dragged down the company’s stock price and its business model. A turnaround stock, however, will continue to have a higher intrinsic value than asserted by the majority. This means that it remains an attractive investment option as its stock price is likely to recover—or “turnaround”—in order to reflect this true value."
End of Quote


What does turnaround mean

https://www.investopedia.com/terms/t/turnaround.asp

Quote :
"A turnaround is the financial recovery of a company that has been performing poorly for an extended time. To effect a turnaround, a company must acknowledge and identify its problems, consider changes in management, and develop and implement a problem-solving strategy"
End of Quote


IMO, the year 2018 is the turnaround year for MZI, thanks to the (hopefully to be announced soon) successful completion of refurbishment/upgrade/optimization/expansion of the :

-MFU (Mine Feed Unit) in Keysbrook
-WCP (Wet Concentrater Plant) in Keysbrook
-MSP (Mineral Separation Plant) in Picton

This would allow increased recoveries, higher levels of production and lower per tonne costs of (Zircon/Lucoxene 70/Lucoxene 88) products. See "pages 13 and 16" from the 22 march 2018 presentation :

Increase in ore throughput to 5.25Mtpa (VS previous 4.50Mtpa)
offsets high proportion of fixed costs (70%).

25-30% targeted reduction in unit costs

Annualised steady state HMC (Heavy Mineral Concentrate) production
of 140,000tpa (VS previous 110,000tpa)

Saleable production per year to increase to circa
96,000tpa (VS previous 62,000tpa)

These changes would allow cash flow positive operations (IMO Minimum 20M$ earnings per year (5M$ per quarter) up to 40M$ earnings per year (10M$ per quarter depending on achieved basket price per tonne and levels of minimization of costs per tonne realized).

I evaluate total costs at 13.5M$ per quarter + 1.5M debt and interest payments, so give or take any revenue beyond 15M$ per quarter would constitute net income.

Assuming 25.000 tonnes of saleable products per quarter at an average basket price of 1000 AU$ per tonne (around 800 US$ per tonne which is achievable IMO given rising trend of rutile and zircon prices) that is 25M$ revenue per quarter translating to 10M$ profits per quarter and 40M$ profits per year.

At 12x earnings multiple, this would translate to 480M$ market cap fair value, almost a 20 bagger from current levels.

IMO MZI is achieving this turnaround in its business through the implenetation of 2 strategies : 1- major change in Management/leadership transition, and 2/ implementation of 5.25Mtpa expansion plan of production (adopted just after change in management).


Regarding change of management team, for those interested, this was the timeline :

22 August 2016 : appintment of a new chairman of the board
Mr Rod Baxter succeeds the long serving (for 10 years) retiring chairman Mr Mal Randall.
It should be noted that Mr Rod Baxter served a 2 years Director term in MZI board before being appointed as a chairman (which IMO helped ensure a smooth transition).

07 November 2016 : appointment of an interim Managing Director/CEO + succession of Chief Operating Officer
Dr Steve Wards succeeds Mr Trevor Mathews who served (for 5 years) as a Managing Director and CEO of MZI. The search for a new permanent Managing Director/CEO begins.
In addition, Mr Kevin Watters has been appointed as permanent Head of Operations, succeeding Chief Operating Officer Mr Mike Ferraro.

Quote from the ASX announcement :
"Mr Matthews oversaw the development of MZI Resources’ Keysbrook Mineral Sands Project, with the Project successfully commissioned in December 2015. With the project now undergoing a transformation from an early-stage operation to ramping up to design capacity with steady state production, the Board and Mr Matthews mutually agreed the time was right to transition to a new Managing Director.

To begin this process, MZI Resources Independent Non-Executive Director Dr Steve Ward has been appointed as interim Managing Director while an executive search for the role is conducted."

03 May 2017 : appointment of a new Managing Director/ CEO
Mr Martin Purvis succeeds the interim Managing Director/CEO Dr Steve Ward.

Quotes from the ASX announcement :
"Mr Purvis will succeed Dr Steve Ward, who has been Interim Managing Director and Chief Executive Officer since November 2016, during which time the Company has completed significant plant upgrades and associated optimisation activities at Keysbrook."

"Welcoming Mr Purvis to MZI, Chairman Rod Baxter said: “We are delighted to appoint someone with Martin’s energy, leadership ability and extensive natural resources management expertise. Martin will be a tremendous asset for MZI as we look to build on the strong production base we have established at Keysbrook, and further consolidate and grow our status as a major supplier of premium quality mineral sands products into a rapidly improving global market.” Mr Baxter said Martin’s skills and experience are well-suited to MZI’s requirements, as it embarks on the next stage of its journey."


18 september 2017 : beginning the implementation of the new increased production plan (5.25Mtpa throughput VS previous 4.50Mtpa)

Quote from the ASX announcement :
"MZI Resources Ltd (ASX: MZI) is pleased to announce it has implemented a higher throughput Operating Plan for the Keysbrook Project to deliver reduced unit cash operating costs and sustainable positive operating cashflow in FY2018.

The plan, approved by the MZI Board, is the result of detailed optimisation and independent reviews undertaken since April 2017 in support of the Company’s financial restructuring program targeted for completion in early 2018.

The Plan incorporates actual operating data generated since the start of operations at Keysbrook in late 2015. It also takes into account the greater than originally anticipated complexity and underlying costs associated with commissioning, debottlenecking and operating the Keysbrook Project. These factors have to date prevented the Project from achieving its targeted operational and financial performance, necessitating a review and optimisation of the Operating Plan.

This has identified a number of changes, including increasing ore throughput to an annualised rate of 5.25Mtpa, and associated incremental low-capex modifications to the Keysbrook flowsheet.

These changes are anticipated to increase saleable production by over 50% in FY2018 compared with FY2017 figures and reduce unit cash operating costs by approximately 25-30%.

Based on current product pricing and outlook, the Plan is forecast to deliver a moderate gross operating surplus for the current Financial Year. Once implemented, the changes are expected to deliver consistent and sustainable annual operating cashflows comparable with the original financial projections for the Project."




Happy multi-baagger hunting and investing to all !