Metanor Resources: Trying to dig itself out of a hole

Metanor Resources trades on the TSX Venture exchange under the symbol MTO.  At 14 cents/share, its market cap is $37.42M.

Excluding its mining assets, the company has around $11.522M of assets versus $52.633M of liabilities.  This would imply a value of $78.531M for the mining assets.  The cash flow of their flagship Bachelor Lake mine suggest that the mining assets aren’t worth anything near $78.5M.  The shareholders may very well be wiped out.

The economics of the mine are hard to figure out

Management does not make it easy to figure out whether or not the mine is profitable.

  1. Investor presentations state that cash costs are around $1000/ounce and will drop to around $800.  However, the phrase “cash cost(s)” does not appear in the company’s latest MD&A or financial statements.  They aren’t providing data to back up their claims.
  2. Investor presentations state that the company is thinking about expanding the mill capacity.  I don’t understand why this would make any sense at all.  The prefeasibility study was based on a mine life of four years.  Further exploration could extend mine life to more than 4 years.  However, justifying an expansion of the mill/mine would likely require a mine life of at least 15-30+ years.
  3. Press releases state the amount of gold produced and the tonnage mined on a monthly basis, for months where production is good.  I haven’t been able to find this information in quarterly form in the MD&A or financial statements.  I believe that management should try to provide key figures on the operating business in the MD&A.  It is unusual that they don’t.
  4. The regulatory filings provide little information on the amount of gold remaining in the mine.  For YE2013 and YE2012, the MD&A filings state that the “project has 200,177 ounces of gold in the proven probable reserve categories”.  While gold has been mined out of the deposit during both years, the MD&A provides little information to help investors understand how much tonnage or gold is left.

Cash flow

In YE2013 and YE2012, cash flow for the company was negative.  This could simply be because the mine had difficulties in ramping up production.  Note that the company’s press releases paint a very positive picture where there have been few problems in ramping production.

The latest quarter (Q1 2014) might paint a better picture of the mine’s economics.  In Q1 2014, the company’s cash balances increased by $1.562M.  Excluding $0.933M from changes in working capital items, the cash flow would drop to only $0.628M.  If we arbitrarily assume that the mine has exactly 4 years left, then a simple extrapolation suggests that future (undiscounted) net cash flow will be around $10.049M ($0.628M X 4 years X 4 quarters/year).  This is well short of the $78.5M implied valuation of the mine and exploration properties.

This quick and simple analysis of the mine’s cash flow isn’t perfect.  It is affected by non-recurring sources of cash such as the $2.491M received from tax credits.  (I believe these are tax credits from the province of Quebec for exploration costs that happened in the past.)  One also has to take into account changes in the mine’s grade over time.  The prefeasibility study (by George Darling of Stantec) anticipated the following for “net operating cash flow”:

Pre-production year 1:  -$13.548M
Pre-production year 2:  -$21.878M
Year 1: $51,436M <—the mine is roughly at the beginning of year 1 currently
Year 2: $45,354M
Year 3: $37,387M

The big picture is that the cash flow will decline over the mine’s life.  Things will only get worse from here.  What’s less important is that the prefeasibility was wrong and overstated the profitability of the mine.  (To be fair, there are lower standards for prefeasibility studies than feasibility studies.  However, some juniors exploit this by releasing a prefeasibility study, raising capital, and then building a mine without a feasibility study.  Of course the reality is that many feasibility studies are extremely inflated anyways so the whole system is flawed to begin with.)

This cash flow analysis ignores the effect of share dilution from stock-based compensation.  Share dilution is a very real expense that should be factored in.  In this case however, I believe that the cash flow from the existing mine is so awful that you don’t need to pay too much attention to the cost of stock-based compensation.

Metanor has been desperately raising money

In YE2013, Metanor issued $10M in convertible debentures with an interest rate of 10% and a conversion feature.  The effective interest rate would be above 10%.  It is very difficult for shareholders to make money in mining when the cost of capital is above 10%.

Metanor also sold common shares at 10 cents/share and flow-through units at 10 cents/share.  (Flow-through units are worth more than common shares due to tax advantage associated with them.)  After a whopping 8.5% cash commission, the effective proceeds were 9.15 cents/share.  This is well below Metanor’s current share price.

Good things I can say about Metanor

Normally I try to keep my posts balanced.  However, I can’t really think of anything good to say about Metanor’s assets or management at the moment.

Bottom line

It looks overvalued to me.

*Disclosure:  No position… yet.

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2 thoughts on “Metanor Resources: Trying to dig itself out of a hole

  1. Pingback: Casimir Capital | Glenn Chan's Random Notes on Investing

  2. Pingback: Mining Shorts Roundup | Glenn Chan's Random Notes on Investing

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