I appreciate you taking the time to offer me your thoughts.
As for why I hold onto the stock, it's basically the same reason I hold any stock, because I think it's undervalued relative to its future cashflows, intrinsic value and peers.
That said, MML is not the only gold miner I own, I own four other ASX listed gold mining stocks currently (and I have owned others in the past) and I'm fortunate that my average buy on all my gold mining stocks is well below their current price (including MML).
That said, I'll be the first to admit that MML has not been my best performer to date, I've done much better out of RSG, EVN, and NST (and a couple others I've now exited), but as always price is what you pay and value is what you get and rewards await the the prudent and patient investor...
That said it is MML's share price under-performance relative to is peers that first attracted me to work out what was going on and if the circumstances that produced that performance were likely to be the case going forward (which I don't believe they will).
Firstly, I'm not arguing that MML is the best operated mine, nor does it have the largest deposits nor is it located in the best mining jurisdiction - yet despite this, its share price and balance sheet relative to its peers and probable future performance are what I find VERY attractive.
At a share price of $0.70 and a gold price of $1270 I believe MML has very limited downside and if improvements to operations continue as planned over the next 3 - 15 months FCF should improve to the point where I expect the market will push MML's share price substantially higher.
It's because of that belief, MML is my biggest position of the five gold miners I currently own.
But of course I could be wrong, but I'm willing to vote with my money that I'm not...
Personally I like gold miners that have a history of production (MML has produced 650k oz from Co-O so far) and a decent amount of trading liquidity so I can accumulate or dump if my analysis changes.
I use an excel spreadsheet with the various financial and operational metrics as a starting point for assessing ASX gold mining companies and their strengths and weaknesses.
Here is the summary, you'll have to forgive that is becoming a little outdated given that its based on the HY financials that most companies published in February):
So the thing that makes MML interesting relative to its peers is its Enterprise Value (which for simplicity sake in this excel sheet is calculated as being "market cap + total liability - current assets").
Over the last 24 months most Australian gold miners have benefited from the falling AUD which has lowered operating costs, increased FCF and allowed many to rapidly pay down debts or expand.
Share prices have rallied markedly and I think many are still undervalued if the $A PoG remains at these levels.
MML on the other hand, whilst operational cashflow positive was regularly missing guidance due to mill, shaft and hoisting issues - so inspite of being operationally cashflow positive, a growing amount of cash, no major liabilities and having solid expansion opportunities I suspect its share price got beat down badly because it looked like a dog relative to the Aussie gold miners who were printing money once the $A gold price turned in 2014.
Fast forward to today, now when you compare MML's EV to any metric it looks extremely attractive relative to its peers, be it Revenue, EBITDA, NPAT, Reserves, Resources, Book Value, Analyst EPS Estimates...
So if you believe those mill, shaft and hoisting issues were temporary and we are at the end of the turnaround story then MML is cheap, REALLY cheap.
That said, price isn't everything - having a decent resource and the ability to produce returns (FCF) for shareholders in a sustained fashion is what it is all about.
In that regard, I'm expecting MML will produce around US$9m cash for shareholders this year (A$12m) which gives it a FCF to EV yield similar to most gold miners, but what that overlooks is that I think it is more probable than not that MML will produce much higher levels of cash in the coming quarters as it progressively completes it service shaft (full complete to Level 10 in June 2017).
The new CEO stated last week that
"the majority of the long lead Service Shaft costs will be sunk by August 2016 so there will be a noticeable drop off in sustaining capital costs and AISC improving free operating cash flow after this date".
So the FY17 September quarterly should see the bank balance begin to grow faster.
Then as the service shaft is completed in March/June 2017 production will be able increase further which will further reduce AISC and cash costs by spreading them across more ounces.
For the first half of the FY16, AISC was around US$950, and from memory one of the presentations said that building the service shaft was adding US$80/oz to AISC so when you take away that expense and increase production to 100% of mill capacity (currently at 70% - 80%) I'm expecting AISC to fall back into the US$800 to US$880 range (maybe lower) depending on ore milled, grade and recovery rates.
What the mill's production (capacity is said to be 2500tpd) and the grades (reserve grades are 7.3g/t and resources are 10.2g/t) will exactly be going forward is probably just speculation at this point based on the variability and missed guidance in the past - so I'm trying to remain conservative on my FY18 estimate, but currently it is as follows:
330 days @ 2200tpd @ 6.4g/t @ 93% recovery @ AISC of $880 @ PoG of $1260 @ AUDUSD of $0.75
= ~140,000 oz x (1260-880) / 0.75
= ~A$71m
So the biggest reason why I like MML is because I don't know of any other ASX listed gold miners that look likely to produce ~A$70m FCF @$1260 gold that can be bought for an EV of ~A$90m....
