MMG Ltd., a Kakula comp (but not really)Most here are day traders, concerned with technical analysis, market structure, and stock exchange manipulation. The few long-term investors here, which post more or less frequently, may be optimistic, but also worried about the political difficulties. In my view these are totally unwarranted concerns. The key factors for the depressed share price are: (i) we are in a bear market in mining; (ii) development companies, even good ones, are often undervalued, because they are boring; (iii) recently there have been a lot of negative headlines about the Congo.
As I see it, this stock has priced in every possible adverse eventuality, from the perspective of long-term impairment of capital; thus, it is not really risky at all. And the upside is tremendous. I have no doubt that half a dozen mining companies would buy this out for $10 a share tomorrow if the board were to approve. But the board knows it is worth a lot more, so they are putting it into production. At the time of production, that bid would be more like 15-20, or perhaps more. If it isn't bought out, in a real mining bull, I don't think it improbable to see 25, 30, or 40 dollars per share on a blow-off top.
If these numbers are hard to fathom, look at some of the mega-projects. MMG and Chinese partners bought Las Bambas in Peru for $6 billion (100% basis) in 2014. Reserves were 7 million tonnes Cu at .68% Cu. By-product cash cost about $1/lb. The copper price was around the same as today. There are 10Mt at a 3% cut-off in the resource at Kakula alone, including KW and saddle, but excluding recent extension drilling, any other potential targets on the licence, Western Forelands, and all proven resources at Kamoa. Cash cost is low, under 50 cents. Add 75c sustaining capital at each project, and at $3 copper you have $1.75 pre-tax margin at Kakula vs $1.25 margin at Las Bambas. Hence, 40% of Kakula, or 4 Mt, is arguably worth nearly as much as 7 Mt at Las Bambas. In the old days, you would value projects at 20% of reserves, which again, for 40% of 10Mt Cu at $7k/t Cu, would be about $6 billion. This heuristic wouldn't properly apply to any old resources, but for reserves of high quality mines, it wouldn't be far off. So basically, the mostly indicated resources, soon-to-be-reserves, at Kakula are worth 4x the market cap of the company. Giving zero value to Kamoa, Kipushi or Platreef.
Note also that MMG has literally trebled production at Las Bambas since they bought it from Glencore. This shows how aggressive the Chinese are at resource acquisition and development, their economy's ravening hunger for copper, and their view of the long-term value of copper reserves in a growing, electrifying world, where resources are scarce.
Today, MMG has an enterprise value of roughly USD 15 billion, and the lion's share of the value is in Las Bambas, of which they only own 62.5%.
This is just one comparable, in copper, where I think the acquirer paid a roughly rational price. But you could look at all the refuse that was bought at the top of the last market: Kinross bought Tasiast for 7 billion, Barrick bought Lumwana for 8 billion, and sunk half of a 10 billion capital cost into Pascua Lama. Will these projects make a dime of profit? Then take a look at Novagold. WTF is that? Basically glorified moose pasture with a market cap bigger than Ivanhoe's. So what I'm saying is, the market is completely irrational almost all the time, and in periodic mining booms, all big projects trade for ridiculous sums. For gigadeposits you need to measure not in the billions, but in the tens of billions. Maybe one should call them decagigadeposits. There are hectagigapounds of copper. Almost teradollars in-situ.
Worst-case scenario, i.e., war, famine, pestilence, long term, you don't lose money from these levels. Most likely, you make a lot of money, a multiple of your capital within 2-3 years. It is hard to see how you could do better, risk-reward. If anyone has a better stock, please enlighten me.