RE: RE: RE: RE: RE: RE: MAR is worth......Octagon Capital put out a report last week with a $4.00 12 month target, they did a few different scenarios regarding debt/equity financing. Excuse the format.
ecommendation: SPECULATIVE BUY
Updated Feasibility Study – Increased Reserves
and Improved Operations
Event
Marathon’s Updated Feasibility Study has identified areas of significant
improvement over the Initial Feasibility Study. In addition, the recovery
in the metal markets, improved credit, and an uptick in automobile
manufacturing have resulted in a more favourable environment for
development of the Marathon PGM-Cu project.
We are moving to a SPECULATIVE BUY recommendation with a oneyear
target price of $4.00.
Reasons to Own this Stock
• Good leverage to palladium: Marathon presents one of the few
opportunities to participate directly in palladium, which we believe has
more upside than platinum. Currently, palladium trades at US$360/oz
and platinum trades at US$1,440/oz, for a ratio of 4:1. We expect the
ratio to decrease to 3.2:1. We believe that PGM demand will likely
increase significantly, as the market sees increasing demand alongside a
slow supply response. We are forecasting a long-term platinum price of
$1,700 (18% higher than today), versus a long-term palladium price of
$531.25/oz (an increase of 47%).
• Good value: At today’s metal prices, the after-tax NAV for the project at
an 8% discount is $417.8 million, assuming a 50:50 debt-to-equity
financing of the $360 million of upfront capital. At our forecast prices,
the after tax NAV @ 8% is $549.3 million, assuming similar financing.
• Further upside: The Marathon plant will provide infrastructure to not
only recover the current reserves, but potentially production from
nearby Geordie Lake, Bamoos Lake, and the high-grade PGM lenses
outside the current pit. Marathon’s large land position is also underexplored,
and could host further potential resources.
• Few Canadian mining companies on which to play palladium: About 30% of
the palladium mined comes from South Africa as a by-product of
platinum production, while roughly 45% of the palladium production
comes from Russia as a by-product of nickel production. Other than
North American Palladium (PDL-TSX) and Stillwater Mining (SWCNYSE),
there are few mining companies with significant exposure to
Overview
We are moving to a SPECULATIVE BUY
recommendation on Marathon PGM Corp. with a 12-
month target price of $4.00 due to:
• The leverage to palladium Marathon’s flagship
project has.
• An after-tax NAV @ 8% of $417.8 million.
• Significant upside potential through exploration.
• Rising metal prices.
• Precious metal company upside.
COMPANY BULLETIN
December 1, 2009
Marathon PGM Corp. 2 December 1, 2009
Analyst: Hendrik Visagie, MBA · (416) 306-2519 · rvisagie@octagoncap.com
Palladium; other North American production is as a by-product of nickel and copper
production.
• Precious metal company upside: We have used an 8% discount rate to calculate the NAV, a
rate is similar to that used for base metal projects. However, precious metals account for
nearly 65% of the cash flow. Many precious metal projects use a 5% discount rate to
calculate net asset value. If a 5% discount rate is used, the NAV increases by $163 million
based on our metal price forecasts.
Comparison of Initial Feasibility Study and Updated Feasibility Study
On December 19, 2008, Marathon released a Feasibility study on its Marathon PGM-Cu
Project. At the time of the release, metal prices had collapsed due to the world financial
crisis. However, the project economics in the study were positive, based on the three-year
trailing average prices, which were significantly higher than the prices at the time (copper
was trading at $1.61/lb, platinum at $803/oz, and palladium at $183/oz). In addition, a close
review of the study indicated a number of areas that could be improved and required more
study. In 2009, the Company further drilled the pit to upgrade the reserves; conducted
metallurgical test work to confirm the metallurgy; and had the pit redesigned and the
capital costs revisited. Strategic in-fill drilling of the pit added some areas where ore had not
previously been identified. As a result of the additional work completed, four areas of
improvement have been identified, resulting in positive improvements to the project:
(1) decreased capital costs, (2) decreased operating costs, (3) improved metallurgy, and
(4) increased tonnage of ore.
