Stock thoughts: APX, SMPH

APX

Last year, I posted my wish list on what APX should do. To my surprise, my first wish came true!

“Board approval of reclassification of Class “A” and Class “B” shares to a single class of common shares”

I hope all that is in the list will come true because in my opinion, it is the most logical thing to do to increase shareholder value. 🙂

SMPH

To those who are interested:

Making Sense on SM Consolidation

What I Wish APX’s Management Would Do

Apex Mining Company, Inc. (APX), exhibits favorable business developments:

  1. Merger with Teresa Crew Gold Philippines, Inc.
  2. Plans for expansion current mining operations.
  3. Plans for a threefold increase in milling capacity by 2013.
  4. Significant potential of the Maco Porphyry System.

Private investors had expressed their confidence through private placements and preference of creditors in conversion of debt to equity.

MPSAs were approved on December 15, 2005 and June 8, 2007 which allows APX to 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 in the future.

Favorable gold prices, regulatory advantages, young MPSA contracts, satisfactory gold resource, ability to expand operations, and good relationship with the community provide APX competitive advantages.

In my humble knowledge, I wish APX’s management would do the following to increase shareholder value:

  1. Simplification of APX’s capital structure by:
    1. Declassifying existing common shares into just one class of common shares
    2. Reduction of par value from P1.00 to P.01
  2. Use of share premium to eliminate deficit.
  3. Deferment of asset write-off until 2013.

 

Rationale:

  1. At present, the Company has APX and APXB trading in the stock market. APX is exclusive for local shareholders while APXB is non-exclusive. In my humble opinion, there is no advantage on maintaining two classes of shares but only confusion in valuation.Par reduction to P.01 will better align the Company with other gold mining companies with huge growth potentials. The increase in number of shares will also enhance APX’s liquidity and marketability to investors.
  2. Teresa merger, private placements, and debt to equity conversions executed by the Company will generate approximately P1.3 billion share premium. This would make APX’s share premium for the end of 2012 stand at P2.8 billion which is enough to wipe out a deficit of only P1.9 billion as of the end of 2011.A balance sheet with no deficit is not only pleasing to the eyes of future investors but will also provide the Company ways to add shareholder value through cash dividends or stock dividends. A company that provides high shareholder value will reap its rewards through ease of raising capital from the market.
  3. APX enjoys a tax holiday until 2013. APX would be better off if it defers major asset write-offs until 2013 in order to maximize profit without the burden paying income tax expenses and in effect attract more interest from investors and analyst coverage.The two years remaining income tax holiday is enough for APX to expand the milling capacity to three folds and the porphyry system exploration to mature. The three fold expansion of milling capacity will provide the natural advantage of economies of scale thus generates more profit for the Company which will be the right time to write-off assets without presenting loss in the financial results of 2014.

Emotionless or Just Rational? Stock updates: LPZ, GREEN, APX

Check out how Roger Federer plays tennis:

http://www.youtube.com/watch?v=xNPaZj4yn00

He is considered the best tennis player of all time. Notice how calm his face was during the game? How do you describe him? Emotionless or rational?

I tried imitating Federer’s “emotionless” state in playing tennis but I always fail to do it. My emotions burst out of me every time I made an erroneous stroke or get frustrated on my serve. But in one practice game, I realized that by just focusing on the proper form I can manage to have the state that I am after. Emotions are signals that the body sent to the brain to signify something and therefore should not be suppressed but rather understood. I am not being emotionless in the game, I am being rational.

In investing, stock market gyrations do not affect me because the prices of my stocks will not affect the business of the company I own. If CHIB’s stock price decline by 20%, it does not mean that CHIB will stop doing business. Emotionless? Just rational.

I understand that others view the stock prices as signals. If CHIB declined 20% then there should be something bad. In order for you not to panic in times like that, you should do your own tons of due diligence.

 

LPZ

Finally! We can now be certain that GLO’s tender offer will be successful!

http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-8848_GLO.pdf

The successful tender offer is only the first step of our speculation in LPZ. After GLO’s successfully purchase BTI’s debts we can sit back, relax, and wait for GLO’s future move.

So what if GLO buy LPZ’s BTI?

Then LPZ’s balance sheet will then be free of P8 billion debt or an increase in book value of P1.85 and earnings will increase by P.04.

More here.

APX

APX shows off their disaster preparedness:

http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-8844_APX.pdf

It means that APX’s operation and assets are well protected from natural calamities. Good news! But I want the resource estimates. lol

 

GREEN

THEY HAVE A NEW CORPORATE WEBSITE!

http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-8853_GREEN.pdf

And it does not mean anything for us speculators. lol

Wohoo! December 11 is next weeeeeeeek!!! 🙂

PSEi, Stock and Family, Speculative vs. Investment

PSEi

Index at all time high again and trading at high multiples.

When should one be worried? You should be worried if the company that you are investing does not have any promise of future earnings growth.

Is it time to buy?

I’m patiently waiting.

Stocks and Family

Last December 2011, Me and my client allocated plenty AAI. As some of you might have remembered it was very volatile at 25~35 range. During Christmas and New Year, we find our portfolio at negative 50%. I feel bad about it and have that unusual feeling in my stomach. I enjoyed the moment with my family but my mind just reverts back to my stock.

January 2012, I sold all my AAI stock for a 100% profit.

From that date on, I limit my speculative holdings to just 20% of my portfolio and I learned to disconnect my ego from my bank account. Never again an activity I passionately do distract me in my time for my family!

 

Speculative vs. Invesmtment

What exactly is a speculative and what is an investment?

