This is an update to our position in Mongolia Mining Corporation.
Our friend and colleague Kuppy (Harris Kupperman) kindly provides us with the following:
In our world of 140 characters, anything longer simply bores people searching for the answer.
Therefore, CEOs have evolved the press release to ease all burden of work from equity analysts. That’s how you end up with metrics like; non-GAAP EBITDA adjusted for various expenses. When even that is too lengthy, a quick 3-word “beat the number” headline is justification to buy or sell.
Of course, not all companies play this game.
As a result, some tend to be grossly undervalued. Who is going to do fundamental research if the data isn’t fed in easily analyzed data-points? What if the company makes you search hard for this answer? This naturally creates opportunity for those of us willing to do the work and leads to the curious case of the Mongolian Mining Corp’s (MMC) first half earnings (all numbers in USD except Hong Kong share price).
The officially reported number is that MMC earned $29.9 million. Annualizing that, gives you a full year earnings projection of $58.8 million. Based on Wednesday’s closing price of 14.5 cents, you have a market cap of US $193 million and the shares are trading at 3.3 times forward earnings. At first blush, that’s not particularly expensive, right at the lower bound of 3 to 5 times earnings that you’d expect a Mongolian coal miner to be valued at.
However, there’s a lot more going on below the surface. To start with, due to border issues, the first quarter only experienced 646k tons of exports. During the second quarter, exports ramped back to historical levels of 1.282 million tons, near plant capacity of 7.5 million tons. Even if you assume that the border never improves beyond 6 million tons (the second quarter rate), you can be conservative and estimate future earnings.
We know that they are selling coal at $140 and delivering it to the border for $70 a ton. That’s a $70 net-back after some logical adjustments. However, if you run your plant at less than capacity, your costs per ton will be elevated. The real cost is probably closer to the low $60s, but even after baking in some margin of error and assuming $70 to deliver coal to the border, we have a $70 net-back and on 6 million tons per year, you’re looking at $420 million in gross margin. It costs about $30 million a year in SG&A and MMC pays $40 million a year for interest expense.
So, we have $350 million in earnings before tax and $263 million in after-tax income. So, the shares are currently valued at .7 times earnings. That’s damn cheap. If you take their current metrics, assume they can continue exports at current rates, now that the border is fixed, you have 4 to 7-fold upside to get back to a normalized market multiple.
Of course, as production increases, costs will decline, and you will have true operating leverage. You’ll also rapidly pay down the debt. I’ll leave it to you to build the model, but at 7.5 million tons of production, and some logical assumptions, you are looking at well north of 10-fold upside. Even if the railroad never happens, you still have plenty of upside to get excited.
I sure wish management had taken the time to spell this out. I wish they had given some guidance for the back half of the year. I wish they had spoken about how they’re ramping up a fleet of double-trailer trucks that are far more efficient and cheaper than the current fleet. I wish they had spoon-fed a model that even a rookie analyst could understand. I wish a lot had happened—the stock would have rallied strongly. It didn’t happen that way, and that’s the opportunity here.
MMC is doing well and no one knows.
It’s been a game of patience with the stock running from our original HK$0.11 to around HK$0.40… only to give back all those gains. Given that few investors are taking any notice, we may have to wait some more. We’re ok with that. Our bent here is to hold positions largely with a “when”, not an “if” setup.
Granted, there are a number of things that can go wrong in a specific company, and Mongolia is one helluva crazy place for sure, so it’s not without risk.
But it’s also priced as if risk is off the charts, so we’re not paying much for something that in a “normal” world would be priced substantially higher.
As always, thanks for reading and being part of Insider.
Founder & Editor In Chief, Capitalist Exploits Independent Investment Research
Founder & Managing Partner, Asymmetric Opportunities Fund
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