Exhibit 1: Updated Study vs. Initial Study
Capital Investment Updated Feasibility Initial Feasibility Change
Pre-production Millions $351 $386 -$35
Life-of-mine Millions $495 $586 -$91
Operating Cost $/tonne milled $13.39 $13.50 -
.11
Metallurgical Recoveries
Copper 90.80% 90.80% 0.00%
Platinium 71.00% 63.00% 8.00%
Plalladium 80.10% 77.00% 3.10%
Gold 79.90% 73.00% 6.90%
Silver 74.50% 77.00% -2.50%
Source: Octagon Capital Corp.
Exhibit 2: Change in Mineable Reserves
Tonnes Cu % Pd g/t Pt g/t Au g/t Ag g/t Cu lbs (M) Pd Oz (000) Pt Oz (000) Au Oz (000) Ag Oz (000)
Updated Study 91,447,000 0.247 0.832 0.237 0.085 1.44 497 2,447 696 251 4,235
Initial Study 79,347,000 0.266 0.757 0.234 0.079 1.58 465 1,931 597 202 4,031
Change 12,100,000 0.119 1.326 0.255 0.127 0.53 32 516 99 49 204
*Note the change in tonnage from 2009 drilling and metallurgical improvements has resulted in the addition of ore with low grade copper and higher
grade PGMs.
Source: Octagon Capital Corp.
Marathon PGM Corp. 3 December 1, 2009
Analyst: Hendrik Visagie, MBA · (416) 306-2519 · rvisagie@octagoncap.com
Via the updated study, the Company has optimized the Marathon operations through a pit
redesign that not only captures the new ore reserve but also relocates the ramps so that the
haulage distances for waste is minimized, lessening capital and operating costs. The
increased reserve also results in a lower ore-to-waste ratio.
The big change in the updated study is the optimization of the metallurgy, resulting in
improved PGM recoveries, capital and operating cost reductions, and increased resources,
which all contribute to the improved economics.
Exhibit 3: Comparison Study of Updated Feasibility
*All in C$ unless noted Updated Feasibility Initial Feasibility Change
Copper Price US/lb $2.91 $3.12 -
.21
Palladium Price US/oz $321.00 $345.00 -$24.00
Platinum Price US/oz $1,347.00 $1,340.00 $7.00
Gold Price US/oz $819.00 $688.00 $131.00
Exchange Rate Cdn/US 1.1 1.09 0.01
Undiscounted cash flow (pre-tax) Millions $847 $510 $337
Undiscounted cash flow (after tax) Millions $596 $369 $227
After- Tax NPV @ 6% (8% in Initial Feasibility) Millions $251 $77 $174
IRR (pre-tax) 21.00% 15.50% 5.50%
IRR (after tax) 17.00% 12.40% 4.60%
Payback period Years 4.4 4.7 -0.3
Proven and probable reserves contained
Copper Millions lbs 497 465 32
PGM+Au Millions oz 3.4 2.7 0.7
Silver Millions oz 4.2 4 0.2
Average annual metal production 1st 5 years
Copper Millions lbs 37 42 -5
PGM+Au oz 234,000 201,000 33,000
Silver oz 182,000 310,000 -128,000
Cash cost per PGM+Au oz (net of credits) US/oz -$14.40 -$53.00 $38.60
Cash cost per Cu lb (net of credits) US/lb -0.25 0.28 -
.53
*Note: The cost of producing PGM has increased due to increased PGM production and the reduced
copper production, resulting in a lower credit per ounce of PGM.
Source: Octagon Capital Corp.
