metro mining ltd (asx:mmi)bridging loan repayable by february 2018 made available by largest...

Research compiled by Graeme Newing 20 April 2017

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Metro Mining Ltd (ASX:MMI) Listed shares 1,004.0 million ord fp shares Employee options 2.5 million with strike price 13.7¢, expiry 14 Dec 2017 Employee options 1.0 million with strike price 2.7¢, expiry 5 May 2018 Other options 4.0 million with strike price 6.7¢, expiry 23 Dec 2019

Share price 13.5¢ Market cap $137m fully diluted

Joining the big players in Australia’s bauxite export industry

• MMI is set to become a significant bauxite exporter from mid next year, generating substantial profits thereafter.

• The company owns the strategic Bauxite Hills mine on western Cape York, which has ore reserves of 92Mt. A bankable feasibility study was completed last month on a $36m 3Mtpa DSO export project, expanding to 6Mtpa within 3 years. Long lead time items are already being ordered and certain site works will proceed in May, ahead of formal project approval in July.

• An offtake contract with China’s Xinfa Group was secured in October 2016 for 1Mt in the first year of production and 2 Mtpa for a further 3 years. MMI is working on securing further offtake agreements but if necessary the project could commence with shorter term deals to supplement the existing contract.

• Financing for the initial project has effectively been all but secured through an unsecured $40m bridging loan repayable by February 2018 made available by largest shareholder Balanced Property and currently drawn down by less than $10m. MMI intends to replace the bridging loan with a secured four year bank loan in coming months but it is not necessary to do so prior to proceeding. I allow for bank finance of $30m to be drawn down in the December half year, together with a $20m equity raising at a 10% discount to the current market price.

• The only remaining pre-condition is environmental approval, for which there are no known impediments. The company already has environmental approval for some of the project including the port and load-out area, and the remainder is expected to be granted by the end of June.

• The company calculates a project IRR of 81% and a taxed NPV10% of $601m based on an assumed profile for annual bauxite prices, which looks reasonable to me. I have constructed my own spreadsheet and can broadly replicate these finding.

• Deducting corporate costs of $5m annually and allowing for full dilution, I derive a valuation of 48¢ per MMI share as at 30 June 2017, increasing to 60¢ within two years.

• I estimate EPS of 3-4¢ in the initial years and of about 7¢ once in full production. • Obviously these figures are highly levered to bauxite prices, and likewise the share price, but I

would think that a reasonable 12 month target price would be somewhere in excess of 20¢. • The potential both to add to ore reserves and to lift production above 6Mtpa, bauxite markets

permitting, provides further upside to the longer term valuation.


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THE BAUXITE HILLS MINE

Project description

The Bauxite Hills deposits are located 5km southeast of an existing port on the Skardon River and 95km north of Weipa on Western Cape York, QLD. The deposits are flat lying, some 0.5-3.0m thick, underlain by a kaolin horizon and overlain by 0.5-0.8m lateritic overburden. Ore reserves currently total 92.2Mt.

A bankable feasibility study (BFS) was completed in March 2017. Subject to a number of pre-conditions, project site works and construction is planned from May 2017 during the dry season, and production from April 2018, after the wet season. Production is scheduled at 2.0Mt in calendar 2018, 3.0Mt in 2019, 4.9Mt in 2020, 6.2Mt in 2021 and about 6Mtpa thereafter. In financial years, these can be restated as 3.0Mt in FY19, 3.4Mt in FY20 and 6Mtpa thereafter.

The operation will entail:

• A contract mining operation with overburden removed by scrapers and placed on mined out areas, and ore extracted by excavators and loaded onto road trains for transport to the port area.

• ROM stockpiles, a screening plant to remove organic material and reduce the top size to less than 100mm, and marketable ore stockpiles, all located at the port area.

• A 1,500tph barge loading facility consisting of a 125m conveyor extending along the jetty, leading to a barge stacker located on a floating pontoon.

• Transhipment over a distance of 15 nautical miles on shallow-draught flat-topped dumb barges towed by tugs to an anchorage point offshore for loading onto sea-going vessels.

