PYX Resources: Achieving volume and diversification milestones. Watch the video here.
Note:
I've spotted a small error in currency conversion affecting Perlite pricing, but having worked it through it doesn't make a material difference to the outcome. So I'm not going to confuse the picture by re-sending the calculations. The rounded approx. share price figures at the end of the calculations still stand.
N.B. If you compare mining techniques requiring drilling, dynamite and heavy on-site crushing of blast rock with free digging using just earth moving equipment the cost difference is considerable. A production & delivery cost of $42/Ton is, in reality, more likely to be closer to $30/Ton. These figures therefore are likely to capture a further significant contingency allowance, by default.
PART 2 – INTERPRETATION
Taking account of mine set-up costs (at the high end of company estimates) production & delivery costs and maintaining income at 2021 levels over the approx. 42 year mine life (which won’t be the case), to obtain a picture of value across the whole CS Project resource NOW, this produces an approximate share price of 11.79p per share/£436m for the whole project or 7.71p per share/£285m for the permitted area on its own. (Based on 3,701,804,687 shares in circulation).
A purchaser can contrive deals all day long using derisory up-front payments and “jam tomorrow” royalties if the objective is to steal an asset. We should all think as business owner, which we all are, and in simple terms the CS Project, as at August 2021 on a conventional valuation basis, is worth approx. 7p per share for the permitted area alone or 11p including the NE Zone or if you’re content to accommodate generous discounting, it’s approx. 3p per share/£111m or 5p per share/£185m at a halved P/E Ratio of 5x earnings & 3x earning respectively, which should satisfy those favouring a Discounted Cash Flow Model.
There is no basis for the assertion that the CS Project is worth 1p per share/£37m, if it were to be sold, unless the objective is to give it away……..
……..OR you expect a buyer to arrive wearing a mask and carrying a gun!
PART 1 – THE FACTS
Here is a precis of a more detailed valuation produced a while ago, based on published SRES and broker information. Dollar commodity, production & delivery pricing is used and converted to Sterling totals (using 0.72 exch. rate), enabling a Sterling share price outcome:
PERMITTED AREA (27 Year Mine Life)
Pozzolan 14,500,000 Tons @ $110/Ton = £1,148,400,000
Perlite 1,300,000 Tons @ £100/Ton* = £ 130,000,000
GROSS INCOME = £1,278,400,000
Est. Prod. & Delivery Cost @ $42/Ton** = £ 477,792,000
Co. Presentation High End Set-Up Costs = £ 28,800,000
NET INCOME = £ 771,808,000
Value Per Share = £ 0.2084
EST. SHARE PRICE (@ 10x Earnings) = £ 0.0771
NORTH EAST ZONE (Estimates 15 Year Mine Life)
(My conservative estimate is that the NE Zone is approx. 62% the size of the permitted zone, based on company schematics/aerial photographs. However, the figures below are based on less than 50%).
Pozzolan 7,000,000 Tons @ $110/Ton = £ 554,400,000
Perlite 500,000 Tons @ $100/Ton* = £ 50,000,000
GROSS INCOME = £ 604,400,000
Est. Prod. & Delivery Cost @ $42/Ton** = £ 226,800,000
NET INCOME = £ 377,600,000
Value Per Share = £ 0.1020
EST. ADDITION TO SHARE PRICE (@ 6x = £ 0.0408
Earnings, reflecting reduced mine life)
TOTAL EST. SHARE PRICE OF CS PROJECT = £ 0.1179
*Extremely conservative, given a processed $850/Ton upside, giving considerable additional price scope to a buyer.
**Extremely generous $42/Ton rather than $40/Ton, ACROSS ALL PRODUCTION, even though Pozzolan prices are delivered prices and mine production is now “free digging” i.e. very cheap. This is to ensure Perlite delivery costs are adequately covered, which in the 2017 Broker note were priced “at the gate” excl. delivery. This $2/Ton extra, ACROSS ALL PRODUCTION, is effectively a project contingency reserve of £31m.