Metals Market Overview
Auto Demand
In 2008, catalytic converters for automobiles represented the primary demand for platinum
and palladium, at roughly 62% of the 13.2 million oz consumed. Last year, platinum supply
was in a slight deficit and palladium supply was in a surplus. Depending on the relative
price of platinum and palladium, the manufacture of autocatalysts will substitute one of the
metals for the other. While the monthly ratio of palladium-to-platinum prices has varied
from less than 1:1 to up to 5.34:1 over the last 20 years, the average ratio is 2.54:1. Recently,
the ratio of palladium to platinum has been roughly 3.91:1; as the North American car
market recovers and the technology to use palladium for autocatalysts in diesel cars
improves, we see the ratio declining. In our long-term forecast, we have used a 3.2:1 ratio.
Marathon PGM Corp. 4 December 1, 2009
Analyst: Hendrik Visagie, MBA · (416) 306-2519 · rvisagie@octagoncap.com
Demand From Emerging Markets of China and India
Recently, Chinese state media reported that annual car production topped 10 million units
for the first time, and is set to challenge the U.S. and Japan for the top spot. In 1999,
production in China was 565,366 cars; by 2008, it was 6,737,745 cars – a tenfold increase over
the 10-year period. It appears that the rapid increase in car production is continuing in 2009.
In addition, India produced 533,149 cars in 1999, increasing to 1,829,677 cars by 2008. While
India’s car production growth is much slower than that of China, we believe it will become
much more significant over the next 10 years.
With growth will come increased demand for PGM. While there is a lot of talk that new car
technology will reduce demand for autocatalysts, we do not see the advent of hybrid and
electric cars as an immediate threat. Hybrid cars will in fact require increased use of PGM in
their autocatalysts due to the start-stop nature of their burning of hydrocarbons, and electric
cars are currently at a large cost disadvantage versus regular combustion cars and hybrids.
Going forward, we expect the car market outside of China to resume normal growth; the
only question is over what time period. Over the next 10 years, based on China doubling its
current car production, India’s car production continuing its growth trajectory, and the rest
of the world’s auto production returning to its historical output level and then growing at
normal growth rates, we can easily see autocatalyst demand increasing 50% plus from
current levels.
Supply Side Constraints
We believe such an increase in PGM demand will be difficult to fill from increases in mine
supply, unless PGM prices increase. Roughly 75% of the world’s platinum and 25% of the
world’s palladium supplies come from South Africa, and recent increases there in power
and labour costs, coupled with a strengthening rand and required new investment to access
deeper ore zones, will push production costs higher for South African PGM miners. In
addition, Norilsk produces 45% of the world’s palladium and 15% of the world’s platinum
as by-products of its nickel operations. Given the outlook for nickel prices, we do not see
Norilsk expanding production significantly in the near term. Furthermore, it is believed that
the Russian palladium stockpiles that have kept the palladium supply in balance are
depleted or near depleted. This will further impact the supply side of the equation.
As a result of increasing demand and limited supply, we are forecasting a platinum price of
$1,700/oz and a palladium price of $531/oz.
In addition, our long-term forecast for copper is $3.00/lb, for gold is $1,000/oz, and,
assuming a silver-to-gold ratio of 52:1, a silver price of $19.23/oz.
Marathon PGM Corp. 5 December 1, 2009
Analyst: Hendrik Visagie, MBA · (416) 306-2519 · rvisagie@octagoncap.com
Valuation
Marathon has been working on the Marathon PGM-Cu deposit since 2004, and has done
extensive drilling to date. A Preliminary Economic Assessment, a Feasibility Study, and an
Updated Feasibility Study have all been completed on the project. Marathon submitted an
Environmental Impact Statement (“EIS”) in 2007, which was rejected. Since then, the
Company has changed their Environmental consultants and has forged close relationships
with local groups, including natives. Now that the Updated Feasibility Study is complete,
the Company will be submitting its revised EIS study. The Company expects that the project
will be approved over the next 18 months, and that project construction can start in 2011 and
be completed in 2012. We have modelled for project start-up in 2013.