All operations will be restricted to the dry season from April to November, not so much because of the wet conditions but because during the wet season the prevailing wind changes to the west, making transhipment difficult.

A contract is held with Transhipment Services Australia for the provision of barges and tugs. In the first two years the project will use barges each with load capacity of 3,500t bauxite. Metro will

Figure 1: Location of Bauxite Hills project


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charter sea-going vessels equipped with cranes and grabs suitable for uploading bauxite from the barges.

From April 2020 Metro will commence using larger 7,000t-10,000t barges towed by more powerful tugs. In addition an offshore floating crane platform will be utilised to speed up loading at the anchorage and allow larger vessels to be used. This will reduce transhipment costs and ocean freight and allow much higher shipment rates.

In 2020 also Metro intends to install a truck dump plant to supply ROM ore directly to the screening plant, thus eliminating the ROM stockpile and saving on rehandling to reduce costs. Mining will be ramped up to 6Mpta by extending haul roads and contracting additional mining equipment.

The environmental approval will be for an operation of up to 10Mtpa. In future years, if market conditions are sufficiently favourable MMI will examine the feasibility of raising the production rate from 6 Mtpa, if only for brief periods.

Ore reserves

Ore reserves almost doubled to 92.2 wet Mt of direct shipping ore after the merger with Gulf Alumina Ltd with each company contributing equally. The mineral resources and ore reserves were not simply an addition of those contributed by each of Metro and Gulf, which would have resulted in ore reserves of 96.5Mt (dry basis) grading 49.9% total alumina and 12.9% total silica, within mineral resources of 128.8Mt grading 49.9% total alumina and 13.3% total silica. Instead, they were recalculated from first principles, and this resulted in reduced totals of 92.2Mt (wet basis).

Figure 2: Bauxite Hills Mineral Resources and Ore Reserves as stated 15 March 2017

BH lease area Category

DSO tonnes

(Mt)

Total alumina

(%)

Total silica

(%)

Mineral Resources (in-situ, dry basis) 1 & 6 Measured 54.7 50.0 11.9 1, 2 & 6 Indicated 66.4 49.2 14.5 1 & 6 Inferred 23.7 47.4 16.0 Total 144.8 49.2 13.9

Ore reserves (ROM, wet basis, 10% moisture) 1 & 6 Proved 48.3 49.8 12.0 1 & 6 Probable 43.9 49.0 14.6 Total 92.2 49.4 13.2

The mineral resources are inclusive of the ore reserves. Proven ore is taken from the Measured resource, while the Probable ore is taken from the Indicated resource. The alumina and silica grades are for dry material for both Resources and Ore Reserves. Source: Company reports.


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The new disclosure did not reveal grades of available alumina and reactive silica, which are arguably more important. Back in January, prior to merging the mineral resources and ore reserves contributed by each of Metro and Gulf, the combined available alumina and reactive silica grades were put at 39.4% and 6.3%, respectively, with Gulf contributing slightly superior quality.

The quality of the ore reserve allows Metro to offer a diverse product to its customers suited to both high and low temperature refineries.

There is potential to add to these reserves from infill drilling the inferred resource of 23.7Mt. Currently at 400m spacing, these will be closed up to 80m spacing. However the conversion factor from resource to reserve could be relatively low given that the trucking distance is greater and that the average bauxite quality is lower.

Project costs

Initial capital is estimated at $35.8m with a further $37m required in years 2 and 3 for the offshore floating crane ($19.5m) and the truck dump and upgraded haul roads (13.9m). All the figures include a 10% contingency. Ongoing capital expenditure is projected at $1m annually in the initial years increasing to $2m annually once full production is reached.

While external funding is required for the initial project, the expansion can be funded from cash flow. Moreover, MMI can choose to lease the offshore crane if that suits better, saving $19.5m in capital cost at the expense of higher cash operating costs.

Over the 17 year life of mine (LOM) average FOB cash operating costs are estimated at $16.42/t, or $22.99/t allowing for royalties. The latter includes a state government royalty of 10% and aboriginal royalties ranging from 2.23% to 4.0% depending on the bauxite price received. Unit costs will be higher in the initial years and lower at full production rates.