A very impressive piece of work SDG
I understand why you’ve chosen this approach and you may well be correct. My own preference is, rather than look at a related but seemingly different transaction, to follow a more conventional valuation approach.
I think it would be worth taking a look at the Beaufort Securities Broker note of 10 July 2017, if you’re not familiar with it.
Sunrise Resources plc - Beaufort Research Note - 10 July 2017.pdf
It’s quite useful because it draws on the company’s own numbers which are a little different. For example, if you go to “Potential Economics”, I think your pozzolan production costs are heavy. In 2017 the company estimated they would be approx. $40.00/ton (delivered). We now know, but didn’t then, that the pozzolan is “free digging” which will make it cheaper than 4 years ago or certainly cancel out any inflationary rise over the same period.
In 2017 they used a $65.00/ton sale price which I would agree is probably $110-$120/ton today.
The price of product is clearly rising at a significantly faster pace than the cost of production, widening margins.
Due to the pressure on companies to radically change their modus operandi, I think speed is a factor acquisitive companies will pay for and reflect in bolt on acquisitions which satisfy that criteria.
You’ve chosen to take a very cautious approach, but I would be inclined to use a P/E of 10 rather than 6 and factor into pricing a greater margin for the Perlite. Why? Irrespective of the CRMC’s principal activities, it would be difficult to ignore the massive additional upside from processed Perlite product, which by the company’s own estimates can be as much as £850/ton (March Presentation). So something mid-range would seem appropriate.
The other point I would mention is, although not part of the current permit, the North East Zone should be factored in if for no other reason than PC made the point in the March Presentation that he envisaged it coming on-stream before the Tuff Zone because of its level free digging characteristics and a purchaser would feel the same, pure economics.
Finally, I can’t say I’m familiar with the detail of the deal you’ve focussed on, but when in a negotiation you strengthen your hand enormously when you have options. It would seem, from what we’ve been told, that we are in discussion with a number of entities, none of whom know what we are discussing with the others, which may put us in a different position from Kirkland.
Hi SGD
I’m happy to look at your numbers and highlight where we agree or differ in our assumptions.
In terms of your point about market value, a company being sold, take Morrison’s bidding round recently for example, will sell for what the target company/its shareholders and a suitor agree is fair value, normally arrived at as a multiple of the company’s estimated future earning potential using a sector norm and an assessment of other asset values (property for example). In the case of the mining sector this can be anything from 10 and 40 times annual earnings. I’ve used a conservative 8-10 times, for an asset which has about a 40 year life (with the North East Zone).
If I understand you correctly, I don’t define market value as the asset’s current total value which in the case of the CS Project is approx. $1.5b (at 2021 pricing) or around $2.4b (my estimate) if you include the North East Zone, which I believe a buyer will also want to include.
Yes, I’ve factored that into my P/E Ratio (which only uses 2021 commodity prices, no future inflation allowances), and takes into account mine set up costs, which if correct would see fair value at a relative fraction of the full asset value of $1.5-2.4b, as one would expect, clearly allowing the buyer to make significant profits and increasing with commodity price inflation over time. So in very simple terms the current market value could be for example $100m, $200m or $300m with a current asset value of between $1.5b-2.4b increasing over time, leaving enormous scope for future costs and profit by a buyer.
Taking your other point, every company tries to drive a hard bargain but there are norms and in this increasingly pressured world eager to demonstrate environmentally friendly credentials we have to 3 important assets; we’re permitted, saving a CRMC years in development, we’re close to some of the USA’s largest and developing population centres (and getting closer if your work on rail links comes good) and our Pozzolan has shown incredible results in laboratory testing.
In summary, the value of CS is far higher than some currently think, even after taking all the relevant factors into account.
I don’t subscribe to this regularly recurring theme that the current share price should temper shareholder expectations and we should all be grateful if it reaches 1p!
The share price is where it is because we don’t YET make anything or sell anything, irrespective of the potential.
The market responds when uncertainty is removed and there’s something to respond to, in the same way as the share price moved significantly when the permit was approved.