Though I'm always willing to consider the alternatives if you have some?
I also think there will be positive share price catalysts on the way to that FY18 result.
As previously mentioned AISC should fall in August 2016 in relation to reduced capex expenditure on the service shaft development.
The Annual Report in September is on track to being EBITDA of ~A$100m and an NPAT of ~$A75m.
Also the Bananghilig Resource re-estimation is expected in late June 2016.
And if these things are well received by the market and the share price appreciates back above $1 it will bring a GDXJ and ASX300 relisting back into play, which will presumably put upward pressure on price.
With all the said, it's not that I haven't had concerns about MML, I do and they've included:
- High AISC
- Poor management/operations
- Single mine operation
- Low reserves
- Too small for institutional investors
- Located in single jurisdiction (Philippines)
The thing is, most of these issues have been or are being addressed. To each point;
High AISC: As previously mentioned the development of a service shaft should solve the AISC problem over the next 3 - 15 month.
Poor management/operations: One can never be sure how a new CEO will perform or if they can turn an operation around, but I'm optimistic about the new CEO.
In the phone conversation I had with him last week he had a good understanding of what the operations and shareholders required going forward (and I think this was also reflected in the recent briefing and presentation he made).
Single mine operation: Obviously not ideal when it comes to trying to produce consistent results for shareholders who don't like volatility, but MML has been sitting on the B1 deposit since its scoping study in 2013. However a languishing gold price and more pressing Co-O operational issues made starting a second mine a low priority.
However with Co-O mine and its mill looking to soon be operating closer to their potential and the PoG @ $1270 the building cash pile and strong cash flows make the B1 expansion much more realistic, as indicated by the new CEO's recent comments of
"we will be releasing a JORC compliant resource for the Bananghilig (B1) Gold Deposit, followed by an economic scoping study".
If the 2013 B1 scoping study is still indicative of what we can expect then the B1 mine would be a 1m+ oz resource producing 200k ozpa at a cash cost of US$565/oz.
Obviously the share price isn't pricing this in, nor should it yet, but if the PoG remains above $1250, the new Philippines president doesn't do anything too rash and the scoping and feasibility studies come back positive (which I'm expecting) then I suspect that this will be MML's logical progression and its share price will begin to price it in as it becomes more likely.
Low reserves: Both in the recent announcement and in the phone conversation I had with Boyd increasing reserves is a major focus of his.
The recent presentation to shareholders stated:
Major resource to reserve conversion drilling program commenced January 2016.
Currently all production is from L8 and above but we know the epithermal vein system is open at depth and plunging to the east with Reserves drilled off to approximately level 10 and Indicated and Inferred Resources extending down to level 16. The immediate focus is to drill reserves between levels 10 and level 12 to underpin a robust LOMP for the coming 5+ years. From there we can further define the resources to L16 and convert them to reserves.
Whilst there are many things for which shareholders could fault MML, replacing mined reserves over the years is not one of them with Co-O having already produced 646k ounces to date.
Even the current reserves (427k oz) have been calculated on a gold price of US$1150 ($120 below today's price) so this gives me confidence that those resource ounces will be economically converted to reserves in time.
Too small for institutional investors: My expectation is that once the Co-O mine and mill start operating to their potential the MML's share price will easily be pushed back above $1 and the MML will at least be readded to the GDXJ and ASX300 - this would help put it back on many bigger investor's radar.
Beyond that I think successfully building out B1 to become a 300k+ ozpa gold producer would be what is required to have investors willing to attached the EBITDA, NPAT and FCF multiples that many other 250k+ ozpa gold producers have.
This is where MML as an investment would become REALLY interesting - there are not many producers of that scale trading with a market caps below A$1B.
Located in single jurisdiction (Philippines): This was a risk I was willing to accept as part of the investing in MML, but I was pleasantly surprised to see in the new CEO's presentation, whilst not a near term focus (nor should it be), he is considering opportunities beyond Philippines.
That said, it's obviously going to be something that will have to be constantly monitored (as KCN demonstrates).
Though maybe more importantly I don't think we can be myopic about sovereign risk when you read things like this:
http://www.abc.net.au/news/2014-08-05/miners-unite-to-fight-gold-royalties-rise/5649852
"Desperate governments do desperate things" and whilst the Philippines is likely more corrupt than Australia from a financial stand point I'd argue that Australia's finances are in a far worse position than the Philippines...
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So that is why I like MML and why I think it will outperform most of the other gold miners in an industry that will continue to outperform the broader All Ordinaries index.
