Everything You Need to Know About MHM Metals

The other week MHM metals released a company presentation that in my opinion is outstanding.
I know I am biased, but if you ever wanted a single document to tell you where MHM came from, where they are now and where they intend on going in the future then this is it.

I recommend you all give it a read as it is highly detailed and very informative.

I also sent managment an email to let them know that the presentation was perhaps the best I have ever seen.

Link to the presentation.

MHM Announcement: February Monthly Report

MHM recently released a month update on their operations. As I have done in the past I will provide my comments under the headings used in the report.

Australian Aluminium Operations

The report provided confirmation that 24 hour processing is currently taking place at the Geelong Facility. This is important because once we have processed the part-processed stockpiled salt cake we can begin work on the 160,000 of landfill. The stockpiled salt cake is expected to take three months to clear.

The other important point that I am glad MHM mentioned was that the potential shut down of Alcoa’s Point Henry Smelter will have no impact on MHM. Point Henry is a PRIMARY smelter, whereas MHM processes salt cake from SECONDARY (or recycled) aluminium industry/plant. This will hopefully clear up any confusion in the market place surrounding this.

Thirdly, the export of the AL80 is scheduled to commence on the 5^th of March 2012 with customs finally approving the paperwork. Impex has exclusivity for all AL80 produced in Australia, however MHM has received expressions of interest from other countries interested in the AL80 produced from our US plant.

US Operations

The preliminary budget estimate is US$25 million for the construction of a 250,000 tonne per annum plant. However, given the property has existing buildings/infrastructure in site there is a strong chance this figure could be reduced to below US$20 million. Targeted earnings at $25 million per annum with the full capacity reached within 12 months of commissioning.

Silica Division

No new information was provided other than to say that MHM continue to engage with their corporate advisors and that a potential spin—off will take place.

Link to announcement

MHM Metals US Property Settlement

Yesterday MHM announced that they had settled on the purchase of their 115 acre industrial site in Russellville, Kentucky.

The final figure was $838,761 (which is probably an odd figure due to currency conversion). The announcement then does on to state that “The Company is in the process of finalising process plant design and costing, with a number of existing buildings on site expect to decrease both time and expense of plant construction.”

Furthermore, “The large land-holding provides ample opportunity for MHM to grow, and to accommodate additional associated technologies under development.”

Now it’s just a matter of getting the design completed, financing in place and building the thing.

Link to announcement.

MHM: Another Way the Silica Spin-Off Could Work

Following my recent post on how the Silica project could be spun off there was some discussion on Hotcopper with another suggestion put forward. I believe this idea has merit, but would be worth less and more risky for any shareholders in the new silica company in my opinion. In summary it involves the following steps:

Step One:

MHM spins-off the Silica division into a new company. This company holds all our silica assets and signs an off-take agreement with a company that is to develop the smelter.

Step Two:

The external party, let’s just use Wacker Chemie AG as an example, would then develop the Smelter by themselves. The new MHM Silica Company would also receive a free carried stake (say 5% in the smelter). This is akin to receiving a 5% share of projects.

Step Three:

The Silica company then begins mining and obviously has a guaranteed customer with the off take agreement signed with the smelter own.

In this scenario the spun-off silica company is more involved in the mining side of the operations, rather than the smelter operations. It is also a little harder to run the figures see as we don’t yet know the scale of mining operations required to support the smelter.

If this indeed turns out to be the strategy of management then I would expect a return less than that outlined in the previous post. I do however believe it could still be worth around 10-20 cents per share just using some back of the envelope figures.

How Much is the First MHM Plant Going to be Worth?

The other day MHM released their quarterly report which provided some figures on how much the US plant is going to cost and what the targeted earnings are. Both of these figures came in at US$25 million. As a result we can now do some rough calculations as to what the US plant is likely to be worth.

Targeted Earning                =             $25,000,000

Less Tax @ 30%                 =             ($7,500,000)

Add back Depreciation*     =             $625,000

Net Profit                               =             $18,500,000

* Please note with Depreciation I have just used 2.5% of the projected development costs of the plant (US$25m). This is an Australian based figure so it may differ slightly, however for the time being it will be sufficient.

For those of you who have reviewed my earlier research on MHM I was a lot more conservative on these figures originally. At the time I was working with an EBIT of $16 - $20 million and always used the lower estimates to arrive at a value.

Now that the company has provided a little bit of guidance I think we can be a little more bullish. Using a PE of 10 the US plant would be worth $185,000,000. A significant increase on my original estimate of $112,000,000 (using the more conservative figures).

However, what I think the last few months has taught me about MHM is that the business is all about scaleability and expansion. Once this first plant is up and running I think we will move forward at a lot faster rate. As a result a higher PE of up to 16 would be justified in the short term and a medium term PE of 12 (once Plant 2 and 3 are in construction/running) is ideal in my opinion.

