RE: Using Debt/TAM analysis NOT using debtfinancing, thus very conservative :
Tamerlane Ventures – a zinc/lead/copper bargain
Disclaimer : I take no responsibility whatsoever for any errors, bad conclusions, important facts missing etc that might affect my analyses and their readers in any respect, but I always try to keep the facts accurate, as well as the calculations with their usually simple mathematics. Sometimes even the companies analysed deliver false information which could be impossible to detect for me and many other interested parties. In general I trust the corporate information and use it for my analyses. The future can´t be predicted 100 % and the stock market in particular is associated with considerable risks on the company level, but also on branch-, country- and world market level, implying that each person has to take their own full responsibility of the consequences of buying this particular stock.
Do your own due diligence !
2007 price target CAD 2-3
This is a calculation of the long term price outlook for Tamerlane ventures, TAM stock if and when the production at the R -190 deposit is planned to start, i e within a couple of years, but also of a 2007 price target, assuming long term zinc and lead prices as of Feb 2 2007, USD 1.40/lb and USD 0.76/lb respectively, around which time the prices hit bottom for 2007 thus far.
The Tamerlane CEO is very experiencied and in fact worked as a geologist at Pine Point when the mine was producing a few decades back. The chairman of the board, with no or little executive responsiblity in Tamerlane, was involved in a mining company in the 1990-s when there was a tragic incident, which may affect her reputation negatively now, maybe not justified though since she was declared having no responsibility, at least according to my Internet googling of the incident. Others had responsibility though including certain authorities. She is though said to be very capable of raising funds for projects like this one. The chairman of the board and the CEO have a 3 % NSR, net smelter revenue deal implying a cost for Tamerlane of around 2.5-2.6 % of total revenues. Therefore they have a strong incitament for the project to succeed.
Tamerlane will use freezing technology in their pilot project to control ground water. There are examples of freezing rings functioning well. Freezing technology is not what caused the big problems at Cameco´s Cigar Lake project, but one of the messures among others to restore their troubled uranium mine.
With an estimated historic resource base of about 70 millions of tons from all 34 deposits, near the Pine Point area with its historic mine , containing an around 1.6% lead and 4.2% zinc, the total sales value at metal market price would be around USD 10.9 billion, with zinc accounting for most of that value. The long term price outlook for zinc and lead seems good, as long as the China and India economies continue to grow at a very high level.
If you just would like a hint of the long term stock potential of TAM, let us take a look at this example. Assume that the Tamerlane profit margin after all costs including tax will average 10-20 % (which is lower than the approximately derived profit margin from the higher grade pilot project R – 190 calculation below ). That would leave TAM potential future nominal profits after tax of around USD 1.09-2.18 billion. The total production time is assumed to be around 30 years. Now if we just calculate with the first 10 years of production starting with 2009, total net earnings would be half of that or around USD 363-726 million. The 2007 discounted value at 10 % interest rate, is around USD 203-406 million. At this moment there are only nearly 41 million diluted shares. but let us calculate with a heavy stock dilution for the total financing, to 100 million TAM shares, we would get an earnings based approximate discounted net per share value of around CAD 2.35-4.70 in 2007 (with USD=1.16 CAD). So the stock potential has to be very high, even if the calculation assumes unchanged metal prices, but on the other hand assumes a very big stock dilution and only considers the roughly calculated discounted value of first 10 years of earnings.
Long term average zinc and lead prices may be significantly lower in the future than in the calcution above which used the Feb 2 levels, and much lower average prices should reduce the discounted value significantly. On the other hand TAM should be able to debt finance at least a great part of the capital needed for the pilot project, thus resulting in far less stock dilution and a much higher discounted value per share. These two factors may in the long run more or less neutralize each other, since they work in opposite directions, and therefore the expected value of the discounted long term stock price could be in the order of the calculated value above.