Ocean freight over the LOM was estimated at US$8.78 or $11.71/t at an A$ of 75¢.Again, these costs will be higher than this in the initial years and lower at full production.

Figure 3: Bauxite Hills operating costs (A$/t)


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Project economics

The key determinant of project economics is of course the bauxite price expressed in US$/t together with the Australian dollar conversion rate (the BFS assumed a 75¢ A$). The annual prices used in MMI’s BFS are shown in Figure 4 below. It recognises that the market is relatively weak at present but is expected to strengthen in a few years as Chinese import requirements increase sharply.

Figure 4: Bauxite price profile assumed in BFS

Source: Company reports

Using these prices the company estimates that the project would enjoy a payback of 1.7 years, an IRR of 81% and a NPV of $601m real post-tax discounted 10% pa taking into account current tax losses of $56m.LOM average EBITDA would be $145m per year.

I have constructed a spreadsheet using these prices (by reading them off the diagram) which reproduces these estimates reasonably closely. But for my own estimates, I use a simpler price profile, of US$40/t through to 2024, of US$45/t in 2025 and of US$50/t in 2026. This results in an IRR of 81% and an NPV of $577m.

EBITDA in the first few years will be considerably less than the average LOM. My figures are for EBITDA of $40-45m in FY19 and FT20, increasing to $100-120m in FY21 through FY24, thereafter increasing to $190-200m.

Project status and financing

A bankable feasibility study was completed in March 2017. The schedule is for construction to commence in July 2017 effectively subject only to final environmental approval. This is almost certain to be granted given that kaolin has been mined in the past at the project location and the fact that Gulf Alumina had already been granted approval. MMI expects to be granted all approvals by the end of June.

You might wonder why I do not include project debt finance as a pre-condition. But MMI has been given an unsecured bridging loan of $40m from shareholder Balanced Property (see elsewhere in


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this report) with perhaps $30m still undrawn. Obviously it would be desirable to secure debt finance, and MMI is working to achieve that, but construction can commence without it. My assumptions on bank debt and also equity raising for the project are included on page 14 of this report.

As for offtake, a four year agreement was agreed with Chinese aluminium producer Xinfa Group in October 2016 for 1Mt in the first year and 2Mtpa thereafter, for a total of 7Mt of high temperature bauxite. For this contract, pricing is based on the alumina price index.

Discussions on additional agreements are being held with a number of parties. Securing another offtake is less certain in a market which is currently oversupplied but I would suggest it is still a good bet even if not of the same quality as the existing contract. Longer term it should not be a problem given growing Chinese demand. In addition, spot sales can be undertaken if terms are sufficiently favourable.

OTHER INTERESTS

Bauxite

MMI has a number of tenements covering a total of 2,500km2 over bauxite plateaus elsewhere on western Cape York and also near Bundaberg in Central QLD. These may be of interest in the longer term. Systematic exploration programs are ongoing.

Some of the tenements are close enough to Bauxite Hills that they could possibly add to project life. At the Musgrave prospect south of Bauxite Hills MMI has outlined an Indicated resource of 2.2Mt in-situ which can be beneficiated to 1.6 Mt grading 52.8% total alumina and 11.2% total silica. Two other areas possibly within trucking distance of Bauxite Hills at present have Inferred resources of some 3.8Mdt in situ at slightly lower grades.

Coal

Exploration of thermal coal deposits in the Surat Basin QLD was Metro’s main focus before acquiring its bauxite interests, and the company retains interests in a number of tenements. Expenditure is being kept to a minimum with all field work currently suspended. The main assets are: a 100% interest in the 2.0 billion tonne Bundi project near Wandoan, immediately south of Glencore’s Wandoan open cut and New Hope’s proposed Elimatta mine; and a 49% JV interest, with SinoCoal Resources holding 51%, in the 1.8 billion tonne Columboola project located near Miles, targeting the down-dip extensions of the seams currently being mined by Yancoal at the nearby Cameby Downs mine.

