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Monument Mining Limited – Insanely Cheap

May 19, 2011 | About:
Monument Mining Limited (MMY.V)(MMTMF) is an emerging Malaysian gold producer with a market capitalization of slightly above $100 million (Fully diluted = $191M – $60M Cash from warrants and options exercises = $131M). As of the date of this report, it has about $35 million of cash in the bank so the enterprise value is about $65 million. In September 2010, the company announced commercial production, and it is currently producing gold at a rate of about 40,000 ounces per year. This equates to cash flow from operations of about $10 million per quarter or $40 million per year.

Based on the current enterprise value, the company is trading at 1.62 times the operating cash flow. By April 2012, the company is expecting to increase the mill capacity by 250 percent. Along with ongoing exploration activities, this will allow it to increase its annual gold production to a rate between 75,000 and 100,000 ounces per year. When this is accomplished and the price of gold remains at current levels, cash flow from operations in only one year will exceed the current enterprise value. If the market’s current pricing is not ridiculous, then I don’t know what is.

Company Description

Monument Mining, together with its subsidiaries, engages in the exploration, development and production of gold minerals in Malaysia. If you are familiar with Yukon-Nevada Gold Corporation, then you are familiar with Bob Baldock who is also the president and CEO of Monument Mining. I cannot understate the importance of Baldock running this company. I probably would not have invested in this company if he was not running it. When I spoke to him on the phone, he asked me why I was interested in Monument Mining and Yukon-Nevada and I replied, “Because of you.”

Monument Mining has 100 percent ownership interests in the following three projects:

  • Selinsing Mine
  • Damar Buffalo Reef
  • Famehub
Selinsing Mine Project

In June 2007, Monument Mining acquired the Selinsing gold project and by October 2009, the company had its first gold pour. It went through the acquisition, financing, engineering, permitting, construction and partial commissioning in a little more than two years, which is simply incredible.

Selinsing mine project has an NI 43-101 compliant resource estimate of 231,000 ounces indicated and 388,000 ounces inferred. These estimates are based on the NI 43-101 that was completed on Dec. 27, 2007. Currently, the company is working on creating a new NI 43-101.

In September 2010, the company announced commercial production at a rate of 40,000 ounces per year. The plant has a capacity of 400,000 tonnes per year, and it is currently operating at full capacity. The management plans to increase the production to between 75,000 and 100,000 ounces per year by expanding the plant to a capacity of one million tonnes per year by April 2012.

Damar Buffalo Reef Project

Damar Buffalo Reef project, which is adjacent to Selinsing mine project, was also acquired in June 2007. This project does not have an NI 43-101 compliant resource estimate. However, it has a historic resource estimate of 155,800 ounces historic indicated and 29,600 ounces historic inferred. Within the near future, the company will generate a new NI 43-101 which will show how much more gold is in the ground.

Famehub

Famehub, which was recently acquired, consists of 32,000 acres of land adjacent to the Selinsing and Buffalo Reef properties. This property will allow for years of gold exploration which will increase the company’s annual gold production far beyond the current production levels. The size of this project is more than 10 times the sizes of Selinsing and Buffalo Reef together. The exploration potential should not be underestimated.

Why Is Monument Mining So Cheap?

Since the company announced commercial production in September 2010, the stock price increased significantly but nowhere near where it should be trading. Why?

  • The company has had only two quarters of commercial production. For many investors, this is not a long enough track record. Obviously, time will remedy this.
  • Gold mining companies that produce less than 100,000 ounces per year are not of much interest to big institutional investors. Again, time will remedy this. After expanding its plant by 250 percent, the company will be on track to produce 100,000 ounces of gold per year.
  • The current mine life of the producing pit is only five years. The goal of the current exploration activities at Selinsing, Buffalo Reef, and Famehub is to lengthen the life of the mine.
Why Is Monument Mining Not Going to Trade This Low for Too Long?

