Monument Mining: Upside Is Theoretically Unlimited As Gold Price Rises Nov. 18, 2024 4:00 AM ET
Monument Mining Limited (MMY:CA) Stock,
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Summary - Monument Mining Limited is a promising junior gold miner with significant profit potential due to rising gold prices and low production costs.
- The company's profitability has surged by 440% since 2018, driven by increased gold prices and efficient cost management.
- Monument's forward valuation is attractive at 3x earnings, with no debt and strong cash flow generation expected from full production.
- The market is underestimating the impact of rising gold prices and increased production, presenting a compelling investment opportunity.
DieterMeyrl The following segment was excerpted from
this fund letter.
We recently discussed a new idea for us in a new sector, Monument Mining Limited (TSXV:
MMY:CA). Gold has been rising in price for over 8 years now, with an acceleration in the last two. Commodity companies are often difficult long-term investments and have typically been avoided by Value and GARP investors, but the situation here is highly unusual. The underlying commodity price has risen by 134% over the last eight years and the sub-sector of junior gold miners has underreacted. For example, the junior miner ETF
GDXJ increased by 36% over the last five years whereas gold spot price has increased by 84%. In fact the discrepancy is even larger, because the profit and value of a producing junior gold miner is proportional to the difference between gold selling price and AISC:
Profit($)production volume(oz) × (Gold selling price ($/oz) - AISC($/oz)
2)
Thus these companies have call option-like characteristics. Like a call option the upside is theoretically unlimited as the gold price rises, and the downside is limited to operating costs. The strike for the call option is where the gold selling price (the price of gold sales the company achieves) passes the AISC. The AISC is the company's estimate of all costs (including corporate) required to produce that gold. Multiplied by the production volume this gives a rough measure of profit before tax and then a multiple of this would imply the company value. Monument is one of the lowest cost junior miners, in part due to the local workforce at their mining operations in Malaysia.
So, in the case of Monument mining in 2018 the AISC was $957/oz and gold selling price $1,320/oz, or a net of $363/oz. Q3 2024 this had increased to an AISC $1,273, gold selling price of $2,097/oz and net price of $824/oz. Estimating selling prices now for the gold price as of the time of writing would be a net price of $1,227/oz. This would imply profitability has increased by 440% since 2018. While the price of Monument has increased since we first discussed, we believe there is still more room to run and that at current prices it's trading at a forward value to earnings of 3x (also factoring some increases in production that will come through their refinement of gold sulphide processing which is underway). Monument also has a great capital structure with no debt and shouldn't need to raise debt or equity in the current environment.
Commoditized businesses are disliked because of their lack of pricing power, but the flipside of this argument is the certainty of the selling price received. There will be no new competitor, change in technology or flood of product into the market (total gold production increases available gold by approximately 2%). And so the current gold price gives a guide to what is happening and what has already happened. Monument, and many other junior gold miners reporting up to 30 June, 2024 reported record cashflow generation. We already know that Q1 2025 (to September 30, 2024) saw gold prices 3% higher than the average in Q4 2024 (to June 30) and we are now over halfway through Q2 2025 with gold prices even higher than Q1 (by approximately 5%).
Our estimate of forward valuation is 3.0x (2.2x including cash balances). Part of this mispricing in our opinion is that the market is lagging the impact that gold prices will have in the last, current and future quarters, combined with increase in production. Monument mining has restarted mining production switching from gold Oxide to Sulphide production. This process is now largely complete and the next few quarters will see close to full production, which will highlight the level of cashflow production.