Saturday, July 16, 2011

Metallica Minerals (MLM) & MetroCoal (MTE)

It's pretty rare that I cover a company whose assets aren't dominated by precious metal tenements and resources, infact the last may very well have been my first ever post on this blog when I covered Mantle Mining (MNM). Mantle Mining, like the company I will be covering today, has predominantly coal based assets/exposure and since the writeup on the site last year MNM's share price rose from 4.5c to 29c and following has drifted back down to 11.5c.

Metallica Minerals (MLM) provides fairly diversified exposure to several different resources through their large positions in several other ASX listed companies as well as a flagship project of their own.

A summary of their current positions is best summarised using a slide from a presentation they made available several days ago:

Their share price closed today at 43.5c (down 7.5% after shares from a rights issue started trading). At 43.5c MLM has a market cap of approximately $56m (including additional shares from rights issue). Their investment in MetroCoal (MTE) was worth $66.8m as of today's close (80m shares @ 83.5c), so MLM is trading at a 16% discount to the value of their MTE holdings alone (without taking into account their almost $10m in cash and major stakes in several other resource companies). ** See more information on MetroCoal later in this post.

Further to the above cash and investments held by MLM they also have their flaghip Nickel-Cobalt & Scandium “Tri-Metal” Project (Nornico). The project contains approximately 400,000t Nickel, 42,000t Cobalt and 3,000t Sc Oxide. Production is targeted for 2014.

Owning 2 out of the 3 known Scandium deposits puts MLM in a powerful position to be THE company to provide this Rare Earth Element (REE) globally.

With the price of Sc Oxide currently commanding around US$1600kg it's not hard to see the potential here if MLM were able to mine it at a rate of 40,000kg pa ($64m revenue) and that's just one of the three metals!

I suspect the biggest concern here is the Capex that will be required for the 500ktpa HPAL plant which will likely be in the vicinity of several hundred million to develop. Further studies and analysis on Capex costs and plans are in progress.

**Further information on MTE:

176.7m Shares on Issue (approx 78m in escrow)
$147.5m Market Cap
$13m in Cash (excluding JV funds)
1,188 Mt Coal Resource
Market Cap/Resource at around 12.5c per tonne

Top holders include Metallica Metals (45.3%), Mathews Capital (17%), National Nominees (2.7%) & UBS Private Wealth (2.7%), the top 20 hold over 70% of the company.

The discount to the value of their MTE holding makes MLM an attractive alternative for investors looking for cheap entry into MTE. Technically if buying MLM at today's prices the buyers would be exposed to a larger number of MTE shares (by proxy) than if buying direct. Of course there are downsides to not owning MTE directly. If a takeover offer eventuates then investors will be relying on MLM to make the decision on their behalf.

Recent speculation on outside interest in MTE's projects has been confirmed:
Three top Indian companies, including Reliance Power, Aditya Birla Group's Essel Mining and the RPG Group, have been shortlisted for final round discussions to buy a strategic stake in Australian coal mining firm, MetroCoal. The Australian company plans to raise $600-700 million from the sale.

The Queensland-based MetroCoal has put two of its thermal coal bearing blocks with proven reserves of 1.2 billion tonnes [BB Edit: Note companies correction to this figure in response below], up for sale and has invited expressions of interest from suitable companies. According to people familiar with the development, the three Indian companies along with at least two other foreign companies have been shortlisted for the final round of talks.

In fact, a team of senior executives from MetroCoal is touring India next week to visit the shortlisted Indian companies. MetroCoal did not respond to email queries on this issue. Metrocoal is planning to divest equity stake at either the entity level or project level, said the people cited earlier. The two exploration blocks in the Surat basin in Queensland, have high value thermal coal used by Indian power plants. Economic Times
Response from MTE in regards to above article was as follows:
MetroCoal Limited (ASX-MTE) is responding to an article published in the Indian media speculating on the progress of discussions on the marketing of the Joint Venture process for EPC 1164 and EPC 1251.

MetroCoal wishes to clarify that discussions with companies are at a very early stage following the receipt of Expressions of Interest from a number of parties from China, Korea, Japan, India, Australia and the United States of America.

