Paying For Blue Sky

When I first purchased MHM the market capitalisation was circa $120 million (undiluted). Since then the price has crashed from around $1.20 to as low as $0.52. It is clear that this fall is not only due to the global market selloff, but also the failure to deliver any material progress with MHM’s US operations. As a result that “blue sky” has been eroded over a period of time.

Even with some rough calculations which ignore the “blue sky” potential we could arrive at the following value:

MHM Australian Operations: $8.6m profit p.a. x PE of 5 = $43m *

Cash = $10m

Resource Ops/Exploration Potential = Say $25m**

Total Value = $78 million

* Please note the $8.6m projected profit is yet to be achieved from the Australian plant. I also only used a PE of 5 because no long term contracts are in place and additional feed will need to be sought after the 160,000 tonnes of Alcoa landfill is exhausted (5 years’ time).

** MHM has interests in Silica, Gold and Copper I have attributed a value of $25 million to these projects based on what other explorer’s trade for. If this was the sole focus of the business I expect that they would have a MC in excess of $20m but no higher than $30m.

As you can see from the above I can arrive at a rough valuation of $78m. This is $44m below the market cap at the time I purchased and hence represents the “blue sky” potential that I paid.

In hindsight I certainly should have waited for the gap between the company’s current operations value and the market cap to reduce, however, news on the US expansion was expected around the middle of the year and if it had announced a 200 – 250,000 tonne plant then $1.20 would be history in my opinion.

What this really shows is that as an investor I need to balance the risk/reward of paying for this “blue sky” potential or waiting for the price to drop and ultimately miss out on the bigger picture. I continue to maintain almost 50% of the portfolio in cash and it is my aim to increase my holdings in MHM after US expansion is approved. I anticipate that I will be able to do this under my initial purchase price of $1.20.