The next focusIR Investor Webinar takes places on 14th May with guest speakers from Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund. Please register here.
Good for you - love a profit!
I have run the numbers and welcome the quarterly update. Good to see metals prices holding firm, smelter spreads narrowing and production back to the normal level of around 240,000 tonnes per quarter.
I estimate revenues of $23m and $26m for Q3 and Q4 2020 for H2 2020 EPS of 5.8c/share. This would give full year 2020 EPS of 3.6c/share. However, from a valuation perspective I am more interested in the 12 months H2 2020 + H1 2021. Allowing for normal seasonality, and assuming normal production, I estimate 12 month revenues of $96m, Profit after tax of $20m, and EPS of around ( in sterling) 8.7pence/share.
A P/E of 8x gives the approximate current price of 70p. However, a P/E of 8 is exceptionally low for a junior minor. Looking at 40 or so quoted stocks they trade on 12x to 40x and a premium to book value up to 4x. GFM is relatively low risk compared to many junior miners: no debt, fully paid for additional processing capacity, productive and cash flow positive, substantial proven resource, and China is probably a less dodgy place to mine than say Nigeria or Angola. So I think it deserves at least a P/E of 12x which is still modest. This would give a fair value of 100p - 110p, which is around book value.
On a DCF basis the big challenge is to pick a suitable discount rate. This is usually done by adding a risk premium to the risk free rate. 10 year treasuries are < 1%. A typical risk premium would be 4% to 6%. We are in strange times but I still wouldn't go much above 5% to 7% (it's an art but I have 40 years practice!). This gives a price range between 100 p and 135p. All this is ascribing zero value to a new licence, whereas the probability has to be at least +ve.
So, all things considered, and erring on the conservative side, GFM should be above 100p with upside to 150p if the new licence is finally granted.
I haven't reworked my 2020 forecasts based on FY 2019 but here are some pointers. Zinc is holding around $2,200 and the board said smelter charges had reduced considerably. If they have reduced to $500 from $750 then GFM will be getting an average received price of $1,700 vs. my earlier estimate of less than $1,200, which equates to an additional $15m revenue over the full year. Gold, which makes up 35% of revenue, is on a year heading to $1,900. It's average for 2020 so far is considerably ahead of my earlier estimates, adding a further $5m in revenues.
Against this I was disappointed to see fixed costs had increased even on lower production and revenue.
However I am increasingly comfortable with profits after tax for 2020 of around $20m, implying a share price of 90p Vs NAV/ share of 120 p. 2021 should be much better so I think adding in NPV of future profits then GFM should certainly be trading around NAV. This is 3x today's price.
I hold 150,000 shares, at an average price below 13p. My last trade was a sale of 50,000 shares at 90p. I am currently buying these shares back as they are undervalued.
Had a nice trade in RRE which I bought 7 weeks ago at £7.90 and sold a week ago at £18.30 on the takeover news.
So I have run all the numbers again! Earnings in H1 2019 were $4.2m or ¢2.36/share. 432,000 tonnes were mined. The average selling prices after production taxes and processing costs ( including the severe escalation in smelter charges) were approximately Zinc $1591, lead $2,000, silver $13.0, and gold $1200. Gold and silver were higher than 2018 average and zinc and lead lower. In particular zinc selling price was $2149 for FY 2018 but already down to $1790 for H2 2018.
Due to lower zinc revenues other metals, predominantly gold, are now around 35% of revenues - so understandable the BOD are stressing zinc and gold mine! The price of gold is important as it affects the break even point for zinc price: high gold revenues the company can still break even at lower zinc prices.
So outlook for H2 2019 based on 480,000 tonnes mined, operating cost at $47/tonne ( always lower in H2 as costs are essentially fixed and volumes mined are higher because H1 is affected by Chinese New year)($46/tonne in H2 2018), average achieved zinc price of $1480 and gold of $1400. This gives H2 2019 earnings of $9m or ¢5/share for full year earnings of around $13m or ¢7.4/share - convert to sterling and chuck on a P/E of 8 and you get today's price of 46p/share.
Not brilliant but $82m of revenue in a debt free company keeps cash flow moving at least. Valuing a company on a P/E multiple assumes that the current earnings are likely to be the long run average earnings. This is clearly daft as we are in a cyclical downturn caused by China US trade wars (which will be resolved as soon as Trump either loses or gets his second term), and a global Coronavirus panic which will also be short-lived in investment terms.
This is why when we estimate fair value we take the NPV of the next ten years or so earnings. 2019 has been bad, 2020 will likely be worse, but after that I strongly expect an earnings recovery. Remember GFM is currently valued at just 40% of book value.