Copper

In June 2016 Metro agreed to acquire an 80% interest in the Mahar San copper project in Myanmar. The project area is prospective for copper, gold and base metal mineralisation in VMS geological settings. It was always intended to farm out an interest to someone who could further advance the project, leaving Metro to focus on the Bauxite Hills project, and accordingly in December 2016 PanAust Ltd (a wholly owned subsidiary of China’s Guangdong Rising Group) agreed to farm in to the project. PanAust can earn up to 82.5% of Metro’s interest through reimbursing Metro’s costs and spending up to US$8m on exploration. The company has the option to purchase the remaining 17.5% of Metro’s interest for US$9.5m.


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THE BAUXITE MARKET

Bauxite demand

By far the biggest market for the Australian exporters is China, which in 2016 produced some 94Mt and imported a further 53Mt of the ore for its refining industry, which is largely located well inland close to its bauxite mines. China continues to increase its refining and smelting capacity but is suffering from declining bauxite quality because of falling alumina/silica ratios, deteriorating head grades, and higher mining costs as mining depth increases. Many of these refineries are expected to close in coming years with new replacement plants built on the coast to facilitate the use of imported bauxite.

Clearly China will need to increase imports substantially. Alumina Ltd earlier this year provided a graph from CM Group dated February 2017 which projected that Chinese imports would rise to 68Mt by 2020, to 120Mt by 2025 and to 147Mt by 2030.

Figure 5: Chinese bauxite imports

Source: CM Group February 2017, courtesy of Alumina Ltd

Other importers of Australian bauxite presumably include Japan and Korea.

A graph of global supply and demand for bauxite was provided by CM Group for the Bauxite Hills BFS report released in March 2017.Refer to Figure 6. Existing supply and committed and probable projects can meet demand to around 2020. From 2020, projects in the “possible” category will be required, while beyond 2025 projects that are currently unknown or speculative will be needed to meet demand.

Presumably Bauxite Hills was in the “Probable” category given its cornerstone offtake agreement with Xinfa.


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Figure 6: Global bauxite demand and supply projected by CM Group for Bauxite Hills BFS


Bauxite supply

China currently imports bauxite largely from Australia and Guinea, with smaller tonnages from India, Malaysia and a range of other countries. In the recent past, imports from Indonesia and Malaysia were important but these proved unreliable, reflecting various export restrictions. This is best seen in Figure 7 which illustrates quarterly Chinese imports from 2007. It reveals:

• Erratic supplies from India due to its domestic circumstances including imposition of export taxes.

• A dramatic surge in Indonesian supplies until May 2012 when export taxes and partial export bans were imposed by the Indonesian government, then the re-emergence of Indonesian supplies until another export ban and higher export taxes were imposed in January 2014 in a further effort to foster a domestic processing industry.

• A surge in cheap supplies from Malaysia in 2015 where new mines were opened to compensate for the loss of Indonesian bauxite, only to be sharply curtailed in January 2016 when the Malaysian government imposed a production ban due to severe environmental degradation.

• A surge in supply from Guinean supplies in2016 to compensate for the curtailment of Malaysian bauxite. But the high freight cost all the way from Guinea makes this bauxite expensive.

• Throughout the period, a steady and sustained rise in supplies from dependable Australia.


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Figure 7: Chinese bauxite imports by source

Source: Australian Bauxite Ltd

In January 2017 the Indonesian ban was eased to allow exports in certain circumstances, with a 10% export duty imposed on bauxite with a content of at least 42% bauxite. It remains to be seen how quickly and to what extent these exports will resume. Meanwhile, Malaysia has extended its ban to the end of June 2017 and may extend it once more. In any case, it would be reasonable to conclude that the Chinese are unlikely to want to rely on Indonesia and Malaysia as much as in the past.

Located as it is on the west coast of Africa, Guinea in the past has exported most of its bauxite to the Atlantic market (North America, Europe and the Middle East) because freight rates to China are high given the distance involved. But China is purchasing bauxite from Guinea because of the curtailment of supplies from SE Asia and because bunker oil prices are relatively low. At the same time Guinea is embarking on a massive expansion of its export capacity with a number of expansions and greenfields projects underway. An additional 20 Mtpa could be on-stream by 2018 and 30 Mtpa by 2020. Much of this could find its way to China, depending on oil prices.