Exhibit 4: Assumptions
Metal Prices Long-term Forecast Previous Assumption Current Price
Cu (US$/lb) 3 2 3.06
Au (US$/oz) 1000 800 1128.75
Pt (US$/oz) 1700 1200 1418
Pd (US$/oz) 531.25 460 363
Ag (US$/oz) 19.23 16 17.74
Exchange Rate (C$ per US$) 1.05 1.11 1.05
Source: Octagon Capital Corp.
Exhibit 5: Comparison of Octagon's New Case And Old Case
( In C$, unless noted) New Case Old Case Difference
Production rate (tpd) 22,000 22,000 -
LOM (years) 11.4 13.5 -2.11
Annual Payable Cu (000 lb) 37,862 37,984 -122
Annual Payable PGM + Au (000 oz) 213 185 28
Production
Waste Mined (000 tonnes) 263,472 362,242 -98,770
Total Ore milled (000 tonnes) 91,446 103,213 -11,767
Total tonnage of ore & waste (000 tonnes) 354,918 465,455 -110,537
Payable Cu (000 lbs) 431,171 512783 -81,612
Pd equivalent oz (000 oz) 3,541 3616 -75
Payable PGM+Au (000 oz) 2,427 2493 -66
Strip ratio 2.88 3.66 -0.78
Financials
Capital Expenditure total (millions) $495 $308 $187
Operating costs total (millions) $1,224 $1,314 -$90
Operating costs per ton of ore milled $13.39 $13.00
.39
Cash Costs per Pd equivalent oz (US$) -$15.69 $95.00 -$110.69
NSR per tonne of ore milled $34.00 $27.00 $7.00
Valuation
After Tax NAV @ 8% (9% Old Case) $549 $498 $51
Fully Diluted Shares o/s at Production (Millions) 86 49 36
NAV per Share $6.42 $10.15 -$3.73
Source: Octagon Capital Corp.
Marathon PGM Corp. 6 December 1, 2009
Analyst: Hendrik Visagie, MBA · (416) 306-2519 · rvisagie@octagoncap.com
Financing and Cash Resources
Marathon has approximately $10.0 million in its treasury, and is examining a variety of
different methods of securing the required funding to develop the Marathon deposit,
including joint ventures, royalty arrangements, project equity, and debt instruments.
We have assumed that the project will require $360 million of preproduction financing,
which will be funded 50% by equity and 50% by debt (paying 7.5% interest), with payback
over four years. We have assumed costs of $120 million in mining equipment, to be leased
with a 10% down payment and financing of the balance over five years at 9% annual
interest. The down payment is in the preproduction capital, and the balance is paid in post
production capital.
On November 15, 2009, the Company had 30,241,880 shares outstanding. The 2,501,250
warrants outstanding are expected to expire; 2.7 million share options outstanding have an
average strike price of
.91 per share. We have increased the total number of shares to
40 million to provide for a fundraising prior to the major project financing.
For the purpose of valuation of the project, we have assumed that the major financing, once
debt has been lined up – subject to equity financing and once approvals to build the project
are received – will be completed at an average of $4.00 per share. As a result, there would
be 86 million shares outstanding (pro-forma) and the NAV per share would be $6.42.
Exhibit 6: Major Financing
Per Share Price $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00
New Shares 91,397,849 60,931,900 45,698,925 36,559,140 30,465,950 26,113,671 22,849,462
Diluted Shares 40,000,000 40,000,000 40,000,000 40,000,000 40,000,000 40,000,000 40,000,000
Total Shares 131,397,849 100,931,900 85,698,925 76,559,140 70,465,950 66,113,671 62,849,462
Value Per Share $4.19 $5.45 $6.42 $7.18 $7.80 $8.32 $8.75
Source: Octagon Capital Corp.
