The Security I Like Best

The mining industry had received a lot of negative sentiments since the signing of EO 79 on July 9, 2012.

In order to understand the reason why the mining index went down, it is necessary to know the salient points of EO 79.

EO 79 has the following stipulation that can materially affect the mining industry:

1.   Section 1 of EO 79
“Mining contracts, agreements, and concessions approved before the effectivity of this Order shall continue to be valid, binding, and enforceable so long as they strictly comply with existing laws, rules, and regulations and the terms and conditions of the grant thereof. For this purpose, review and monitoring of such compliance shall be undertaken periodically.”

2.   Section 4
“No new mineral agreements shall be entered into until a legislation rationalizing existing revenue sharing schemes and mechanisms shall have taken effect.”

3.   Section 6
“The grant of mining rights and mining tenements over areas with known and verified mineral resources and reserves, including those owned by the Government and all expired tenements, shall be undertaken through competitive public bidding. ”

4.   Section 7
“All valuable metals in abandoned ores and mine wastes and/or mill tailings generated by previous and now defunct mining operations belong to the State and shall be developed and utilized through competitive public bidding in accordance with the pertinent provisions of law.”

Considering the above, companies that has no or expiring mining contractrelies on mine tailings for its source of revenue, and depleting mineral resource will face business difficulties.

Other than EO 79, plunging nickel prices also affects nickel ore producers.

Source: http://www.lme.com/nickel_graphs.asp

However, not all mining companies deserve to have a low valuation. APEX Mining Company (PSE: APX, APXB, the “Company”) does not share the business difficulties caused by EO 79 and plunging nickel prices.

APX a gold mine company, is a holder of two mining contracts or Mineral Production Sharing Agreements (MPSA) namely, MPSA No. 225-2005-XI, approved on December 15, 2005 and MPSA No. 234-2007-XI, approved on June 8, 2007. All mining Tenements are in the Province of Compostela Valley. MPSA has a life of 25 years, therefore APX may enjoy an excise tax rate of only 2% of gross revenues until 2032 contrary to the pending excise tax of 5% for new mining contract holders. On April 12, 2012, they disclosed an increase in total gold resource potential of 1.118 million troy ounces from 588,000 troy oz. on 2009. [1] 

The Company exhibited a steady decline of its net losses since 2009 but APX’s cash flow from operations indicates the Company’s inevitable turn around to profit.

The huge gap between the Company’s bottom line and generated cash on operations indicates that the Company recognizes huge non-cash expenses such as depreciation and asset write-off.

The Future of APEX

Another interesting business development of APX is its merger to Teresa Crew Gold Philippines, Inc. [2] Prior to the merger, Apex pays 15% of gross revenue to Teresa as payment for the rental of Teresa’s assets for milling operations. Rent expenses paid to Teresa on 2011 and 2010 are 306 million and 244 million respectively. The merger shall create value for shareholders through future cash savings.

The Company’s plans for expansion were disclosed to the PSE on February 3, 2012[3]. The Company plans to expand their current mining operations in Maco and reopening of historic mining areas. The Company also plans to migrate the current ore processing facility to a new expanded facility to with a threefold increase in milling capacity by 2013, currently the company has a milling capacity of 700 tonnes per day. The Don Calixto, Don Fernando, and Wagas veins are undergoing access rehabilitation and development as future sources of ore production by the 3rd quarter of 2012 which they expect to add 30% to the existing plant’s capacity. [4]

On May 9, 2012, the Company disclosed significant potential of the Maco Porphyry System which they are committed to fund its exploration for the next two years. In the first quarter of 2012, they purchased two additional high-capacity diamond drill rigs which are scheduled to commence drilling on June.[5]

Vote of Confidence by Private Investors

On November 18, 2011, Monte Oro Resources & Energy Inc. (Monte Oro) initiated a private placement to APX equivalent to 5% of the total outstanding shares of the company for a consideration of approximately 3.28 per share. [6] Monte Oro increased their interest in the Company for another 7% on July 3, 2012 for a consideration of 4.40 per share. [7]

On July 16, 2012, the Company’s board approved the issuance of shares to the following:

Apex’s immunity from current industry disadvantages, huge room for growth through increase in ore milled, promising mineral resource, and favorable gold prices makes APX a company good for holding in the next 18 months.

Sources:

1.   “Press Release: Apex Mining Reports a Substantial Increase of Gold Resource Potential to 1.12 Million Troy Ounces at its Mining Operations ” http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-2678_APX.pdf

2.   “SEC approval of Articles and Plan of Merger between APX and Teresa Crew Gold Philippines, Inc.http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-8918_APX.pdf

3.   “Board approval of management business plan re: Maco Mining Operation, election/appointment of director/officer” http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-1036_APX.pdf

4.   “Press Release: “Apex Mining Posted P50 million income in Q1 of 2012; Readies Expansion Program”http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-4592_APX.pdf

5.   “Press Release: Apex Mining Company Initial Exploration Drilling Confirms Significant Potential of the Maco Porphyry System” http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3531_APX.pdf

6.   “Press Release re: Monte Oro Investment into Apex”http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-8120_APX.pdf

7.   “Board approval of issuance of additional shares of Monte Oro Resources & Energy, Inc.”http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-5074_APX.pdf

Disclosure: I have APX shares

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