So now to 2020. I have assumed 1 full month lost production so only 375,000 tonnes mined in H1 2020, rising to a normal 480,000 tonnes in H2 2020. I have assumed average selling prices of zinc $1,195 and $1175 in H1 and H2, lead $2000, silver $13.5 and gold a conservative $1475. On this I estimate revenues of around $68m and earnings of $6m, with essentially break even in H1.
Break even analysis for the market price of zinc (not GFMs net selling price), and depending on the price of gold, comes out at around $2170 in H1 2020 and $1850 in H2 2020.
NPV calculation - which is only partially impacted by a couple of poor years - is currently producing a fair value of £1.20/share.
So there you have it: currently undervalued by about 60% but earnings will get worse before they get better. It's a minimum 2 year hold.
Ex div 24 April, paid 2 June. It's in the RNS
I have reviewed the interims but have not had a chance to write about them as on a wine tasting tour in the Peleponnese. Sit tight: shares will rise in due course!
Whilst zinc one stock levels look very low - supporting a higher price for zinc than now, I think a number of mining companies may be either holding back production or stockpiling ore: with low zinc and high processing charges it makes sense to hold out for better prices.
We don't know what GFM are doing. Are they mining less, or mining the same and processing less, or is it normal production and processing and simply accepting lower net selling price. Until we have H1 figures we won't know. I don't know their pain barrier: in H2 2018 they were prepared to accept $1,780 net zinc price. If it is now around $1,500 they may only produce and sell enough to cover operational expenses.
Results are quite delayed this year which is a worry: PWC are obviously struggling with something! Carrying value of assets? Recognition of work in progress? All guesses!!
In recent weeks we have had the resource update, nearly doubling the known reserves in the mine and extending the mine life by around 15 years, and a realistic expectation that the new licence will be awarded by Q4. The new zone has relatively higher gold grades and relatively lower zinc grades - useful in a high gold/low zinc price environment. It won't help 2019 figures but should be good for 2020 and beyond. The new zone will also have lower production costs - don't have to dig so deep and backfill so much. Against this we have an artificially constrained zinc price due to China trade wars, and I think Trump will keep that going through to end 2020: being tough on China plays well to his base. In addition the reduction in Chinese smelter capacity has led to higher smelter charges and a significant reduction in net zinc price: somewhere around $1,500 vs. $2,500 if both those issues were unwound. For comparison Griffin achieved $2,350 and $1,750 in H1 and H2 2018.
So 2019 and 2020 profitability and cash flow will be impacted, and with start up costs on the new zone and increase in working capital required to support increased production I doubt there will be a dividend.
However, I do not value companies on the basis of 1 or 2 years profits. I value them on the net present value of distributable cash flows. On this basis a 2021 with full production from the new zone and post Trump improvement in net zinc price will be highly profitable and has a significant effect on the NPV calculation.
Short term traders may look to the soon to be announced H1 2019 figures and decide Griffin is fully valued at current prices. I think it remains significantly undervalued and am prepared to wait until at least end of 2021 to see how that unwinds.
Midas you are right about gold price and lower average production costs: both economies of scale and zone 2 will be mined nearer the surface. Zone 2 also has higher gold and lower zinc concentrations than existing mine.
As I said I'm not prejudging the numbers: we need to know production numbers and average selling prices in H1
As those of you who read my posts know I keep a detailed financial model on Griffin. The confirmation that the new licence should be awarded by end September is excellent news, and worth about 30p/share based on recent economics in the zinc market. My model includes production from the new zone, and allows for the significantly different ore grades in that seam.
There is a lot to absorb: continued US China trade tensions undermining the global car market and keeping zinc $750/tonne below fair value; significant increase in smelter charges; likely timing of start up of new and mining operations and effect on investment and cash flow; almost certain continued lack of a dividend etc. Also we are expecting some pretty weak first half figures shorty.
Gut feel that 105/110 is the right level immediately, as let's see what H1 EPS we get. I will update my forecasts then. However, this is even more first class, long life, debt free, cash generative zinc and gold mine and I expect the shares to be much higher by end 2020.