The media article contains a significant inaccuracy that the project has a proven reserve of 1.2 Billion tonnes. MTE advised the ASX on 12 May 2011 that the project areas within EPC 1164 and EPC 1251 contain an inferred resource of 767Mt*.
In the announcement a time frame of late July was given for receipt of Non-binding Indicative Offers with Formal binding Offers to be received by late August.

Recent consolidation in the coal industry points to a positive outcome for MTE. For example Cockatoo Coal (COK) recently sold partial stake in a Queensland project:

COCKATOO Coal will sell 49 per cent of its Woori project in Queensland to Japan's Mitsui for $37.25 million.

Mitsui now owns 49 per cent stakes in the Woori, Collingwood and Taroom projects, all in Queensland's Surat Basin, and Cockatoo Coal said these will now be consolidated into one joint venture managed by Cockatoo.

The joint venture will work on completion of a feasibility study by December 2013, Cockatoo Coal said. The deal with Mitsui remains subject to relevant regulatory approvals. The Australian
In another recent example a take over offer at around a 40% premium to the last share price was made for Macarthur Coal (MCC):
THE world's largest listed coal miner and steelmaker today sweetened their offer for Australian pulverised coal miner Macarthur Coal to about $4.73 billion, while moving a step closer to success by agreeing to start due diligence on the deal.

Peabody Energy and ArcelorMittal on Monday announced they would start receiving data and site-access from Macarthur from next week.

That offer came at a 40 per cent premium to Macarthur's previous share price, but was treated as an upper limit that would be further reduced by subtracting the value of any final dividend declared by Macarthur's board. The Australian
An even more interesting potential takeover is occurring just next door to MTE's Columboola tenement (as pointed out by valinvestor on HC, thanks!):
China Knowledge reported that Yanzhou Coal Mining Co, China third largest coal producer is likely seeking to acquire privately owned Australian coal miner Syntech Resources which owns the 700 million tonnes Carnaby Downs thermal coal project in Queensland's Surat Basin.

Surat Basin is a little developed coal province to the south of the Bowen Basin, Australia's primary coal-producing region. At present, the thermal coal project exports a small amount of coal through Brisbane port. Syntech Resources has plans to expand the output of the project to 15 million tons a year by 2013 if it obtains using rights of the port.

According to unnamed sources the acquisition is valued between several hundred million Australian dollars and more than AUD 1 billion.

Yanzhou Coal Mining acquired Australia Felix Resources Ltd for AUD 3.5 billion in 2009. The deal was China's biggest-ever takeover of an Australian company. Steel Guru
Granted Syntech Resources is far more advanced than MTE with their nearby Columboola tenement, however MTE already has a resource around 75% the size of Syntech's (with further drilling results to come) as well as a much larger area for exploration.

If the figures for a JV operation or takeover of MTE are anywhere near what is being suggested by similar activities in this sector then we could easily see the share price of this company skyrocket (after already doubling in the last couple of months).

It would seem that the recently announced Carbon Tax is having little effect on this booming sector.

It's pretty obvious that the recent appreciation in MLM's share price has been driven by MTE's share price rise. If the market cools on MTE (or the takeover/JV interest doesn't develop into something solid) then it's likely that MLM will also moderate:

That said MLM could just as easily play catchup in the meantime given their undervalued position!


Disclosure: Position held in MLM. Not investment advice. Do your own research.

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  1. Quote: "Syntech Resources has plans to expand the output of the project to 15 million tons a year by 2013 if it obtains using rights of the port." This refers to use of proposed Wiggins Is terminal at Gladstone Port, Stage 1 yet to be built - see Surat Basin Rail recd approval for construction after Xstrata Coal won cond. approval for its Surat Basin $3 bn Wandoan Coal Mine. Xstrata Coal's planned coal mine is subject of a legal challenge that goes to Qld Land Court 22 Aug. 11. Xstrata is key foundation player of the proposed rail & port. Melanie. S-E Qld.

  2. Thanks for the extra information on happenings in the local Coal industry Melanie! Cheers, BB.