Investing in Lepanto Consolidated Mining, Inc.

As indicated in the charts above, Lepanto Consolidated Mining (LC, the “Company”) experienced two declines in share price, on May and on July. May decline was caused by removal of LC from the PSE index while July was due to the release of Executive Order (EO) 79. The EO 79 that was rleased in July served as a huge blow for LC’s share price. LC’s Mineral Production Sharing Agreement (MPSA) will expire in 2015 and originally, EO 79 states that there are no renewal of MPSA until new tax rates are approved by congress.

LC’s story is their interest in Far Southeast Gold Resources, Inc. (FSGRI). On September 20, 2010, the Company approved an Option on Shareholder’s Agreement (Agreement) with Gold Fields Switzerland Holding AG (GFS), a wholly owned subsidiary of Gold Fields Limited, for a non-refundable option fee of $ 10 million.

The Agreement requires GFS to:

I.      Fund the exploration and feasibility study of the FSGRI mining project

II.      Contribute $110 million into FSGRI

III.      Contribute proportionate share of the development cost

The Agreement grants GFS an eighteen-month option to subscribe to new shares of stock of FSGRI representing 20% interest in FSGRI. However, as of to date, GFS is yet to exercise their right pending the acquisition of Financial or Technical Assistance Agreement (FTAA) license—which allows a foreign corporation to legally own and control a majority stake of large-scale mineral resources in the Philippines. If the option is exercised the Company’s interest in will be reduced from 60% to 40%.

The Far Southeast project is covered by MPSA No. 001-90 which is granted on March 3, 1990 and is believed to have 19.8 million oz. of gold reserve.[1] On October 08, 2012, a revised rules and regulations to the implementation on EO 79 was signed which allows the renewal of expired mining contracts even before the congress approves new tax rates for mining. [2][3] This latest developments suggests that the story of LC is still substantially intact. GFS may proceed with the MPSA and increase their interest to 60% in FSGRI as soon as they will be legally allowed to have FTAA.

Risk in investing in LC

Take note that the conversion of MPSA to FTAA is still not allowed until the approval of new mining tax rates. Since FTAA allows ownership of more than 50% in Philippine mining operations, GFS may opt to cease their operation and wait for the new mining tax rates.

Sources:

  1. Update on Far Southeast Project, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6671_LC.pdf
  2. Rules and Regulations to the Implementation on EO 79, http://www.mgb.gov.ph/Files/Policies/DAO%202012-07.pdf
  3. Department Administrative Order 2012-7-A, http://www.rappler.com/business/special-report/whymining/whymining-latest-stories/13865-paje-signs-final-mining-rules?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rappler+(Rappler)

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

COAL Prospectus At A Glance

Coal Asia Holdings Incorporated (the Company, COAL) was incorporated on June 11, 2012 as a holding company. The Company has only one subsidiary, Titan Mining and Energy Corporation (TMEC) and was incorporated on November 11, 2008.

TMEC is a holder of coal operating contracts (COC) in Davao and Zamboanga-Sibugay. All COCs are not yet in the development phase.

Below is the Company’s estimated resource: [1]

TMEC commissioned an independent mining engineer, Engr. Rafael R. Balalad, to conduct a pre-feasibility study in the Davao Oriental project. The result of this study states that the Davao Oriental has total reserves of 7 MMT, as follows:

In the past three years, TMEC generated revenue through sale of steam-grade coal purchased from small-scale mining conducted in its COC areas in the Zamboanga-Sibugay Project. All of TMEC’s sales were made to local canneries and food manufacturing companies.

Among the three COC that the company owns, the Davao Oriental project is at the most advanced stage. The Company plans to spend 74% of the net proceeds from their sale of 800 million IPO shares to put the Davao Oriental project in development and production phase by second half of 2013. The upgrade of TMEC’s COC from exploration to development and production phase depends on the approval of the Department of Energy (DOE) on TMEC’s work program and feasibility study and issuance by the Department of Environment and National Resources (DENR) of Environmental Compliance Certificate (ECC).[2] In order to mitigate this risk, the Company claims to have continually complied and fulfilled the conditions set by the DOE.