However, Australia is likely to continue to be the preferred supplier to China due to its close proximity, political stability, reliable quality, and social and environmental sustainability. AWAC in WA and Rio Tinto on Cape York largely produce bauxite for their own refineries but both have expansions underway for the Chinese market.

• Rio Tinto’s Australian operations supplied some 19 Mt to China in 2016 and this could increase by a further 10 Mtpa by 2020 due to production commencing from the Amrun mine located south of Weipa.

• AWAC probably supplied less than 0.1Mt to China in 2016 from WA and this could increase by 2.5 Mt during 2018 and possibly more by 2020.

Regarding the other potential projects in Australia:

• As discussed elsewhere in this report Metro plans to commence shipments to China from its Bauxite Hills project in April 2018 at the rate of 3Mtpa and to increase this to 6Mtpa by July 2020.


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• Metallica Ltd (MLM, price 6.1¢, mkt cap $17m) owns the Urquhart project, located just south of Weipa, which is being readied for production commencing in July 2017 and ramping up to 1.5Mtpa from a reserve base of 6.5Mt. Projected cash operating costs are relatively high at $32/t FOB. The project is likely to proceed, subject to finalising agreements with Aboriginal land owners.

• Australian Bauxite Ltd (ABX, price 13¢, mkt cap $18m) is exporting modest quantities (just 44,000t in the Dec HY) of low grade bauxite for the cement and fertilizer industries from its Bald Hill mine in Tasmania. The company plans to commence exporting metallurgical grade bauxite when prices increase sufficiently, but strangely the intended production rate has not been disclosed. Reserves are put at 9Mt. Costs are projected to be $31-33/t on an FOB basis and of course shipping costs would be higher than for bauxite from Cape York.

• Other potential producers are less advanced.

Bauxite prices

Historical prices for Chinese imports are shown in Figure 8 below. As can be seen, prices are relatively low at present, presumably due to oversupply. Australian prices, which are primarily for material from the Cape York Peninsula, fell from around US$60/t at the beginning of 2015 to around US$44/t by mid-2016, and remain relatively depressed. Note the much higher price of Guinean bauxite at around US$52/t, which presumably reflects its higher freight cost, and the lower prices for Indian and Malaysian supplies.

Figure 8: Historical prices for Chinese bauxite imports, by source

Source: Chinese customs, Bloomberg, Australian Bauxite Ltd

This state of affairs could continue for the next year or two. Longer term, the future looks bright because of the dramatic increase projected in Chinese imports. We reproduce in Figure 9 the price profile projected for MMI by CM Consulting in February 2017, which takes into account, among other things, the projected increase in supply from Australia and Guinea. I understand that current prices are around US$45/t, somewhat above the price of US$39/t assumed in 2018.


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Figure 9: Price projections for MMI bauxite


As discussed elsewhere in this report, the pricing profile I have adopted is a little simpler, but is close to the one used in the BFS. It assumes a price of US$40/t through 2024, then US$45/t in 2025, and US$50/t thereafter.

HISTORY OF METRO MINING

Metro Mining Ltd was incorporated as MetroCoal Ltd, a subsidiary of Metallica Minerals Ltd (ASX:MLM). It undertook an IPO in December 2009 to list on the ASX with the ticker MTE. Its focus at that time was on its Surat Basin coal interests. Joint venture agreements were reached or proposed with various Chinese companies over the years but for one reason or another, no coal mine was ever developed.

In September 2013 under new chairman Stephen Everett’s direction MetroCoal announced a merger with ASX-listed Cape Alumina Ltd (CBX), whose assets comprised bauxite resources on western Cape York QLD and whose major shareholders were Resource Capital Funds III and IV (RCF), Metallica Minerals Ltd and China Xinfa Group Corporation Ltd. However the merger did not proceed because within weeks there was a material change in circumstances, whereby the QLD government expanded the Steve Irwin Wildlife Reserve to include CBX’s key Pisolite Hills bauxite resource. Cape Alumina’s focus after that switched to its Bauxite Hills project.