China economic data and trade war is bearing down on the zinc price. After rising for a bit, LME stocks have fallen back which would normally see zinc at around $2,750. At current prices GFM may only be getting around $1,600 net. This would imply H1 EPS of around 5p and H2 around 3p. Price range of 90p - 100p, but upside due to increased mine life indicated by resource report. I can see why people are drifting out of the shares ahead of half year report in 3 to 4 weeks, but it is probably at or below fair value. It may d
Trump trade war is undermining global growth. China economy soft, German car industry tanking, US starting to turn down. For Griffin each $100 drop in average net selling price of zinc loses 1p in EPS. My last estimate was 9.3p for 2019 based on higher smelter charges of around $750/800 per tonne of zinc, or $1,800 net selling price. I think this price is OK for H1 2019. If we are around $2,300 zinc in H2, net selling prices could be closer to $1,500 which would be a further 1.5 p decline in EPS to the 7.5 to 8p range. This would imply current GFM share price is about fair value. Not a reason to sell, but not a reason to buy either
Re building a smelter, whilst the economics may make sense can you imagine how long it might take to get all the permits and permissions in China. I would expect close to 5 years in, say, the USA. China is inestimable. Be cheaper to buy an existing mothballed smelter and bring it up to spec, or JV with one that can't afford the required environmental upgrades. On zinc supply and demand it's hard to say: a decent chunk of new capacity was due to come onstream by summer 2019, then Trump started his dick swinging and demand in the global car market collapsed. Hopefully we are in a range from 2,500 to 3,000 . Nothing spectacular but good steady profits and cash flow.
Over the last few years smelter charges have been around $450/tonne zinc. The RNS on increased charges implies these have risen to around $800/tonne zinc. In 2018 GFM achieved an average net selling price for zinc of $2,150, meaning around $2,600 minus the smelter costs. In 2017 they achieved $2,300. For 2019 I estimate the average selling price will be somewhere around $1,800. Interestingly, H1 2018 average net selling price was $2,520 but this dropped to $1,790 in H2 2018, so clearly the increase in smelter costs was biting through the second half of 2018. The effect this had on earnings was to decrease H2 revenues by around $9m, (from $54m to $45m) and profit after tax by $5m (from $15.3m to $10.2m). Thus an initial estimate is we can expect 2019 earnings of around $20m all other things being equal. I did a bottom up analysis based on sales of 930,000 tonnes, my expected ore grades, an achieved zinc price of $1,800 and gold price of $1,300 (vs. $1,170), adjusts for lower licence fees and tax charges, and got exactly $20m (11.65 cents per share, 9.3 pence per share). On this basis my fair value estimate is now 110p plus around another 30p for the increased mine life indicated by the recent resource estimate.
The increase in processing costs will reduce revenues by around 8%, with a greater hit to the bottom line. I'll run the numbers in the next couple of days. Reduced Chinese smelter capacity has the benefit of keep inf zinc supply out of the market. Griffin remains a cash generative debt free well run productive mine with significant forward reserves.
Not a great set of results but no disaster either. Versus my model the only significant change was 40,000 tonnes less processed leading to $10m less revenue. This flowed through to a H2 2018 that only added $10m to H1 earnings of $15m. Cash balances, whilst healthy at $29m only rose slightly due to continuing heavy investment in the mine - due I think to the extra depth they are drilling/hauling in Zone III. Until they open up new areas of Zone III or get the licence for Zone II, I guess this will be the new normal: profits in the range $25 - 35m depending on metals prices. Disappointed no trading update for H1 2019. I have revised my fair value down to 130p per share from 145p until we have more information. Dividend hunters and short term traders will be dumping the stock but I shall continue to hold as the fundamentals remain strong.
Zinc finally breaks through $3,000 barrier in London. Personally think it will top at $3,250 but all this is positive for GFM. They should be having a good H1 2019 - wonder if FY 2018 results will give us a trading update as well.
Indications from other boards, and from people who claim to have had communications with the FD, are that results will be towards the end of the month.
I have now had a chance to look at the resource statement: 75% increase in resources, equivalent to a 55% (gold) to 65% (zinc) increase in total metal - because of a slight downgrade in average ore grades. However, the ore grades are still above both what GFM actually achieves and what I use in my estimates. So, what does the extra resource do to our valuation model?. Well, it doesn't affect my estimates of annual earnings. However, it does prolong the life of the mine. If profits remained constant over that increased mine life (only reasonable assumption so far into the future), and if we assume another 15 years at today's volumes, and discount the additional earnings at say 8%, it will add 65¢, or 50p to our net present value. This takes my valuation based on just zone III from 145p to 195p ' slightly above the estimate from Stockopedia. Lots of upside plus zone II to look forward to.
I explained in and earlier post the fundamentals of the since market implied a price of $3,000+ and we would reach that once the USA/China trade deficit cooled. $3,016 today in London and critically low warehouse stocks. Price stability above $3,000 will bring out a bit more stock in time so I think prices may be limited at $3,250 - but I will be happy to be surprised on the upside