CNCVenture. After being a long-term holder in size in MML, the...

CNCVenture. After being a long-term holder in size in MML, the Q1 report was the straw that broke the camel's back for me and now I am out. There was so much to dislike in the CY16 Q1 numbers that I barely know where to begin.

Let's start with my 4 factor checklist for deciding whether I want to buy a company. Ideally, I want to see

1. Cheap Valuation

This is on a free cash flow basis, and ultimately this should be evidenced by cash build on the balance sheet. In CY Q4, I thought that MML had, at last, turned the corner as we had a healthy $3.4 million or so jump in cash. This quarter, cash barely moved and this despite the average POG jumping from $1,096 to $1,173.

When there is a big margin between POG and AISC and cash is not building on the balance sheet then you either have an extraordinary or some new project in development (no new mine in MML's case). But if quarter after quarter, cash build does not reflect the POG minus AISC margin, then you have to ask whether the AISC is truly "All-In". Extraordinaries that repeat relentlessly quarter after quarter are not 'extraordinary'.

2. Incremental Improvement in Quarterly Performance

Again this appears to be a case of one step forward, one step backward with MML. For CY15 Q3 and Q4, things looked like they were moving in the right direction: positive trends in ore mined, grade, recovery and so on. But for CY16 Q1, we seemed to have slammed the company into reverse gear. The grade decline was horrible. The report states that "the volume of development materials impacts on the L8 hoisting capacity, so was not unexpected' and "the level of broken stocks is cyclic and lags behind the mine development rates". But if mine development is cyclic and 'expected' (leading, in turn, to cyclic good and bad quarters in grade and gold production) then why wasn't this incorporated into the forecast annual production number?

This is also a very different story from that sold to us by the outgoing COO Rob Gregory. For him, the grade improvement up until end CY15 was a direct result of changed compensation practices. Now we have a big, fat question mark over whether this is true. Moreover, we have to ask the question: "Is the true average quarterly gold production run-rate for the mine (before the service shaft is finished) actually 25k oz rather than 30k oz?" That's a big change.

3. Realistic Guidance

Don't get me started! The golden rule of investor relations is 'promise low, deliver high'. It really is not that difficult. It wouldn't even define MML's production targets as 'stretch goals'. They appear to be born out of a parallel, imaginary universe.

This brings us to trust, of which I have none in MML. Rob Gregory and Geoff Davis seemed to be creating a good story with MML after the fiasco of the new mill installation. Then Geoff retired. But what on earth happened to COO Rob Gregory? He seems to have been disappeared like a character out of George Orwell's book '1984'. I will continue to follow MML and keenly await Boyd Timler's first presentation. But he has his work cut out: building credibility starting from zero.

4. Long-Term Growth Plan

For those who have followed MML as long as I have, it once aimed to become a low AISC 280k oz company: 140k oz at Co-O and 140k oz at Bananghilig.

Even after the service shaft is completed, I have to question whether Co-O will ever consistently get much above 100k oz per annum. My fear is that as the mine goes ever deeper, the mine engineering challenges will get ever more complex. The commentary surrounding the service shaft in this quarterly, suggests development has been hit by a range of problems. Once the service shaft is completed, the company will be looking to the L16 shaft. Can we expect that to come in on schedule and within budget. I don't think so, because MML's track record on project deliveky is so poor. And with higher complexity and more unforeseen problems, comes a higher AISC.

Is the true long term run rate of Co-O really 140k oz at an AISC of $800, or closer to 100k oz with AISC over $1,000?

And then we have the question of post-Co-O growth. The quarterly report contained two horrible pieces of information on that front. First, it looks like Guinhalinan is a no go (in their words, "poorer than expected results"). Second they have stared looking for "resource prospects outside of the current tenement portfolio". This suggests to me that Bananghilig is also a 'no go'.

But given that they only have $16 million cash on the balance sheet, I can't see them have the resources to go out and buy new prospects, let alone take them through to production. So, at best, MML will remain for many years a single mine 100-120k oz operation, with all the risks that a single mine entails.

Final Thoughts

As per some of the comments in this thread, will MML go up if POG roars above $1,300? Yes of course. But that is not the point. Investment is a question of opportunity cost. Will a dollar invested in MML outperform one in another name with gold above $1,300? In my view, it won't; and there are still a host of companies that meet my 4 point investment criteria.