MetroCoal was still keen to diversify into bauxite and in March 2014 it made an on market cash bid at 0.6¢ or $1.4m for all the outstanding shares in Cape Alumina and within days had secured a 46% position when RCF sold out. By August 2014 MetroCoal had secured control with 57% of the shares and made a scrip offer for the remaining shares at 1 MTE share for every 1.3 CBX shares. It was all over by November 2014 and from that time on bauxite became MetroCoal’s main focus. To highlight this, in December 2014 MetroCoal changed its name to Metro Mining Ltd with the new ticker MMI.

In February 2015 MMI made a takeover bid for unlisted Gulf Alumina Ltd at 3.3 MMI shares for every Gulf share, after securing a 20% holding from JoyDay Pty Ltd and Equity & Permanent Investment


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Capital Ltd. These terms would have given Gulf shareholders some 44% of the expanded group. However, additional acceptances were slow.

In September 2016, by which time MMI’s interest in Gulf Alumina had increased to 39%, a rival bid from ASX-listed Moly Mines Ltd (MOL) forced MMI to increase its bid to 60¢ cash or 50¢ cash and 1 MMI share. This won the day and MMI was able to move to compulsory acquisition in December 2016. Full acquisition of Gulf Alumina was finally announced on 8 February 2017.

Gulf Alumina had substantial bauxite resources adjacent to MMI’s Bauxite Hills deposits, and so the merger enabled MMI to almost double its ore reserves and resources. In addition, Gulf Alumina owned key on-site infrastructure including a river port and load out area, an airstrip and camp site, and had full environmental approval (because the area was previously mined for kaolin). Post the merger, MMI was able to forge ahead with a larger yet less expensive project.

CORPORATE

Board and management

Directors comprise:

• Stephen Everett (chairman). Former experienced mining executive. • Simon Finnis (managing director). Experienced mining executive. • Mark Sawyer. Represents Greenstone Capital LP. • Dongping Wang. Chairman of China’s Dadi Engineering Development Group. • Jijun Liu. Managing director of China Xinfa Group Corporation Ltd. • Phillip Hennessy. Independent director with KPMG background. • Lindsay Ward. Independent director with mining background. • George Lloyd. Independent director. Chairman of Ausenco Ltd.

All directors were appointed to the board some years ago, except that Simon Finnis was promoted to the board in January 2017 after having been appointed CEO of MMI in January 2015. No change to the board of directors was made subsequent to the merger with Gulf Alumina Ltd.

The directors and senior management have small shareholdings in the company. Most participated in the recent equity raisings. Stephen Everett is the largest holder among the directors with 4.2 million shares, followed by Phillip Hennessy with 2.7 million shares and George Lloyd with 1.3 million shares. Mike O’Brien (a senior executive) had 1.1 million shares at 30 June 2016 and no doubt has increased his holding.

I came across Stephen Everett and also George Lloyd many years ago when I was a professional mining analyst and knew Stephen particularly well.

The board seems overly large and in my opinion could be trimmed.


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Shareholders

The substantial shareholders comprise:

• Balanced Property Pty Ltd 200.7 mill shares 19.99% • Greenstone Management (Delaware) II Llc 199.3 mill shares 19.85% • Dadi Engineering Development Group 76.2 mill shares 7.59%

All three are supportive of the company. In more detail:

• Balanced Property is a subsidiary of the Brisbane-based Gorman property group. It has been a shareholder since October 2014 when it purchased shares from Metallica Minerals Ltd (MLM).

• It increased its holding in the company by 128.3 million shares by participating in the recent placement and by sub-underwriting a component of the entitlement issue to shareholders. The exercise would have cost it $16.0m, equating to 30.5% of the total raised.

• Together with the fact that it also has made available to MMI an unsecured $40m short term debt facility, it can be seen that Balanced Property is extraordinarily supportive.

• Greenstone is a private equity fund based in Guernsey which specialises in mine development projects. It gained an interest in July and September 2016 through a placement of 105 million shares at 8.5¢ to raise $9m cash. The agreement with MMI gives Greenstone anti-dilution rights to maintain a 19.98% shareholding and certain bauxite customer nomination rights.

