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.

Direct Selling, Cheap Stock, Stock thoughts: CAL, LC, GLO, MPI

Direct Selling

I met a lot of people who are into direct selling. If you are one of them, Anton English has a lot of tips to offer:

http://antonenglish.com/three-things-that-will-have-me-running-for-the-hills/

 

Cheap Stock

What does a cheap stock really mean?

http://www.adventuresincapitalism.com/post/2010/03/15/What-Does-Cheap-Really-Mean.aspx

In my opinion, the above article describes Warren Buffett’s investment style. Warren Buffett looks at the future of business and values it while Ben Graham looks at the history of the business and values it. That is the stark difference between the master and the student.

 

CAL

CAL declared cash dividend of P.25:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3115_CAL.pdf

The reason they declared the cash dividend is “significant revenue growth”. I agree, but at CAL’s earnings per share of P.32, a cash dividend of P.25 means giving away 78% of the earnings.

They should have conserved more cash for the business.

My opinion only.

 

LC

LC is trying to convert their MPSA (mineral production sharing agreement) to FTAA (Financial or Technical Assistance Agreement) within this year.

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3126_LC.pdf

This means that their foreign partner may be able to proceed to the development of LC’s mineral claims.

More about LC’s FTAA:

https://fundamentalenthusiast.wordpress.com/2012/10/20/investing-in-lepanto-consolidated-mining-inc/

I wonder how they will circumvent EO79 with regards to FTAA….. We’ll see. 🙂

 

GLO

GLO eyes complete takeover of Bayantel:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3135_GLO.pdf

Of course, why else would they buy Bayantel’s debt? lol

Looking forward for more disclosure. 🙂

 

MPI

As some of you may have noticed, Deutsche is selling a lot of MPI shares. Considering that MPI failed to get the express way project, Deutsche’s valuation model could probably be impaired. Thus, it should be expected that they will sell more of their position in the coming days.

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.

Lepanto Consolidated Mining Co. (PSE: LC) (PSE: LCB)

Business Profile

Lepanto was incorporated in 1936 and shifted to gold bullion production in 1997 through its Victoria Project. Lepanto continues to produce gold from its Victoria and Teresa operations, both located in Mankayan, Benguet.

The Company sells gold bars to Haraeus Ltd. in Hong Kong under a contract that is renewable annually.

The following schedule indicates the percentage of sales and net income contributed by foreign sales in the last three years:

The Company’s subsidiaries and affiliates and its percentage of ownership are as follows:

Diamond Drilling Corporation of the Philippines (DDPC)

DDCP was incorporated and registered with the SEC on August 8, 1971 primarily to provide technical, engineering and management services for the purpose of engaging in mining, mineral or oil exploration construction or other business activity, particularly but not limited to drilling, boring and sinking holes for the purpose of mineral exploration.
DDCP primarily provides drilling services to the parent company and Manila mining Corporation (MMC), an associate.

Shipside, Incorporated (SI)

SI was incorporated on November 12, 1958 primarily to engage in handling all kinds of materials, products and supplies in bulk and maintaining and operating terminal facilities such as pier and warehouses.

Lepanto Investment and Development Corporation (LIDC)

LIDC was incorporated and registered with the SEC on April 8, 1969 and is in the insurane business, It owns 23.14% of Philippine Fire and Marine Insurance Corporation (Philfire) and 100% of DBPI. Its income principally is from Philfire and does not contribute more than 10% of total revenues.

Far Southeast Gold Resources, Inc. (FSGRI)

FSGRI was incorporated and registered with the SEC on July 20, 1988 primarily to operate mines and prospect, explore, mine and deal with all kinds of ores, metals and minerals. LC has 60% interest in the Company through LIDC.
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.  If the option is exercised the Company’s interest in will be reduced from 60% to 40%.

As at March 19, 2012, FSGRI is still in the pre-operating stage.

Diamant Boart Philippines, Inc. (DBPI)

DBPI was registered and incorporated in September 7, 1972 and is primarily engaged in manufacturing of industrial diamond tools for mining exploration, marble cutting and the construction industry. Most of its raw materials are imported from an affiliate, Diaboart Brussels, and are readily available. LIDC owns 100% of DBPI.

Comments

The company forecasts their 2012 earnings to reach P300 million which I believe is very achievable due to the substantial reduction of finance costs or interests paid on loans. However, even if the company achieve an earnings of P400 million, LC will still be trading at 155x PE ratio.

A potential revenue stream for the Company will be the commercial operation of FSGRI which makes LC a company to watch for.