My Lepanto (LC) Bet

Today, Lepanto Consolidated Mining Company (PSE: LC) disclosed this:

Update on Far Southeast Project re: indigenous people vote in favor of issuance of FTAA

I profiled LC here and thoughts about the effect of EO 79 here. The disclosure above simply assures the investor that LC’s most valuable asset is exploitable which is the Far Southeast Project (FSP).

Valuation

FSP is estimated to have a reserve of 19.8 million ounce (Moz) [1] of gold where LC’s interest of 60% will eventually be reduced to 40%.

We then use the following assumptions:

Price of gold – $1,200

FOREX rate – P40/USD

Profit margin – 20%

Estimated reserves of mining companies are never certain; to compensate this, I placed a range on my valuation based on the estimated recoverable minerals on the total estimated reserve. I also used 20% profit margin despite the fact the FSP is an open pit mining operation that commands 30% profit margin in order to provide a buffer on the future changes in mining tax rates.LC1

As you can see in the table above, what compelled me the most is the huge margin of safety that trading LC provides. LC has a value that ranges from P.70 ~ P1.58.

Risks:

1. FSP gold reserve estimate is not accurate.

2. FSP will not proceed to commercial operations.

Sources:

  1. Update on Far Southeast Project, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6671_LC.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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