Hidden Gem Up For A Massive SaleUrsa Major has undervalue written all over it no matter what metric you use to evaluate the company. UMJ is in commercial production and have healthy operating margins despite some custom milling fees going to Xstrata. Based on a 200kt production of ore, the company produces about 3.3M equivalent pounds of nickel annually. With 13.66Mt of M&I ore at the Shakespeare mine, this translates into a mine life well over 65 years under the current program. The company is also debt free and unhedged. The real growth however is getting Shakespeare into fully expanded production based on the 2008 feasibility study. The project needs about $148M and obviously UMJ cannot raise that amount unless one of three things happen:
1) Market participants buy shares at higher prices to raise the market cap for less dilutive equity placements
2) Emergence of a partner or joint venture
3) The company gets bought out
The recent hirings made on Nov 22 are a step towards getting the company promoted to fulfill all three objectives above. It is only a matter of time before new investors become aware of UMJ and build a new base of shareholder confidence. Inspirational Mining seems to agree that UMJ is incredibly cheap and has increased their stake to 19.86% since inititial purchases in July. ISM may end up being a bigger partner, but they don't have the capital to expand Shakespeare operations themselves.
Price target based on 2011 production of 200kt and cash flow:
Basic shares + in the money derivatives = 65,449,084 + 1,400,000 + 150,000 + 1,900,000 + 500,000 + 3,650,000 + 619,200 + 500,000 + 266,367 = 74,434,651
Market cap using closing stock price of Jan 10 = 0.175 x 74,434,651 = $13,026,064
Working capital as of Oct 31 = $3,143,599 - $2,787,379 = $356,220
Cash from in the money options and warrants = (1,400,000 x 0.12) + (150,000 x 0.12) + (1,900,000 x 0.10) + (500,000 x 0.105) + (3,650,000 x 0.15) + (619,200 x 0.10) + (500,000 x 0.12) + (266,367 x 0.12) = $1,129,884
Nickel equivalent pounds produced using 11.18/lb Ni, 4.29/lb Cu, 1373.40/oz Au, 1730.30/oz Pt, 775.3/oz Pd as of Jan 5 = [558,014 lbs Ni + (4.29 Cu/11.18 Ni x 623,857 lbs Cu) + (18.03 Co/11.18 Ni x 38,951 lbs Co) + (1373.40 Au/11.18 Ni x 0.18g/t x 0.035274oz/g x 66,769t) + (1730.30 Pt/11.18 Ni x 0.33g/t x 0.035274oz/g x 66,769t) + (775.30 Pd/11.18 Ni x 0.36g/t x 0.035274oz/g x 66,769t)] x 50,000t per quarter / 66,769t in Q2 x 4 quarters = 3,269,206 eq Ni lbs
Net revenue = 11.18/lb Ni x 3,269,206 eq Ni lbs x (100% - 40% going to Xstrata's smelting and refining fees) = $21,929,834 or 6.708/lb Ni
Cash Costs = $6,003,797 x 50,000t / 66,769t x 4 quarters = $17,983,786 or 5.501/lb
Operating cash flow = $21,929,834 - $17,983,786 = $3,946,048
2011 price target using an 8x multiple = $3,946,048 OCF x 8 / ($13,026,064 - $356,220 - $1,129,884) x 0.175 = 0.48
By my calculations, UMJ offers investors a low risk-high reward opportunity with current operating cash flow earning investors an internal rate of return of 34% at current stock and metal prices. The recent SP pullback makes for even better entry points. Technical support should be found around 0.15 and long term resistance is around 0.55