Sensitivity
At today’s prices, the project has an after-tax NPV of $417 million. However, at these prices,
a cash shortfall of $20 million would occur in the first year of operation due to lower metal
prices and the need to cover working capital. At the lower prices, we make the assumption
that the project would be financed at $2.00 per share for total shares of 110 million and the
NAV per share would be $2.95 per share.
Exhibit 7: Financing Sensitivity
Today's Prices NAV Finance Equity Shares NAV/Share
8% $417,816,102 $2.00 141,397,849 $2.95
5% $547,309,473 $4.00 90,698,925 $6.03
8% $549,922,165 $4.00 85,698,925 $6.42
5% $712,039,397 $5.00 76,559,140 $9.30
Long Term Prices
Source: Octagon Capital Corp.
Marathon PGM Corp. 7 December 1, 2009
Analyst: Hendrik Visagie, MBA · (416) 306-2519 · rvisagie@octagoncap.com
It should be noted that in the case of our long-term metal prices, nearly 65% of the revenue
is from PGM; as a result, the lower discount rate may be more applicable for calculating
NAV than the 8% rate that is generally used for base metal projects. We also note that the
project is a semi-brownfields project with a work force, infrastructure, and power nearby. In
addition, the project is located in Ontario, Canada, which is a low-risk area for mine
development.
Further Upside Potential
The Geordie Lake Deposit has a total resource (including Inferred resources) of 35 million
tonnes of low-grade copper and PGM. There is potential through drilling to double this
resource, and we believe that it will make economic sense to process the Geordie
Lake ore through the nearby Marathon mill – either at the end of the current
Marathon project life or through an expanded operation. The Company plans to
drill this prospect in 2010.
In addition, the Bamoos deposit is located north-west of the Marathon pit, and
there are indications that potential exists for up to 5 million tonnes of resources.
The Company plans to drill the prospect sometime in 2010.
The Company has further outlined a zone of high-grade PGM with little copper
in the pit, and this zone dives to the west of the pit, where there appears to be
potential for a high-grade underground resource.
Conclusion
The Updated Feasibility Study, coupled with an improved outlook for PGM,
provides the basis for updating our Marathon model. While the Marathon story
on a technical basis is improving, the increased capital costs, a strong Canadian
dollar, and difficult equity market have resulted in our target price declining
from an original $9.80 per share. We have arbitrarily set our new target at $4.00
per share – roughly 60% of after-tax NAV at an 8% discount. We believe that as
palladium price increases to our long-term average, MAR shares will also rise.
We also believe that ultimately, the Company will be able to nearly double the current feed;
hence, there is significant upside potential.
We are therefore recommending Marathon PGM Corp. as a SPECULATIVE BUY with a
target price of $4.00.
TORONTO CALGARY
181 University Ave. 606 – 4th St., S.W.
4th Floor Suite 1400
Toronto, ON M5H 3M7 Calgary, AB T2P 1T1
Tel: (416) 368-3322 Tel: (403) 750-0475
Fax: (416) 368-3811 Fax: (403) 750-0499
IMPORTANT DISCLOSURES
Stock Ratings
Speculative BUY: The stock is in a high growth sector where price
patterns are more volatile and of inherently greater risk.
BUY: The stock is expected to exceed the average total return of the
industry sector, on a risk-adjusted basis, over the next twelve
months.
HOLD: The stock is expected to be in line with the average total
return of the industry sector, on a risk-adjusted basis, over the next
twelve months.
SELL: The stock is expected to be below the average total return of
the industry sector, on a risk-adjusted basis, over the next
12 months.
Distribution of Ratings
Out of approximately 31 stocks in the Octagon Capital Corporation
coverage universe, the ratings distribution is as follows:
Speculative BUY 16.1%
BUY 64.5%
HOLD 9.7%
SELL 6.5%
Under Review 3.2%
Distribution of ratings is updated the first of every month.
