Iron ore junior trades for less than its cash: Stockhouse TickerTrax

Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.

Macarthur Minerals (TSX: T.MMS, Stock Forum; 40 cents)

http://macarthurminerals.com/ 

MMS is thinly traded at this level so it’s difficult to present to a larger audience. However, given the long weekend and the fact many investors are short on cash, liquidity issues may be tolerable. If nothing else, Macarthur is a good example of the issues facing many junior exploration companies.

Because their property and management are based in Australia, MMS is about as low on the radar as you can get. This company would only appeal to those investors interested in hunting discounted cash (backed by advanced exploration projects).

Typically this would be viewed as a mid-term speculation. Other than existing long-term shareholders, few people would be interested in holding this long enough to see a production scenario (and maybe such a scenario is not economically viable). The typical MMS investor would be looking for a joint venture partnership (with a major), an off-take financing agreement that was non-dilutive, or a “general” recovery in penny stocks that saw a return to cash value with a more realistic valuation on the ore reserves.

So long as the company is smart about managing (preserving) their cash, it wouldn’t take much to see the share price recover 25 to 50 percent (from 40 cents). If, however, the next set of financials shows abnormal cash burn, a person would want to rethink the entire strategy.

The market discounts the MMS iron ore project to zero because investors feel (like so many others we’re seeing) that they will never finance or joint venture this project - and will burn through their cash in the attempt. That outcome is the primary risk.

With speculations of this nature you need dirt cheap paper and patience.

Highlights

- 45 million shares outstanding

- Feb 2011 raised $45 million at $3.60

- $29 million net cash to Dec 31st so we’re “assuming” they currently have approx. $25 million net of debt (55 cents per share cash and investments)

- Western Australia near-term production iron ore project with good infrastructure

- 1050 sq.km exploration region (20% of property drilled)

- Development of potential Hematite by end 2013-2014 / Strategic Partner for magnetite

 - Ularring Hematite Project: NPV $227 million AUD, 62% IRR, three-year NPV pay back

If we pull out the cash, the project itself is valued at a negative number. This is an Australia based iron ore play and there is no one around to promote the story and put buy orders on the board. Old shareholders simply want out and sell at whatever price - driving the project valuation to nothing.

I assume the company must care about the share price but when they are well funded, they appear more focused on developing the assets. This is fine if you buy the stock dirt cheap and can tuck it away. If you’re an old shareholder who paid over $1 or $2, you must be very angry.

The share structure is excellent for a company with this much cash and an attractive asset, so the risk/reward from this current price range “appears” attractive. However, if they were to finance further development through a share financing (and do so at these depressed prices, then a person would likely avoid it. This is simply another one of those stories you tuck away. Either a person makes a decent gain in the next year - or it becomes money floating around aimlessly). It's a difficult call in this market environment.

Key project points

1. Ularring Hematite Project to be completed as soon as possible to take full advantage of a high iron ore price. Off-take and debt financing for the Ularring Hematite Project is a core priority for 2012. Project development to align with the completion date of the Esperance Port development

2. Resource growth option for increasing the grade, tonnage and removing the impurities will be the key to ensuring a viable project with maximized profit margins.

3. - Early term cash flow from Ularring Hematite Project - Medium term Moonshine Magnetite Project - Access to existing infrastructure with capacity - Secured port allocation: two million tonne per year - Rail capacity available - emerging iron ore region - No restrictions through private sector control of transport infrastructure - $20/t freight advantage over North/ South American and African projects - Granted Mining Leases - Cleared native title & major environmental restrictions, no royalties to previous owners.

The environmental approvals process is a critical path for the project. Referral of the project to the environmental protection authority (EPA) is planned for second quarter 2012 and submission of the mining proposal to the Department of Mines and Petroleum (DMP) is planned for fourth quarter 2012.

Initial surveys undertaken by the company have not discovered any declared rare flora species or threatened ecological communities within the proposed disturbance areas. Continuing surveys are planned throughout 2012 to continue the collection of environmental data so the company can develop a greater understanding of the potential environmental impacts of the project. There are currently no registered native title claims over the project or any of the granted mining leases.

Iron ore outlook

Five-year iron ore price chart

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Disclosure: Danny Deadlock owns 20,000 shares of Macarthur Minerals (TSX: T.MMS) purchased in May 2012.