Even though Monument Mining generates cash flows from operation in the neighborhood of about $40 million and has about $35 million in the bank, it is still trading at a market capitalization of about $100 million. The biggest drawback is that the mine life is only five years. Let us assume for a moment that this is all we have, meaning that the Selinsing Mine Project is the only project that the company has and once the five-year period is over, we are done. The following are the company’s future cash flow estimates for this project:

Future-cash-flow-projections.bmp

As you can see, the total surplus cash from this project over the five-year period will be $112.6 million. But this assumes the price of gold is $1,000 per ounce. If we use an assumed price of $1,400 per ounce of gold instead, surplus cash is $176 million.

What does all of this mean? After subtracting $35 million in cash that the company has in the bank, we get $65 million in enterprise value. This means that you are paying $65 million to receive back $112.6 million or $176 million depending on whether you use a price of $1,000 or $1,400 per ounce of gold. This looks like a good deal to me.

Let us look at it another way. Based on the price of gold today, the company generates about $10 million per quarter or $40 million per year. If everything stays the same, the company will generate $60 million in 18 months. This is almost equivalent to the current enterprise value. Then, the cash flows after one and a half years are essentially free.

The stock looks even more insanely cheap when you start factoring in its future potential. The company has two sets of goals: near-term and long-term. In the near term, the goal is to lengthen the life of the mine and increase production. In the long term, the goal is to acquire other projects and turn them into producers.

To lengthen the life of the mine, the company will continue exploration which will show the market that it has more resources in the ground than currently shown in the NI 43-101. As mentioned before, the Selinsing mine project has a NI 43-101 compliant resource estimate of 231,000 ounces indicated and 388,000 ounces inferred. Only the indicated portion of resources is taken into account when estimating the life of the mine. With a production level of 40,000 ounces per year, 231,000 ounces indicated will last about five years. The 388,000 ounces inferred are not being factored in because they are not as certain as ounces indicated.

In order to convert ounces inferred into ounces indicated, many more holes need to be drilled, which is exactly what the company is currently doing. This reclassification will more than double the company’s resources. When the new NI 43-101 is filed, the market will most likely re-price the stock of Monument Mining to reflect the change in the resources. This report was originally planned to be completed by March 2011. Because we are already in May 2011, I believe that the filing is imminent, thus providing a near-term catalyst for the stock.

What about Damar Buffalo Reef? This project has a historic resource estimate of 155,800 ounces historic indicated and 29,600 ounces historic inferred. Similar to the Selinsing project, the company is also performing exploration activities to create the first NI 43-101 to show the market what this project has in the ground. An updated report was originally planned to be completed by the end of 2010. Similar to the Selinsing mining project, the release of the new NI 43-101 could happen anytime. Once this report is filed, the market is likely to re-price the stock of Monument Mining to account for more resources.

With the new NI 43-101s from Selinsing and Buffalo Reef, the company could potentially increase its reserves from 231,000 (Selinsing only) to 800,000 ounces, bringing it closer to its goal of one million ounces. However, this does not end here. The Famehub site, which was recently acquired, consists of 32,000 acres of prospective exploration land. This is more than ten times the size of Selinsing and Buffalo Reef together. If Selinsing and Buffalo can have about 800,000 ounces in the ground, then it would not be unreasonable to think that Famehub could have millions of ounces in the ground. And because the stock is so cheap, all this comes as a free option.

The new NI 43-101s will increase the life of the project. The expansion of the plant will allow the company to use these newly created resources to increase production. Currently, the production plant has the capacity of 400,000 tons per year and is currently operating at full capacity. The management’s goal is to increase the capacity of the plant to one million tons per year by April 2012. This will create the foundation that will allow the company to increase production from 40,000 ounces per year to between 75,000 and 100,000 ounces per year.

When this is accomplished, and the price of gold remains the same, the company will generate between $75 and $100 million in cash flow per year. Let’s not forget the current market capitalization is still about $100 million. With this kind of capital, the management will be able to shift to its long-term goal and acquire other projects in Malaysia and turn them into producers as well.

Conclusion

I discovered this company because I also own shares of Yukon-Nevada Gold Corporation, and through this I was introduced to Bob Baldock. While I believe that Yukon-Nevada is a multi-bagger from here, I could not believe my eyes when I started learning about Monument Mining.