Compensation Policy
Analysts are compensated based on their performance. Some of the
evaluation criteria are: quality and effectiveness of research,
soundness of the evaluations and recommendations, client
feedback, internal peer reviews, analytical skills, profitability of the
Capital Markets Group, timeliness and responsiveness.
Dissemination Policy
Octagon Capital Corporation shall deal fairly and objectively with
all clients when disseminating investment recommendations and
material changes from prior research reports. Octagon Capital
Corporation utilizes a variety of channels to ensure, on a best effort
basis, timely and effective dissemination of its research to its retail
and institutional clients via electronic mail, fax, telephone or mail.
Sales staff maintains a list of all clients and the securities or other
investments each client holds to facilitate notification of clients of a
change in an investment recommendation or updates in the subject
security. Initial recommendations are made available to all clients
who indicate an interest.
Additional Disclosures
The analyst and/or associate and/or any immediate family member
owns shares in the Company.
The Analyst who prepared this comment has viewed the material
operations of the issuer.
The information contained herein has been obtained from sources that we
believe reliable but Octagon Capital Corporation cannot guarantee its accuracy
or completeness. This report is for the information of clients only and does not
constitute an offer to buy or sell any of the securities mentioned herein. Octagon
Capital Corporation and/or its directors, officers, employees and affiliated
companies may at times have a position in the securities mentioned herein.
Octagon Capital Corporation is a wholly owned subsidiary of Octagon Capital
Partners Inc. This report may not be reproduced in whole or in part without the
express written consent of Octagon Capital Corporation. Octagon Capital
Corporation is a member of the Canadian Investor Protection Fund
U.S. Persons
Any U.S. person wishing to make any inquiries or effect a transaction in any
security mentioned in this report, or any other security, should contact Octagon
America Limited (“OAL”), a broker dealer registered in the United States.
Subject to the limitations described herein, OAL accepts responsibility for this the
content of this report. This report was prepared by an affiliate of OAL that may
not be subject to U.S. rules regarding research reports and research analyst
independence.
RESEARCH
Base & Precious Metals Special Situations
Hendrik M. Visagie, MBA (416) 306-2519 Max Vichniakov, MBA (416) 306-2514
rvisagie@octagoncap.com mvichniakov@octagoncap.com
Rob Chang, MBA (416) 306-2558 Annie Zhang, CFA, MBA (416) 304-7792
rchang@octagoncap.com azhang@octagoncap.com
Annie Zhang, CFA, MBA (416) 304-7792 Consumer Products
azhang@octagoncap.com Robert Gibson, CFA (416) 306-2544
rgibson@octagoncap.com
Energy
Warren Verbonac (403) 750-0497 Associates
wverbonac@octagoncap.com Nancy Turner (416) 306-2538
nturner@octagoncap.com
Arthur Kwan CFA, MBA (403) 206-2140
akwan@octagoncap.com Tracy Nong (416) 306-2549
tnong@octagoncap.com
SALES
David McLeish (416) 306-2518 Peter Winnell (416) 306-2517
dmcleish@octagoncap.com pwinnell@octagoncap.com
Alice Tsang (416) 306-2510 Katrin Tosine (416) 304-7781
atsang@octagoncap.com ktosine@octagoncap.com
Sylvia Lai (416) 304-7782 Sales & Trading Assistant
slai@octagoncap.com Gloria Spoden (416) 304-7844
gspoden@octagoncap.com
TRADING
John Ponech (416) 306-2516 Gordon Baker (416) 306-2532
jponech@octagoncap.com gbaker@octagoncap.com
Jean-Marc Musacchia (416) 306-2528
jmmusacchia@octagoncap.com
www.octagoncap.com
1-888-478-8888
Octagon Capital Corporation is an independent investment banking partnership creating wealth through ideas.
Participating Organization of the TSX
Member of the Investment Industry Regulatory Organisation of Canada
All of the views expressed in the research report accurately reflect the research analyst's personal views about any
and all of the subject securities or issuers
No part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed by the research analyst in the research report.