The potential is what it is and if the CS Project is sold it will be sold at market value and the current share price has little to do with it.
Some contributors have said they’d accept 1p but they represent a fraction of the overall shareholding. There are some very large shareholders in this company, private and others, who won’t agree that this represents fair value.
Another way of thinking about this is, PC currently holds 234,293,916 shares and whilst some might disagree, everything is relative and it may seem like a lot of money to some, but he isn’t in this for a mere £2.3m.
To respond to Andysel’s point, some of us have done the numbers drawing from the company’s published information relating to commodity pricing, mine set-up and mining costs, own research on transport costs (and SGD I concur) and applied annual profit expectations to a P/E Ratio to arrive at an approximate share price. Although I’m slightly higher, much to my surprise, I broadly concur with this morning’s 3-5p estimate by comeonsres2.
I would like to add my condolences to Mini’s family and friends.
A mild mannered courteous gentlemen of the old school is how I will remember him and always a positive contributor to the debate. I remember him voicing a wish to meet posters to the board once Sunrise had navigated its course, such was his amiable nature, it’s sad that this will not happen for him nor will he see the rewards of his commitment to this company, in which he believed so passionately. A sad and untimely loss indeed.
Hi Dubs
I agree that the next few weeks could prove significant.
As I mentioned on Friday, the company can’t know what the CRMC’s intentions are and are currently pursuing the belief that they are moving closer to an off-take agreement, although I couldn’t hazard a guess as to when the trials will be complete.
I think it’s likely that PC will announce when the trials have concluded and inform the market of their level of success, but he’s then in the hands of the CRMC as to what happens next.
The CRMC is the only participant who knows whether off-take negotiations or an offer for the CS Project is in the offing. If the former, I don’t see any reason why SRES wouldn’t announce that contract negotiations are continuing. If the latter, I would expect the CRMC to remain coy about its real intentions, due to Stock Market rules, until it has its ducks lined up. SRES can’t currently know if an offer is coming otherwise they would have to inform the market, which would also alert any other suitors. These things are always cloak and dagger until the very last moment. So any offer being considered will be known only by bidding company board members and possibly a small number of close advisers.
The significance of recent news that the CRMC’s mining manager visited the CS Project shouldn’t be underestimated, either way, nor the past experience of our recently appointed non-executive director.
There’s also the possibility, in the next few weeks, of Perlite announcements on the horizon following the reference in a recent RNS that the backlog in demand at Perlite producers now seems to have eased allowing them to properly test samples and develop a response.
In terms of sequence, the most likely imminent news is the Baker’s assay results, which could well drop in the next few days.
Twiggy, what I said was:
"If the CS Project were to be sold, as the company’s current most valuable asset the proceeds would have to filter back to shareholders one way or another through a special one off dividend or some other mechanism."
The scenario in which I mentioned "It’s not as if it would simply fill the company coffers...." was made merely to illustrate a point.
Sheldrake, I think there’s a difference between gambling and investing and every mining exploration company you could name uses the proceeds of sale, whether of product or assets, to finance future investment in opportunities.
One way or another you would have the opportunity to realise the value in your shareholding by one or other of the means I've mentioned, if CS were to be sold.
Thanks Dubs
I suspect PC doesn’t yet know the CRMC’s intentions fully, a matter which will only become clear to him and us when the trials are complete and the “real” negotiations fire up.
If the CS Project were to be sold, as the company’s current most valuable asset the proceeds would have to filter back to shareholders one way or another through a special one off dividend or some other mechanism. It’s not as if it would simply fill the company coffers for example, without re-setting the share price which would in itself provide shareholders with the opportunity to exit at a higher than current share price, if that’s what they chose.
The company has numerous assets, largely as yet undeveloped, which it could turn its attention to, including Baker’s and others which have been mentioned. Picture the hypothetical scene, Baker’s proves extremely valuable – that alone would present a long term mining project for the company to get behind. So I don’t think we need worry too much about where the company would go from here if CS were sold. The company expertise lies in exploration and it’s likely that the company will be aware of other, as yet unnamed, opportunities should the finance and circumstances become available. After all, its ambition is to be a self-funding mining exploration company.
