Marengo featured in RRS

ASX: Marengo Mining Ltd (MGO) - The BEST buy of 2011

The results of my research are getting much more interesting and exciting than I had envisioned earlier! I decided to compare Rex Minerals (RXM) with Marengo Mining (MGO) after reading an article in Eureka Report that compared SFR and RXM in Oct’10.

RXM & MGO Comparison Table:

	MGO	RXM
Copper Resource:
Measured	1 Billion pounds	Nil
Indicated	1.9 Billion pounds	Nil
Inferred	3.6 Billion pounds	2.64 billion pounds
Other resources:	Molybdenum	Gold
Measured	45 M lbs ($540M)	Nil
Indicated	68 M lbs ($816M)	Nil
Inferred	91 M lbs ($1.09B)	1.1 Moz ($1.5B)
Capital Cost:	US$1.6B	Not determined yet
Financing Strategy:	NFC offering to arrange financing of at least 70% of the capital cost of project	Unknown (No clear financing strategy so far identified from presentations.)
Market Cap:	$300M	~$430M
First Production:	2014	Unknown
Completion of DFS:	1Q 2011	Unknown (starting in 2012, but could last for more than a year)
Cash at Bank:	$70M	$103.7M
Exploration Upside:	Project covers +100km of the highly prospective Bundi Fault Zone. Less than 5% of structural corridor drilled to date.	Multiple large scale and shallow targets on the Yorke Peninsula near Hillside.
Operating Cost:	$0.90-$1.00/lb of copper	Unknown

If comparing JUST the inferred category of resource, MGO has $15.5B and RXM has $12.06B worth of resources (based on $4/lb for copper and $12/lb for Mo and $1350/oz for gold). This means that MGO should be at $550M market cap purely on an inferred resource comparison basis, i.e. a share price of $0.56!! We haven’t even factored the resource that MGO has in the measured or indicated category!!

In my opinion, MGO should experience a significant re-rating soon (if not NOW!!). It’s either SFR, RXM and OZL share prices that need to drop to the level of MGO, or alternatively, MGO rising up to the level of SFR & RXM.

In any case, if one is to buy MGO shares now and hold them for 3 years, one will have a stake in a $300M market cap company that will be producing US$600M cashflow per year in 2014! This will be a very attractive takeover target!!

By: Peter Koay

ASX Marengo Mining Ltd (MGO): A better value proposition than Sandfire Resources (SFR)

If one has to understand the value of MGO, one has to compare it with all the other copper producing companies. Based on the most recent SFR reported resource statement and its pre-feasibility report, the following comparison is made.

Resource comparison:

	MGO (Cu)	SFR (Au)	SFR (Ag)	SFR (Cu)
Measured	1000M lbs ($4B)	47k oz  ($63.4M)	-	52.8M lbs ($211.2M)
Indicated	1900M lbs ($7.6B)	491k oz  ($662.8M)	3750k oz ($112.5M)	1078M lbs ($4.31B)
Inferred	3600M lbs ($14.4B)	186k oz ($251.1M)	1305k oz ($39.1M)	286M lbs ($1.14B)
Total	6500M lbs ($26B)	724k oz ($977.3M)	5055k oz ($151.6M)	1416.8M lbs ($5.67B)

*Conversion using copper price of US$4/lb, silver price of $30/oz, and gold price of US$1350/oz.

	MGO Resource Value	SFR Resource Value
Measured	$4B	$274M
Indicated	$7.6B	$5.08B
Inferred	$14.4B	$1.43B
Total	$26B	$6.78B

Capital Cost comparison:

MGO: US$1.6B

SFR: A$400M (refer to: http://asx.com.au/asxpdf/20110304/pdf/41x7hft3k0lzyg.pdf)

The capital cost of MGO is 4 times SFR’s. In the right ball park considering that MGO’s resource is approx 4 times of SFR.

Operating Cost comparison:

MGO and SFR’s operating cost is almost the same, i.e. ~$0.90-$1.00 per lb.   

Production Timing:

MGO 1^st ore concentrate produced: 2014

SFR 1^st ore concentrate produced: Q3, 2012

Note also that DFS completion for SFR is 2Q 2011 whereas MGO’s DFS report is targeted to be released to the market by 1Q 2011.   

NPV Analysis:

Basic NPV analysis of SFR project gives us a price of $7.80/share with the following assumptions:

1. 70kt/Cu and 45koz of Gold production/year.
2. Mine life of 7 years (as per PFS report)
3. 1^st Production in 3Q 2012.
4. Net Cash Flow: Gross Cash Flow ratio: 0.56
5. Cost of capital: 10%
6. Capital cost: $400M
7. 150M issued shares
8. $4/lb copper price and $1350/oz gold price

Based on NPV analysis, it seems that the value of SFR’s project is almost fully factored into the share price.

Based on market cap comparison,

Current market cap of SFR is $1.02B (@$6.90/share) with 148.3M shares issued. 

Current Market Cap of MGO is $300M (@$0.30/share) with 994M shares issued.

Based on “Net Profit before tax, depreciation and interest” comparison, SFR is saying that it’ll have $330M-$350M cash flow. MGO will have ~ $600M cashflow per year. Almost doubling SFR’s cashflow!!

Basically, this comparison between MGO and SFR tells us that MGO should have at least $1B market cap NOW, which means that it’s share price should be about $1/share NOW. And in 2-3 years time, it should be ~$3/share when it’s producing copper at a similar rate of OZ Minerals.

  

Note: This comparison is done assuming that SFR has no value factored into the share price from all its other projects/investments.

SFR’s most recent upgraded Resource report: