Baja Mining (TSX:BAJ)… dodged that bullet

I wrote a post on Baja Mining on Sept 8, 2011 but never published it because I didn’t really understand the mysterious cost inflation of the project.  Around a year later, the stock has gotten crushed as it has revealed that its mine is not as economic as originally expected.  Here is my original post:

Somebody else’s VIC writeup here: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/55114

Baja Mining is a junior mining company that is in the process of building its mine.  It has received financing and has started construction.

Some of the numbers

Capital cost according to 2007 feasibility study: US$568 million
Capital cost according to 2010 NI 43-101 technical report update: US$889 million
Capital cost according to 2011 July presentation: US$1,143.60 million (+$254.6M)
I would call this a credibility problem.  I dislike these types of companies as it is hard to value to company, not knowing what the real numbers are.  It’s also possible that the overstatements cause investors to lose money.

NPV (net present value) at 8% discount rate, SEC prices, after taxes according to 2010 technical report: $1,306M.  $2.91/lb Cu, $26.85/lb Co and $1,175/tonne ZnSO4·H2O.  Currently copper is at $4.10, so that is favorable for Baja.

A quick and dirty calculation: (NPV of $1,306M – 254.6M) * Baja’s 70% share of the JV = $735.98M.  (This completely ignores taxes, doesn’t try to estimate cost overruns, doesn’t factor in current copper prices, etc.)

At a $1.03 share price, Baja has a market cap of 347.06M undiluted.  Ignoring its other assets and liabilities (and attractive financing), Baja seems like it may be trading at half of the value of its mine.

Metallurgical risks

Baja is using a new process that has been proven on a pilot scale but has never been applied on a commercial scale.  I am not a metallurgical engineer and I am scared to invest in this without having that technical expertise.

Bottom Line

I don’t know enough about mine engineering to understand what the mine will actually cost. 

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