I have been a strong supporter of the management of both Monument Mining (MMTMF.PK) and Yukon‐Nevada Gold Corporation (YNGFF.PK). However, with the most recent plans about the Mengapur Polymetallic Project in Malaysia, I became more confused and doubtful about the management's ability to allocate capital for the benefit of shareholders
Maybe there is something that I am missing; please help me understand your rationale.
The management states that after extensive analysis and discussions, the acquisition of the Mengapur project is in the best interest of the company and its shareholders. Based on my own analysis by using the confusing information that has been provided by the NI 43‐101, I have a hard time seeing how the Mengapur project creates value for shareholders.
The management is asking its shareholders to vote and support this project. Based on the analysis that I am about to present, I have no idea why any shareholder in their right mind would vote "yes" for this project. At this point, the management's communications are not giving shareholders any reason to support it.
In the current state, Monument Mining is awash in cash. The gold production is generating approximately $70 million on an annualized basis. As of the date of this letter, the company probably has another $70 million in the bank. Within 12 months or less, the company will be producing gold at an annualized rate of 100,000 ounces of gold per year, which will generate cash flows of approximately $140 million, based on the current price of gold. On a fully diluted basis, this translates into $0.43 per share. The stock of Monument does not even trade at this price.
Instead of waiting and realizing this tremendous potential, the management is choosing to engage in the Mengapur project. Based on the most recent NI 43‐101, this project is estimated to bring revenues of $100 million with cash flows of approximately $40 million. To bring this project into production, it will cost approximately $179 million. I understand that these projections are based on outdated numbers, and therefore, are understated.
When the estimates are brought up to date, this project should yield approximately $300 million of revenues per year. If we keep margins the same, this should translate into $120 million in cash flows. Because Monument will only own 70 percent of the project, the company's portion will be $84 million in cash flows per year.
At first glance, this sounds terrific, but what will it cost us to get these juicy benefits? At first, the company will be paying $60 million for the original acquisition. To the management, this price tag may seem reasonable, but for shareholders, it is much higher. We are not paying $60 million because we are paying with undervalued shares, which are worth at least four times the current trading price. This means that we are really paying $240 million for the acquisition of the Mengapur project. However, it does not end there. We also know that it will cost at least $179 million to bring it into production. I say "at least" because the construction costs are also based on outdated numbers. Today, it will probably cost approximately $350 million, and therefore, the total cost will be $590 million or over half a billion dollars.
As I mentioned before, at first, getting $84 million in cash flows looks great, but after realizing that we are giving up over half a billion dollars of value to get it, it does not excite me anymore. Assuming that the project is successful, how will this translate into cash flows per share? Currently, there are 321 million fully diluted shares. Because the management is planning to issue an additional 140 million common shares and 140 million warrants, the newly diluted shares will be 601 million. The total cash flows from both projects will be approximately $228 million. I am assuming gold production of 100,000 ounces per year and $84 million from the Mengapur project. This gives me cash flow per share of $0.38.
Previously, I calculated that without the Mengapur project, we will get cash flow per share of $0.43 after the company produces 100,000 ounces of gold per year. Let's not forget that by that time, the company will probably have $150 million in the bank. Now, the management is asking us to approve a deal that requires giving up over half a billion dollars worth of value so that we can get $0.38 of cash flow per share in the distant future. How is this a good deal? We are being asked to approve something that is risky (even the management called it "challenging") yet it does not deliver any incremental value per share. As a matter of fact, we are being guaranteed that that the value per share will be less with the Mengapur project than without. I don't even want to think about how much value will be destroyed if the project turns out to be a failure.
I have been contacted by several Monument shareholders who are similarly confused and some of them went so far as to conclude that the Mengapur project is not supposed to benefit shareholders but the company's management because when the company grows in size, it will be able to pay higher salaries and other benefits.
After speaking with Bob Baldock, the CEO of Monument, on numerous occasions, I have a hard time believing that his intentions are to hurt shareholders for the sake of benefiting his own best interests. However, based on the information that is available to the public, I cannot see the rationale behind the Mengapur project. Growing for the sake of growing does not benefit shareholders. What benefits shareholders is allocating capital appropriately so that the intrinsic value per share is growing.
At this point, I do not know why anybody other than the management should vote "yes" for the Mengapur project.
Please help me understand why you are trying to do this deal. Tell me why I should vote to support it. If there is no additional value created on a per share basis, I urge the management to consider one of the following options:
• Cease pursuing the acquisition
• Purchase it with existing cash and develop it over the number of years with cash flows from operations
• Purchase it with existing cash and then make a decision in future years on whether selling the project or developing it makes the most economic sense for shareholders
President Classic Value Investors