• It participated fully in the entitlement issue and also in the placement in order, lifting its shareholding by 94.1 million shares to maintain its percent holding in the company.

• Dadi Engineering is a Chinese company involved in the coal processing industry. It has been a shareholder for some years. Its last disclosure was that it held 62.3 million shares, then equating to a 10.7% interest. So it has added 13.9 million shares, presumably by part-participating in the shareholder entitlement issue, or alternatively by buying shares on or off market. But a Form 604 (notice of change of substantial holding) has not yet been lodged.

There are a couple of other shareholders worth mentioning, updated from the list of top 20 shareholders released on 31 March 2017. Neither one appears to have participated in the recent equity raising.

• Joyday Pty Ltd now owns 32.6 million shares (3.2%). It is owned by Sydney-based chartered accountant Charles Victor Alexander. Joyday became a substantial shareholder with 45.6 million shares in August 2016 when it accepted MMI’s bid for Gulf Alumina but has been reducing its holding since then. At 26 August 2016 it held 35.1 million shares (equating to a 6.8% holding).It has since reduced its holding by a further 2.5 million shares. But a Form 605 (notice of ceasing to be substantial holder) has not yet been lodged.

• Chinese aluminium company China Xinfa Group Corporation Ltd owns 20.3 million shares (2.0%), unchanged from the position on 26 August 2016.


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Financial position

The company's cash position at 31 December 2016 was $11.5m, while its debt position was $48.9m.

MMI’s debt position arose because it borrowed $48.5m through unsecured short term loan facilities to complete the Gulf Alumina merger and for working capital. The loans were provided by two shareholders, being Greenstone ($40m) and an entity associated with Balanced Property ($8.5m) The loans had to be repaid through equity financing, debt financing or conversion to equity.

In February 2017 MMI announced equity capital raisings to raise $52.4m from the issue of 419.4 million shares at 12.5¢. This was completed in March. The two components were:

• An institutional placement of 126.9 million shares, to raise $15.9m. • An underwritten non-renounceable 1:2 entitlement offer, of 292.3 million shares, to raise

$36.5m. The offer closed on 17 March and the shares were allotted on 27 March.

Most of the funds were used to repay Greenstone’s bridging loan of $40m and so this was largely a swap of debt to equity. The remainder of the funds are being used to pay for the completion of BFS and final project approvals $3m, environmental bonds $2m, and purchase of long lead items and grade control equipment for the mine $7m.

At the same time it was announced that the Balanced Property group had effectively replaced and extended its existing $8.5m loan facility to MMI up to an amount of $40m to ensure the company has sufficient liquidity to advance the Bauxite Hills project towards production. It was expected that the loan would be drawn down by $7m post the capital raising. The loan is unsecured, has a term of 12 months from 24 February 2017 and attracts an interest rate of 10%. It can be repaid by MMI at any time without penalty.

The intention is to replace it with cheaper project debt from banks in the next few months, together with further equity capital. I allow for financial completion in the December half year, comprising:

• project debt of $30m, repayable over 4 years; and • an equity raising of $20m, through the issue of 163 million new shares at a discount of 10%

from the current share price of 13.5¢. This represents a 16% increase in shares outstanding.

Financial projections

Based on MMI’s projected bauxite production profile and costs, together with my own bauxite pricing profile, and allowing for corporate costs of $5m annually, my projections are that the company’s net profit would be $36m (3.1¢) in 2019 increasing to $80m (6.9¢) in 2021. The latter would be after a full tax expense.

On the same assumptions, I can derive a valuation of 48¢ per share as at 30 June 2017 and of 60¢ as at 30 June 2019, based upon discounting future cash flows at 10% pa. These valuations equate to a PE of about 15 in the initial years and of about 9 once the project is expanded to 6 Mtpa.

More detail is provided over the page.


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Disclaimer This analysis is cursory in nature and is not intended to be relied upon by third parties, who should make their own enquiries. The report does not does not contain investment advice.

Any views expressed in this report are purely my own unless otherwise indicated.

Disclosure I have not received any remuneration from any person for this report (I wish I had though). An associated entity has a small position in MMI at the time of writing.

© 20 April 2017, Graeme Newing

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