Regarding Baker’s, I have no doubt 5 weeks into lab analysis that PC knows what’s in them.
Whatever the short term throws up, the future looks bright for SRES and shareholders.
Two thoughts occur following yesterday’s RNS; firstly, it emphasises the company’s unwavering commitment and confidence in the CS Project as its core asset, and secondly, you wouldn’t dispose of 2 gold assets, even if early stage, unless you’re certain you have a better and more valuable gold asset in your portfolio.
So I’m expecting good Baker’s assay results very soon and transformational CRMC trial results soon after.
Naughty, just to put us on the spot Dubs! Haha :)
A fair question but an emotive one, given the huge range of view on this, on here.
As you know, I’ve done quite a bit of work on this using the companies own published figures, my own research regarding transport costs, revised assumptions about mining costs now established as free-digging and a degree of interpretation.
Taking the permitted CS resource only, at this stage, I see it attracting a value to a buyer of between 4p & 7p per share (revised up from my earlier range of 3p – 6p).
I can’t put any figures on NewPerl or Jackson Wash as we have no data to base it on, although I’ve looked, but so far as the North East Zone is concerned, it may be discounted because it is likely to come on stream a little later, but not much later because it’s more straight-forward to mine than the Tuff Zone. My figures on this are less honed than on the Main & Tuff Zones because we have less data and more assumptions have had to be made about the area and depth of the resource. Additionally, I’ve allocated the mine set up costs to the first phase, so the North East Zone shows better numbers because of less capital costs drag even though it’s smaller than the Main & Tuff Zones, but I’ve currently got it in my numbers at an approximate addition of 7p per share (before any possible discounting mechanism although I’m not convinced this would necessarily be material).
I’m sure there will be disagreement on this but the one thing that is certain, we’re literally sitting on a fortune here that is in no way reflected in the current share price.
I still believe there will be a sale of the CS Project, simply because it would be the logical conclusion to the testing and dialogue currently taking place.
Observing unfolding events and viewing things from the multinational’s perspective, I can see no long term, strategic or supply security advantage in merely negotiating a contracted supply of natural Pozzolan from SRES, nor can I see a strategic, management or operational advantage in being tied by a joint venture which whilst securing a source of supply limits autonomous decision making, alien to a largely independently minded and competitive multinational corporate culture.
I continue to see this dialogue as the preliminaries for a friendly acquisition of the permitted CS resource, whether that’s how it’s currently being expressed or not, with the current trial results being the trigger.
Picking up Dubs point regarding the North East Zone, this could be dealt with by a simple option to later acquire this area according to a pre-agreed formula, once properly defined.
This multinational has a big appetite for raw materials and one good reason for acquisition, apart from autonomy, long term value capture and control of the supply chain is that it’s probable it would wish to increase production by revisiting annual permitted mining limits to satisfy its own demand.
In addition, for all of these reasons, the logical progression, subject to more work, would be to treat NewPerl and Jackson Wash in the same way, under option, with all of SRES Nevada industrial mineral interests being seen as a long term strategic acquisition.
The focus of SRES could then return to its core business of precious metals exploration, which is where its expertise lies.
If I’m wrong I will be the first to put my hand up and if Dubs is correct I’ll be the first to congratulate him on his foresight :)
One thing we can all agree on, the CS Project is now moving towards a positive outcome!
I take the point Dipp, but the announcement is quite clear that the UK Corporate Governance Code encourages a maximum term of 9 years, which Mr Swan has served, and this is why he has chosen to step aside, to safeguard the independence of the post.
Although perhaps not planned, the choice and credentials of his replacement is significant.
A very interesting choice of replacement NED. A significant development and unlikely to be merely a passing reference in the RNS to Mr. Cole having “a track record of success in mergers, disposals and acquisitions” and with experience in the mining sector.