From the interview between Alan Kohler and Mitch Taylor, Supervised Investments, in July 2017.
".........
Once they get there, the strip ratio will reduce by more than 50%. As a result of this, Hillgrove will go from being a very marginal producer to a copper miner operating in the bottom quartile of the global copper cost curve.
From December 2017 to June 2020, over this time period, if the copper price remains where it is today, we expect Hillgrove will generate net cash more than double its market cap. Beyond 2020, there are significant mine life extensions. We don’t value them at this stage; however, their significance is actually in extending the mine life and thus extending the time to mine closure. 30% of the company’s now owned by antagonistic shareholders, and they want this cash that’s going to be generated over the next three or four years to be returned to shareholders. Hillgrove actually has about half of its market cap backed by franking credits. We like the cash return aspect to this one.
What is its market cap?
It’s a complicated one. Because of the existence of the convertible notes and the options, the market cap that you’ll see quoted on Bloomberg and other data providers is only about $17 million. Because those convertible notes and options are in the money, we treat them as equity. If you adjust for them, the market cap is about $48 million today.
You’re saying that over the next 18 months, they’ll generate, what, $100 million in cash.
Over the next two and a half years. My number’s actually 125 million in cash. To put that in perspective, that’s about 130 million pounds of copper. A lot of people will look at this company and say, that’s very well, forecasting the mine plan, but this thing’s been a monumental disaster. They’ve never been able to do what they’ve said over the last seven years. Up until recently, I would say. When they did change the mine plan and they changed the independent expert assessing the amount of copper that’s in the ground about 11 months ago, he drastically cut the reserve. My numbers are based on his mine plan, and for the last 11 months, the company has actually operated slightly better than his proposed mine plan. Of course, it’s a copper producer, so there is copper price risk in this one.
The company’s unhedged at this stage. It’s difficult for them to hedge until they start getting through this ore body because of the restrictive covenants contained within the convertible note. However, from December, we think that they’ll be in a position to hedge the copper price. We expect they’ll hedge about half their copper price exposure over that key two and a half years. We’re sitting on our hands with it, with the copper price for the next five months, but if it holds where it is, we really think this is a good one and could do very well.
Could you tell us what your average entry price was?
Our average entry price is about four cents.
You’ve doubled your money already.
We have. When we invested, we invested with the copper price approximately 20% lower than where it is today. I think most of the uplift to date has been on the back of the copper price going up rather than the operational improvements. I think there is still plenty more upside. Basically, given the fact that stock trades at eight cents, I think net cash per share will be at least 18 cents or 17 cents by mid-2020 at the latest.
What does that imply, do you think, for the share price at that point?
If the thing’s got net cash of 18 cents and you’ve got antagonistic shareholders who want the company to distribute that cash, I think that the market will be excited about the prospect of receiving half of their investment in cash, i.e., more than approximately the current market cutback in cash. Then they’d be happy to let the rest sit and back the continuation of the ore body, assuming management succeeds.
Are you saying that they value the cash return as a yield?
No, because I think the cash will all be returned at once. I think if this thing does work as we think it will and the mine life continues to be extended by way of underground drilling, they’ve got a little tiny exploration programme that should be sufficient to extend the mine life, I think this could be actually priced on an earning to multiple. If it were to be priced on an earning to multiple, say, I don’t know, even 10 times or eight times average earnings, it could be even more than 20 cents per share. I’m not speculating about it. What I like about it is the net cash per share that we think it’s going to generate is double the current share price. With that margin of safety, we’re pretty comfortable to take the copper price risk, and we think everything else will look after itself.
You said it’s southeast of Adelaide. That must be, what, near the Coorong or perhaps even the McLaren Vale wine region. Where is it?
That’s correct. It’s in a place called Kanmantoo, and it is near the premier wine region down there. The permitting is sufficient, so there’s no issues there. To their credit, despite the real difficulty in operating and the lack of performance over the last few years, management has really managed the environmental and local engagement very well. They have exceeded the requirements of their rehabilitation to date. What’s so important about that is that enables or increases the chances of securing significant increases in mine operating life. The numbers that I’ve quoted today out to mid-2020 are all based on the current approved mine life. Any mining beyond that date, which is largely expected to be underground mining on the same ore body that continues at depth: that will have to be subjected to another environmental review. There could be a bit of argy-bargy with the local wineries there. To their credit, they’ve preemptively managed this and are in good stead."
Expand
(20min delay)