Now if you examine the case within the more foreseeable future a little more close, the R – 190 pilot project is supposed to produce 0.110 million tons of zink and 0.0555 million tons of lead in just two years according to the news release of May 16 2006 (even if their are indications of a production time shorter than that). The company then would have total revenues of about USD 432 million, corresponding to approximately CAD 250 million average per year, still assuming metal market prices of Feb 2007. The costs are very roughly assumed to be CAD 160 million per year, indicating profits before tax of around CAD 90 million and earnings per share of around CAD 0.6 after assumed 35 % tax and a heavy stock dilution up to 100 million shares. The profit margin after tax then would be around 23 %. If the pilot project takes less time than 2 years, which might be the case, the earnings per share should be correspondingly higher than calculated. Thus the total profit per share due to the pilot project would be around CAD 1.2 or more, achieved in around two years or less (corresponding to an annual earnings per share of around CAD 0.6 or more).
As pointed out before though, TAM could ,at least partly, debt finance the pilot project, thus resulting in much less stock dilution. In this respect my price target is conservative and will probably be increased after the feasibility study is released. TAM could also hedge metal prices (but at a lower price level than the shortest term metal prices) probably even for the whole pilot project. Combining these two measures TAM might even show slightly higher earnings per share at a lower risk, due to the hedging, than in my previous estimate of the pilot project.
A short term stock price target should not discount all of these scenarios now, but a mere fraction of them. I find that CAD 1-1.50 seems a rather realistic fundamentally based stock price in this rather early stage, i e just before the feasibility study becomes official, and before the pilot project R – 190 hopefully will be permitted. After a potentially or most likely fully permitted project probably late this year, my TAM price target should be increased to CAD 2-3 assuming current metal price levels stay intact. CAD 2-3 then would roughly imply a one-two years looking forward p/e ratio of around 3-5 or even less, if you accept the CAD 0.6 or more earnings per share as reasonable (with the earnings per share possibly even higher if there will be less than 100 millions shares with debt financing as discussed before).
Tamerlane has optioned Los Pinos Copper Deposit in Peru. Total payment will be around USD 1 million. It has a historical resource of around 63 million tons with an average grade of 0.36% total copper at a cut-off grade of 0.22% copper. TAM plans to carry out a USD 1.0 million in-fill drilling program on the Los Pinos property on receipt of a drilling permit, which will be applied for during the second quarter of 2007. The results will provide input for an NI 43-101 compliant technical report and the basis for an updated feasibility study. The possible profit from this project is not calculated with in my analysis now, but it could turn out to be of significant value since the historic feasibility showed plans for producing 25 million pound of copper per year corresponding to revenues of around USD 75 million with copper price at today´s levels around USD 3. Furthermore the copper resource is expandable.
After an assumed successful, feasibility study for the zink & lead pilot project, permitting and the following initial production, there seems to be an extraordinary fine long term potential for TAM, and the stock almost has to be undervalued att levels below CAD 1 now, and should be discovered by more speculators & investors in the stock market in the near future. The permitting issue should not be a very big obstacle but very time due to the economic boost the project would result in. But it is the environmental authorities who actually can permit the project. and I feel there is a high probability for acceptance, given the type of operations, the historic mining in the same area and Tamerlane´s measures to act within the regulations. The local support can´t be a negative factor either.
In summary the long term metal prices and the permitting process are most likely the most important risk factors this year, but the metal prices are also a long term potential especially for the pilot project, as long as especially China & India continue their fast economic growth. TAM also could hedge prices thus reducing risk substantially.
Short term we can look forward to a news release, probably during the first quarter of 2007 or somewhat later in april, concerning the feasibility study where the whole pilot project will be thoroughly examined including all the important economical aspects. The feasibility will most likely give a very positive outlook for the project as hinted in my calculations, and should in my opinion cause the TAM stock price to reach a higher level when the stock market sees that there is a real and significant potential for Tamerlane which it not had considered enough. For the TAM stock price to increase even more, let say above the CAD 1.50-2 level, I presume the project has to be fully permitted, my guess is in last quarter of 2007.
Before permitting, TAM is a high risk junior zink and lead mining stock although with an extremely fine long term potential. Thus you could treat TAM now as a strong but speculative buy as an obvious immediate revaluation case with an very fine risk/reward ratio.
Anyone with other input data can, as always, change these figures easily and do their own rough, simple and I think very useful calculations for an absolute and relative stock valuation purpose.