A stock purchased for speculative and for investment purpose does not differ on the time frame but on the amount of information available prior to the purchase that can promise us safety and returns for our capital.

Stocks I consider an Investment

FGEN, AGI, PCOR, CHIB, and EDC are companies that allow us to project their earnings based on the readily available information that only requires number crunching.

Let’s have FGEN, FGEN derives 90% of their earnings from sale of electricity to MER. Electricity demand is almost certain not to decline dramatically so we can easily project FGEN’s earnings in the coming years.

Stocks I consider Speculative

LPZ, APX, GREEN are speculative.

APX is speculative since the mineral reserve estimates are not yet disclosed and that we are not sure if the increase in APX’s capacity can be met by APX’s reserve. Current APX reserve can only last for 5 years should the capacity be tripled.

LPZ is speculative since GLO buying LPZ’s BTI is in the mind of GLO’s decision maker.

GREEN is speculative since we have no comparable operating years to project earnings.

Why did I buy these shares?

Because, IMHO, the odds are very much skewed to the speculator’s favor. 🙂

APX to announce a substantial mineral resource is very likely.

LPZ’s BTI to be eventually purchased by GLO is very likely.

GREEN’s management declaring property dividends to increase shareholder value is very likely.

Apex Mining Company, Inc. (PSE: APX) (PSE: APXB)

Business Profile

Apex Mining Co., Inc. (the “Company”) was incorporated and registered with the Philippine Securities and Exchange Commission (SEC) on February 26, 1970 and listed its shares on March 7, 1974. On August 24, 2005, Crew Gold Corporation (Crew Gold), an entity incorporated and doing business in Canada, and its associated Philippine company, Mapula Creek Gold Corporation (Mapula), acquired 28.03% and 44.88% of the Company’s shares, respectively, by virtue of the Share Purchase Agreement (SPA) entered into by both Crew Gold and Mapula with the previous majority shareholder (Puyat Group).

In October 2009, Crew Gold completed its divestment in the local mining industry and sold its equity share in the Company, as well as to local affiliates including Teresa Crew Gold (Philippines), Inc. (Teresa) and Mapula to Mindanao Gold Ltd. (Mindanao Gold).

As of December 31, 2009, the Company’s majority shareholder is Mapula Creek a Philippine incorporated company.

The Company is a holder of two Mineral Production Sharing Agreements (MPSA) namely, MPSA No. 225-2005-XI, approved on December 15, 2005 with a total area of 679.02 ha located within the Municipality of Maco and MPSA No. 234-2007-XI, approved on June 8, 2007 with a total area of 1,558.53 located within the Municipalities of Maco and Mabini. All mining Tenements are in the Province of Compostela Valley. On April 12, 2012, they disclosed an increase total gold resource potential of 1.118 million troy ounces from 588,000 troy oz. on 2009. [1]

In 2011, the Company milled 202,580 tonnes of ore producing 26,257 troy oz. of gold and 146,295 oz. of silver. Although the increase in the tonnes milled from previous year was only 5%, the increase in gold prices boosted their revenue growth as compared to 2010 by 31% narrowing their net losses to 39 million from 120 million in 2010.

On a disclosure on February 3, 2012[2], the Company announced their 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 with a threefold increase in milling capacity by 2013. 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. [3]

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. [4] Monte Oro increased their interest in the Company for another 7% on July 3, 2012 for a consideration of 4.40 per share. [5]

On December 1, 2011, SEC approved the merger between Apex Mining Co., Inc. and Teresa Crew Gold Philippines, Inc (Teresa) effective January 1, 2012. [6]

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.[7]

On July 16, 2012, the Company’s board approved the issuance of shares to the following: [8] [9]

Other data:

Comments:

Based on a conservative estimate of $1,600/oz. of gold at an exchange rate of P42/$ and an average milled ore of 695 tonnes/day, I expect APX to realize an earnings per share of .05. The reversal of 2012 results from a loss on 2011 would be largely due to the rent savings that will be generated on the merger between Apex and Teresa and the income tax holiday which is effective until 2013. 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.

With the expected opening of historical veins in the third quarter of 2012, increase in milling capacity and increase in free cash flows due to rent savings, I believe that an average ore milled of 1,150 tonnes/day for 2013 is achievable considering that the company aims to expand production to 2,400 tonnes/day by 2013. Assuming that the price of gold remains above $1,500/oz. at an exchange rate of P42/$, I expect the company to realize .53 earnings per share.

The average price that Monte Oro paid for the 12% interest in Apex amounts to 3.97 per share which is only 7.49x estimated earnings for 2013. Apex is currently trading at 9x of estimated 2013 earnings at P5.00. To put the figures in perspective, Philex Mining Company, the largest mining company in the Philippines currently trades at 18x earnings.

Apex’s huge room for growth through increase in ore milled, promising mineral resource, favorable gold prices, stable forex rates, and the Company’s conservative use of leverage 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.   “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
3.   “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
4.   “Press Release re: Monte Oro Investment into Apex” http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-8120_APX.pdf
5.   “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
6.   “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
7.   “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
8.   “Board approval of additional share issuances to Viscal Development Corporation, Mindanao Gold Ltd. And Mapula Creek Gold Corporation; Trading Halt”  http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-5363_APX.pdf
9.   Results of Organizational Meeting of Board of Directors: resignation/election of directors/officers/committee members, issuance of Class A shares to Solar Securities, Inc., amendment of issuance of Class A shares to Viscal Development Corporation http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-5478_APX.pdf

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