In my book, investing in Monument Mining is a no-brainer. The company produces serious cash that is allowing for expansion of the plant and annual production. It is run by Bob Baldock, one of the best mining executives in the world, and it is trading below the value of its first five-year pit. In my opinion, this ridiculous valuation cannot last much longer.

For more information, I have included some related videos and links to reports and articles.

Interview with Bob Baldock, President & CEO of Monument Mining

Popout

http://www.youtube.com/watch?v=KyYjyj4TERU

Popout

http://www.youtube.com/watch?v=0NI0Xp6hg5g

Monument Mining Investor Presentation – November 2010

http://www.monumentmining.com/userfiles/file/PowerpointNovember2010PDF.pdf

Monument Mining Research Reports

Byron Capital Markets March 3 2011

Fundamental Research Corporation – February 24, 2011

http://stockgroup.stockgroup.com/baimg/img/FunRes/Feb_2011_MMY_Update.pdf

Byron Capital Markets – October 22, 2010

http://www.byroncapitalmarkets.com/wp-content/uploads/2011/02/Monument-Mining-Initiation-Report-10-22-2010.pdf

Fundamental Research Corporation – April 7, 2009

http://www.investorideas.com/Research/PDFs/MMY_April_2009.pdf

Fundamental Research Corporation – September 15, 2008

http://www.investorideas.com/Research/PDFs/MMY_I_Sept15_2008v2.pdf

eResearch – November 27, 2007

http://www.eresearch.ca/_report/MMY_112607.pdf

Articles

The Northern Miner – December 20-26, 2010

http://www.monumentmining.com/userfiles/file/MonumentNorthernMinerDec2010.pdf

Disclosure: I, or persons whose accounts I manage, own shares of Monument Mining Ltd. (MMTMF). This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing or disposing shares of Monument Mining Ltd. (MMTMF). You are advised to consult your financial advisor or conduct the due diligence yourself.

About the author:

Mariusz Skonieczny
Mariusz Skonieczny is the founder and president of Classic Value Investors, an investment management firm. He is also the editor of Ultimate Value Finder, a monthly newsletter that features three underfollowed, unknown, and undervalued companies ignored by Wall Street.

Visit Mariusz Skonieczny's Website


Rating: 3.5/5 (13 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
This might be the deal of the decade. I don't know. However a couple points (uneducated as they are) about gold and mining companies:

One, I have a personal bias against mining companies because they are like casino slot machines but where the 'house' decides what to do with the payouts. More often than not, big payouts are quickly "reinvested" by management in new developments, expansion and exploration often with long odds. i.e. the player/investor loses and the house/management wins.

Two, I understand that there is a considerable amount of known but un-mined gold in the world and as the price has risen, much of this formerly uneconomic gold is now 'economic' to extract. That's nothing new, its happened with the oil sands and other resources, but I have no idea at all as to how close or far we are from reaching 'peak' gold. Gold companies though are clearly popping out of the ground to raise funds to extract it.

If we are far from peak gold with more mega finds ahead of us, and as evidenced above, productive capacity rising rapidly in the sector, then what happens when demand falls off even slightly? It's not like oil that has been consumed - the supply is ever growing and put in storage. So, much more so than with depleting resources like oil, gold instead suffers from higher downside risk as the price rises and takes the productive capacity upward with it - possibly geometrically so.

Lastly, unlike other 'they're-not-making-any-more-of-it resources which face some technological discovery limiting the upside, gold faces a much more esoteric and eccentric risk. Gold faces huge market and decision maker risk - and no one can even identify exactly what those conditions are that bury demand for gold. Following the last gold bubble, for basically two decades - yes - a whopping two decades - fiscal, political and economic conditions as dire as they often seemed, still left gold in the vaults and in the ground despite endless seemingly sensible arguments justifying a higher price. Hey, maybe it was just the persistence of overcapacity from the 1970s.

rmoesker
Rmoesker premium member - 3 years ago
The company’s future cash flow estimates start in 2009?

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