Executive Order 79 (EO 79) which states reforms from the old mining act of 1995 affected mining companies since its signing in July 2012. Although EO 79 pertains about mining, it does not cover coal mining operations as it is under Presidential Decree 972 (PD 972). Rendering coal miners immune from regulatory encumbrances currently encountered by their mineral counterpart.

TMEC claims to have high quality of coal deposits. See the values below:

Strip ratio or stripping ratio refers to the volume of waste materials required to be hauled in order to obtain one cubic meter of resource. In the case of TMEC, TMEC needs to move 10 cubic meters of waste materials in order to obtain 1 cubic meter of coal. The same goes with the Zamboanga-Sibugay operations.

Heating value is the amount of heat that would be produced upon complete combustion of the material. The energy given off is measured in British thermal unit (BTU). A single BTU is equivalent to the energy of one match. One pound or TMEC’s Davao coal is equivalent to lighting 9,500 matches.

Ash, sulfur, and moisture contents in coal affect boiler efficiency. Ash is a non-combustible component of coal. Coal ash consumes heat energy and reduces overall generating capacity of a power plant. The effect of moisture is the same as that of coal ash. Sulfur decreases boiler efficiency because of the need to maintain high temperature to avoid condensation of sulphuric acid that results to corrosion of power plant equipments.

To place the figures in perspective, Semirara Mining Corporation (SCC)’s coal quality are as follows:[3]

The Company believes that they have the advantage in coal quality in the domestic market particularly in the Zamboanga-Sibugay project which can be sold in raw form.

TMEC entered into a memorandum of agreement (MOA) with Huanzhou Fuyang Gaoquiao Thermal Power Plant Co. on January 28, 2010 where TMEC agreed to deliver 50,000 MT of coal every month or 600,000 MT per year. The delivery schedule will commence in January 2014.

Comments:

Assuming that the coal prices will not go below P3,000 / MT, the Company is bound to earn P1.8 billion revenue in 2014 and a profit of approximately P540 million [1.8 billion x 30%] assuming that TMEC will have the same profit margin as that of SCC’s coal operation. Current reserve only allows five years of commercial operations however, the management expects to realize the potential deposit feasible for extraction.

Note/Sources:
1.   There are two classifications of mineral deposits, namely: Mineral resources which are reasonable prospects for economic extraction and Mineral reserves which are valuable and feasible to extract.

The Company presented mineral resources estimate, mineral resources can be sub-classified as:
I.   Indicated resources are estimates that can be relied on at a reasonable confidence.
II.   Measured resources are acceptable estimates that can be relied upon at a high degree of confidence.
III.   Inferred resources are estimates that can be relied upon at a low level of confidence.

Mineral resource classification,
http://en.wikipedia.org/wiki/Mineral_resource_classification

2.   Coal Model Contract,
http://www.doe.gov.ph/PECR4/coal/coal%20operating%20contract/COAL%20MODEL%20CONTRACT.pdf

3.   Semirara Mining Corporation Coal Product,
http://www.semiraramining.com/CoalProduct.php

Disclosure: This article is published with the permission of the client. No position in any stock mentioned.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Everything About Philex

Philex Mining Corporation (PX) was incorporated on July 19, 1955 and went public on November 25, 1956. The company derives its revenues from sale of gold, copper, silver, and petroleum. Gold, copper, and silver contributes 96% of the Company’s revenues net of marketing charges through their operation of Padcal Mine in Benguet. Petroleum which provides approximately 4% of the Company’s revenue is sourced from their interest in the Galoc oil field through their interest in Philex Petroleum Corporation. Below is the Company’s corporate structure:

PX’s Padcal Mine in Padcal, Tuba, Benguet Province produces copper concentrates containing copper, gold, and silver.  The Company has an existing long-term gold and copper concentrates sales agreement with Pan Pacific where at least 60% of the total annual production is committed since 2009. The uncommitted balance was subject to a contract with Louis Dreyfus Commodities Metal Suisse S.A. The value of the shipments is initially determined based on prices during the final quotation period.

