Weekend reading on one that has done well in the past...

Weekend reading on one that has done well in the past week:

Altura Mining AJM/AJMOA: An Outstanding Opportunity
For the first time last Wednesday, I met [face to face] with the MD and another executive director (Paul Mantell) and I was impressed with what they had to say. AJM is a stand out company on my criteria of nearness to cash flow, quality management with a proven track record of success, and a suite of projects which can underpin long term growth and fuel multiple up-side in the share price.

Altura Mining was already a strategic long term investment in my portfolio and yesterday's meeting served to reinforce my belief in the future of the company. Here is a review of their assets and my valuation.

Management Team
Management have a good track record with prior involvement in the development of New Hope Corporation, an ASX listed company with a market capitalisation in excess of $4.0bn. James Brown, (Managing Director of Altura) was Business Development Manager for New Hope until 2005, whilst Paul Mantell (Executive Director of Altura) was the CFO and Company Secretary until he left in 2009. Both had spent more than a decade each building up the business of New Hope Corporation before they left so they have good credentials.

Mt Webber, Western Australia
Altura's 30% interest in the Mt Webber DSO JV should prove to be a valuable asset as the project moves towards production. Atlas (ASX Code: AGO) have said in a recent announcement (see ASX price sensitive announcement from 9th May, 2011) that they intend to build a Mt Webber Infrastructure Hub to support their target production of 12mtpa by the end of 2012. This is a huge vote of confidence in the Mt Webber DSO project and reinforces the substantial valuation and near term cash flow potential of AJM's 30% share of the joint venture. My valuation is based on the production of 42mt of DSO over a 15 year period at a full ramped up rate of 3mtpa.

At a $110 per tonne price the project would have an operating margin of $65/tonne with AJM's share being 900,000 tonnes or a margin of $59m per annum. Note that the current price which the company is assuming is $120 per tonne of DSO shipped.

I see three possible scenarios for the Mt Webber project:

The first scenario is that the project is developed as a JV with AJM contributing its share of capital for the project which would be expected to be about $12m. Under this scenario AJM may need to pay AGO a fee for the use of shared infrastructure.

The second scenario is that AGO offer to buy out AJM's share at Mt Webber through the payment of a substantial up front cash or cash and shares payment. In my opinion for this to occur the offer would need to be somewhere between $100m and the $205m net present value I have calculated for the project. Note I have not discussed any potential "sell out" price with management.

The third scenario is that AGO make a bid for AJM. Although this scenario is less likely, especially with management controlling 40-50% of the stock), it is possible that AGO could try to seize control of the company for $100 - $120m, carve out and keep the DSO prize and dispose of the remaining assets. Given the NPV in excess of $200m this is always a possibility whilst the market fails to place a more realistic valuation on AJM's shares.

One fact I deduced from the recent announcement of the expanded Lithium ground was that AGO were one of the vending parties to the agreement. This gives me some reassurance that the relationship with the team at Atlas is a good one and that they can work well together to develop Mt Webber.

Tabalong Coal Project, South Kalimantan, Indonesia
The Tabalong coal project has a JORC resource of 13.4m tonnes of high quality thermal coal. The capex for the project is relatively low at less than $10m which makes the project attractive from a financial perspective.

The company plans to develop the project late in 2011 with a ramp up to full production likely to occur in Q1 of 2012. The project is currently going through the government and regulatory approval process which is anticipated to lead to final approvals in Q3 this year.

At a coal price of $110 per tonne and cash costs of $60 per tonne the project should deliver an operating margin of around $20m per year.

Pilgangoora Lithium Project, Western Australia
I have now included a first stage valuation for the Pilgangoora Lithium project. I have arrived at my initial valuation by comparing AJM against peer companies in the Lithium business. If I use Talison (TSX Code: TLH) as the benchmark company, their current market capitalisation is $512m and their major asset is the Greenbushes Lithium project in WA. The resource there is 72.4m tonnes @ 2.6% Li for 1.9m tonnes of contained Lithium. TLH produce a Li concentrate and not Lithium carbonate. Li concentrate sells for $500 to $600 per tonne (as opposed to Li carbonate which sells for $5,000 to $6,000 per tonne, but that involves further processing and a much higher investment). If I use the mid point of the Li concentrate price then their resource in ground value is $550 x 1.9m = $1,045m. The TSX market is currently valuing TLH at $512m for the company which means the market is valuing the company at about 50% of the in ground resource value. Even though the grade at Greenbushes is higher than Pilgangoora I will use the same valuation metrics because of the nearness to surface of the deposit and the potential for a high quality concentrate that could be produced from the project. If I use the same assumptions for AJM's based on the mid point exploration target resource, the metrics come in at $550 x 120K = $66m x 50% = $33m. This valuation excludes any potential upside in terms of growing the resource beyond the exploration target. For now I will place a value of $30m on the project.

Drilling Business, Indonesia
The company has a drilling business in Indonesia which employs around 250 people and generates about $2.0m in positive cash flow per year. On a discounted cash flow basis this business is worth around $15m to Altura.

Cash Balance
The company's cash reserves at the end of the March quarter were actually $14.9m comprised of $10.9m in cash plus a $4.0m term deposit. I had previously included $10.9m so $4.0m has been added to the cash balance. For valuation purposes I'll assume that there is now $14.0m in the bank.

Valuation
The current EV of the company determined by the ASX is therefore $57.0m less $14.0m in cash or $43.0m for all of the assets listed below (excluding cash).