Friday, March 25, 2011

ASX Marengo Mining Ltd (MGO): A better value proposition than Sandfire Resources (SFR)

By Peter Koay

If one has to understand the value of MGO, one has to compare it with all the other copper producing companies. Based on the most recent SFR reported resource statement and its pre-feasibility report, the following comparison is made.

Resource comparison:

MGO (Cu)
SFR (Au)
SFR (Ag)
SFR (Cu)
1000M lbs ($4B)
47k oz  ($63.4M)
52.8M lbs
1900M lbs ($7.6B)
491k oz  ($662.8M)
3750k oz ($112.5M)
1078M lbs
3600M lbs ($14.4B)
186k oz ($251.1M) 
1305k oz ($39.1M)
286M lbs
6500M lbs ($26B)
724k oz ($977.3M)
5055k oz ($151.6M)
1416.8M lbs

*Conversion using copper price of US$4/lb, silver price of $30/oz, and gold price of US$1350/oz.

MGO Resource Value
SFR Resource Value

Capital Cost comparison:
MGO: US$1.6B

The capital cost of MGO is 4 times SFR’s. In the right ball park considering that MGO’s resource is approx 4 times of SFR.

Operating Cost comparison:

MGO and SFR’s operating cost is almost the same, i.e. ~$0.90-$1.00 per lb.   

Production Timing:
MGO 1st ore concentrate produced: 2014
SFR 1st ore concentrate produced: Q3, 2012

Note also that DFS completion for SFR is 2Q 2011 whereas MGO’s DFS report is targeted to be released to the market by 1Q 2011.   

NPV Analysis:

Basic NPV analysis of SFR project gives us a price of $7.80/share with the following assumptions:

  1. 70kt/Cu and 45koz of Gold production/year.
  2. Mine life of 7 years (as per PFS report)
  3. 1st Production in 3Q 2012.
  4. Net Cash Flow: Gross Cash Flow ratio: 0.56
  5. Cost of capital: 10%
  6. Capital cost: $400M
  7. 150M issued shares
  8. $4/lb copper price and $1350/oz gold price

Based on NPV analysis, it seems that the value of SFR’s project is almost fully factored into the share price.

Based on market cap comparison,
Current market cap of SFR is $1.02B (@$6.90/share) with 148.3M shares issued. 
Current Market Cap of MGO is $300M (@$0.30/share) with 994M shares issued.

Based on “Net Profit before tax, depreciation and interest” comparison, SFR is saying that it’ll have $330M-$350M cash flow. MGO will have ~ $600M cashflow per year. Almost doubling SFR’s cashflow!!

Basically, this comparison between MGO and SFR tells us that MGO should have at least $1B market cap NOW, which means that it’s share price should be about $1/share NOW. And in 2-3 years time, it should be ~$3/share when it’s producing copper at a similar rate of OZ Minerals.

Note: This comparison is done assuming that SFR has no value factored into the share price from all its other projects/investments.

SFR’s most recent upgraded Resource report: 

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