The final quotation period for gold and silver is one month after month of arrival in Japan while quotation period for copper are two months after month of arrival in Japan for the period April 2010 to March 2011 and three months after month of arrival in Japan for the period April 2011 to March 2012.

Padcal mine is covered by two mineral production sharing agreement (MPSA), MPSA 156-2000-CAR and MPSA 276-2009-CAR valid up to 2025 and 2034 respectively.

As of December 31, 2011, the Padcal Mine’s mineral resources and proved reserves are estimated as follows:

In August 2011, the economic life of Padcal Mine was extended to year 2020 from 2017. A total area of 13,729 hectares within the municipalities of Tuba and Itogon in Benguet is covered by the following mining agreements:

The Company spent P324.2 million and P271.7 million in 2011 and 2010 respectively for environmental compliance.  The Company and its subsidiaries have been consistent winners in environmental contests. Padcal mine has been ISO14001 Certified since 2002 for Environmental Management System and won several environmental contest namely, Best Mining Forest first runner-up in 2010 and 2009, and champion in 2008, 2007 and 2011[1].

The Company is currently exploring and developing mine sites which is done internally or through drilling contractors incurring P2.022 billion, 1.246 billion and P855 million for 2011, 2010, and 2009 respectively.

The Silangan Project which is owned by the company through Silangan Mindanao Mining Co., Inc. (SMMCI) covers Boyongan and Bayugo deposits in Surigao which are currently under pre-feasibility stage. Anglo American Exploration (Anglo) completed a prefeasibility study of the Boyongan deposit in December 2007 and concluded the project to be not feasible which PX disagree. In November 2008, Anglo offered to sell their 50% interest in the project. In February 2009, Anglo’s interest in the project was purchased by PX for $55 million.

As of August 5, 2011, Boyongan and Bayugo which is covered by MPSA-149-99-XIII (to expire on 2024) and EP-XIII-03 Lot-B located in Surigao de Norte has the following estimated mineral resources:

In May 2011, the Company executed a Farm-In Agreement with Manila Mining Corporation through the purchase of 5% interest in Kalayaan Gold-Copper Resources Inc. (KGCRI) for $25 million[2] where the Company should conduct exploration activities in the Kalayaan properties (adjacent to Bayugo deposits) for three years. Should it declare commercial feasibility within the period, PX will have the right to increase their holdings in KGCRI to 60%.

Other mining projects of the Company that are at advance stages are the Bulawan mine in Negros and Sibutad mine in Mindanao. Bulawan mine and Sibutad mine operated on 1996 and 1997 respectively and both ceased their operations in 2002 due to unfavourable metal prices. As of December 2011, the Company is contemplating in reopening the Bulawan mine and conducted diamond drilling to come out with a resource estimate. Sibutad mine which has a remaining resource of 17.1 million tonnes with 0.84 g/t is temporarily at standby due to the standing open-pit ban in the province that they are operating.

Another source for revenue for the Company is the sale petroleum. Petroleum revenues came from their ownership of Philex Petroleum Corporation (PXP) which has a minority interest in Galoc oil field. An interesting business development for the Company is the commencement in commercial operation of their subsidiary Brixton Energy & Mining Corporation (BEMC) in 2010. BEMC previously engaged in buying coal products from small producers and selling it by bulk since 2005.  On January 16, 2012, BEMC entered into purchase agreement with Republic Cement Corporation for the delivery of 50,000 MT with a base price of P3,200/MT. On May 21, 2012, PXP expressed their confidence to be able to sell 100% of BEMC’s output of 100,000 MT of coal and plans to expand operations through bidding for the six coal blocks near existing Brixton coal project. [3]

Other Data

Source:
1.   “MINING FOREST PROGRAM REFORESTS 88% OF DISTURBED MINING AREAS”; http://www.mgb.gov.ph/art.aspx?artid=320
2.   “Agreement with MA for exploration and development of Kalayaan Project; Lifting of trading suspension” http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-3577_PX.pdf
3.   Clarification of news article: “Philex expects to sell off full Brixton output” http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3916_PXP.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

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