Looking at lead - Part 2
Blue Note is an almost producer, currently in the start-up phase of their newly refurbished/built Caribou mine that Breakwater has an 20% interest in. Figuring out their “true” fully diluted market cap is more complicated than for other companies because of the Breakwater interest, which gives Breakwater choices about how they cash in on their interest, either 20% of Caribou or about 42 million shares, and there are hidden shares with debentures that are easily missed. Breakwater must make a decision within one year providing Blue Note does $1.5 million in further exploration on the Caribou property. Fully diluted excluding Breakwater’s interest Blue Note has a market cap of about $172 million. As shares Breakwater’s interest adds an addition $22 million to the market cap.
For 2007 projected production is 68 million pounds of zinc, 35 million pounds of lead, 0.8 million pounds of copper and 850,000 oz of silver, for total metal values of $157 million of which 80% is $126 million or about 3/4rds of the market cap excluding Breakwater. For 2008, with full production, the projection is 104 million pounds of zinc, 57 million pounds of lead, 1.3 million pounds of copper and 1.3 million ounces of silver for $245 million, of which 80% is $196 million and exceeds the market cap.
Metal values per ton in the Caribou/Restigouche reserves are about $370/ton with a total reserve value of about $1.8 billion at today’s prices and the resource, where the life-of-the mine is extended beyond 5 years from, has about $380/ton in resource metal values and about $1.4 billion at today's prices. There is no measure for copper values in the resource, which is 0.34% in the reserves. The cut-off grade used was a profitable 9% combined lead and zinc.
Breakwater previously had problems with poor recovery rates and poor metal prices. Metal prices were low when they decided to sell. Blue Note has installed a milling process shown to dramatically improve recovery rates developed in the last 15 years by Xstrata. Xstrata has used the technology long enough to prove it works and Blue Note has a contract with Xstrata to buy half its zinc concentrate and all of its lead concentrate. Blue Note is still very much priced as a junior explorer. It is in start-up operations currently testing their milling process and will soon be a producer eligible to move to the Toronto exchange. As a new start-up it runs the risks that things will not go as management plans and there are no operational financial reports to review and evaluate.
Blue Note has several exploration properties in the vicinity of the Caribou mine including Armstrong, California Lake, McMaster, Orvan Brook, Rio Road and Woodside Brook.
Blue Note’s relative leverage to metal prices means that every 2c change in lead price has about the same effect as 1c change in zinc price.
Acadian Mining is a small new producer with 159 million shares fully diluted as of May 31, 2007, giving it a fully diluted market cap of $191 million. They have two main projects of interest, Scotia Zinc and Scotia Goldfields, and they own about half of Royal Roads, which owns about half of Buchans River.
Scotia Zinc has a 2007 production target of 23 million pounds of zinc and 8 million pounds of lead and a 2008 production target of 45 million pounds of zinc and 19 million pounds of lead, for $44 million of gross revenue in 2007, 1/4 of market cap and $90 million for 2008, almost half of market. The reserves have a zinc grade 3.6% zinc and 1.7% lead, for $160/ton metal values. Total reserves are about $750 million to be mined over 7.5 years. As a new start-up it runs the risks that things will not go as management plans and there are no operational financial reports to review and evaluate.
Goldfields has several properties with about 1.35 million ounces of gold contained in resources that have metal values ranging from about $60/ton with the Beaver Dam property which has about 600,000 oz of gold, to about $350/ton with Goldenville with about 265,000 oz. The metal values may be worth about $900 million, but low grades spread out in several deposits means high extraction costs.
The Royal Roads holding has given them an interest in the Tulks North property. It currently has inferred resources with metal values of about $530/ton, or about $900 million in metal values. With the 1% zinc cut off instead of a 2% zinc there is 2.5 times as many tons of ore, but metal values per ton of ore decline to about $250/ton. This only adds $100 million in metal values to the deposit for an extra 2.5 million tonnes of ore that would need to be processed. This extra could quite possibly cost more to mine and process than the value of the recoverable metals. Acadian's interest is about half of this deposit.
How do they compare?
Zinifex by far has the best grades and looking at their financial data, you can see that about 1/3 of the gross sales ended up as earnings. Contrast that to Breakwater's lower grades and about 20% of their sales ended up as earnings, although Breakwater's earnings were pulled down by Myra Falls' lower grade during the quarter and will likely increase to more like 25% of gross revenue. Zinifex's higher grades and endless deposits justify a higher P/E than Breakwater, but both are nice looking companies. With strong prices there is always more downside risk that prices will decline, so commodity companies in this market commodity companies should never be priced the way a company like Pepsi might be priced, with an expectation the prices will generally always increase. So, 5% earnings might be great for Pepsi, but is a good way to potentially lose your capital with commodity companies. Zinifex currently has earnings of about 11%, which has a safety margin built in and gives them cash flow to fund future growth and exploration.
Breakwater has lower grade and is priced lower relative to market cap. Earnings for Q1 were low, about 5%, but should improve, most likely doubling when their new production that has started shows up in the financial reports. Also, Myra Falls contribution to operational earnings was relatively small as the grade they actually mined for the quarter was much lower than the overall grade their reserves/resources indicate they hold. Breakwater has a safety margin built in and they have good cash flow to fund future growth and exploration.
Tamerlane has a beauty deposit with that R190 deposit but they have a lot of steps to go through to actually get that deposit producing and any revenue possibility is about two years out. The economics of the R190 deposit at today's prices are nice, but it is a minimum of two year out and the further out you go, the more likely projections on everything are going to be wrong.
Blue Note has high grade to mine, an exceptionally high gross revenue potential relative to market cap and good reserves/resources relative to market cap. On this basis it is currently priced at about 1/3rd to 1/2 of the valuation given to Zinifex or Breakwater. The metal values per ton are very comparable to Breakwater's grade, so the simplest projection on earnings by contrasting is that they will be about 20-25% of gross revenue. Octagon has an estimate of 15c/share, or about 30% for this year, and 25c next year, for about 50%, or a P/E of about 2.
Acadian Mining has the lowest start-up production relative to market cap and the lowest grades, less than half that of the other companies profiled. Blue Note has combined open pit and underground mining operation, as does Acadian. In general high grade is what makes a company profitable and low grade is what limits profitability. For Acadian the gold deposits also tend to be low grade and/or small deposits, both of which rarely make money. It has a grade that with a large operation and economies of scale can make money but from reviewing many financial reports of other operations my conclusions are that its small size makes it questionable as to whether it can make money. This one I'd definitely want to see proof of earnings because of the lower grades.
Other details I picked up from looking at the relative deposit size is that Acadian's information indicates that they expect to recover about 90% of their deposit in 7.5 years. Blue Note's numbers indicated about 60% of their deposit will be recovered in 5 years. It is strictly a perception it gives me that there is not much room for error built into Acadian's numbers. Blue Note uses a 9% zinc-lead equivalent cut off which builds in a safety margin for investors in their evaluation. The 1% zinc cut off used for Royal Roads does not.
Note: I am not an investment adviser and I write about investments to help me to evaluate my own investments or potential investments or to better understand investments as a whole. For this post, because I own Blue Note, it was time for me to re-assess it's valuation relative to other companies in the sector. If you've seen something of interest you need to do your own due diligence. Current prices, Blue Note 53c, Acadian $1.20, Breakwater $3.19, Tamerlane $1.62.