As a result this would value Plant 1 at $296,000,000 in the short term as a lot of “blue sky potential” would be built into its price. Over time as the blue sky potential was realised the justifiable PE would decrease, but the slack in the company’s value would be picked up by plant 2 and 3 commencing operations. Following this period of high grad a medium term PE of 12 would equate to a value of $222,000,000.

Now multiple that across as many plants as you want and that is the potential value of the business. And that’s before we add in the potential of the additional technologies MHM has first right or refusal over or the Silica project.

Potential Value to MHM Holders From the Silica Project Spin-off

As per my comments on the quarterly report I have conducted some research into the potential value of the silica project for exisiting MHM holders.. I posted these thoughts on Hotcopper and provide a copy of my post below:

Hi Guys,

I have done some research and most of the previous articles refer to the Silicon Smelter costing $500 million. I also found a few other mentions of Silicon Smelters in other parts of the world coming in at around the same price.

I also think it is important to consider that Management want MHM to be a sole Al/Salt Slag play and therefore will not retain the state in the Silicon Co at the company level (IMO). As a result we as shareholders either A. Get shares in the new company or B. Receive a one off capital return (following the sale of the project).

Seeing as the project is already going to cost $500m I don’t think the partner is going to want to pay MHM/MHM shareholders a large sum to take the project off our hands 100%. As a result we are left with option A. The company will be spun out and listed on the market (IMO).

So what could this mean?

-          Seeing as MHM have done a lot of the ground work and held this project for a number of years I would expect that we would get a minimum of 20% (any less and I would be disappointed in management).

-          The company who comes in and acquires the project would most likely want 50% IMO as a Silicon project is not like a Gold Mine where you dig it up and sell the stuff to anyone. The company that builds the plant will also be the one using the end product.

-          That leaves 30% to be raised via an IPO, which MHM shareholders can participate in as well.

Seeing as our 20% stake is “free”, i.e. we don’t have to pay any more money as we already own MHM shares. Then the $500m must be raised by the Major Partner and IPO. This would mean the Major partner contributes 62.5% of the money or $312.5million and the IPO the remaining 37.5% or $187.5 million. (NOTE: This money may not be raised all in one go as I doubt they could get that much coin less all DA and environmental approvals were in place. As a result that may be the “end figure” a year or so down the track after another CR along the way).

That would then imply that our 20% stake is “worth $83 million”. Calculated by taking $500m that it will cost to develop dividing by 120 (100 for the amount financed by other partners plus our 20% on top) to give a value relative to the projects total cost of $500m. (hope that makes sense – in other words of 20% is funded by others, but we still get the benefit).

Fully diluted MHM has 136,974,395 shares as a result our “implied” value in the project is worth 60 cents per share. However, obviously the Silicon Co once listed wont trade at $500m, given that the Major Partner will probably fund a large proportion of their investment via debt, not equity.

Assuming they kick in $125m in equity (40% of their required $312.5m), plus the $187.5m in equity from the IPO that would give a Market Cap of $312.5 million. And our 20% would be worth $52 million on market or 37.9 cents per share. (Assuming that the company trades at 100% of the equity kicked in). In the real world it will probably trade at less than this, but for arguments sake lets run with the figures

I know it seems like a lot of money, especially when you consider that our share price is under $1. But if this project is to go ahead then there will be a number of announcements along the way that will significantly boost the SP. On top of that we have progress in America. If this was to get our Share Price to $2 then an in-spec distribution of shares in a new company at 37.9 cents (would obviously be rounded up or down to a round figure) would account to less than 20% of the SP’s current value (0.379/$2). Which is definitely in the ballpark of possibilities IMO.

Anyway I just wanted to provide these figures to highlight the “potential” value of the project based on ONE possible scenario. Obviously management and our eventual partner may have different ideas.

As always please do your own research. Also this deal still has some way to go and the figures are very rough as a result. As more details emerge we will be able to work out with a lot more accuracy what the likely outcome is to be.

MHM Quarterly Announcement - To 31 Dec 2011

Yesterday MHM put out their Quarterly Report (to 31 Dec 2011) and my first impressions are that management cannot understand the poor performance on the share price. This is evident by the fact that the announcement starts off by stating our current cash reserves ($5.9 million), planned road shows for Australia, New York, London and Asia and the numerous references to financing that is non-dilutionary.

The international road shows are planned to take place before the end of March 2012 and are designed to inform and engage new investors. This initiative also follows the recent visit of the Geelong facility by a number of stockbrokers interested in publishing research on MHM. If all goes to plan I would expect that the next three to six months will deliver a constant flow of new broker reports which will hopefully garner some support for the company and its share price.

As, usual the rest of the report is broken down into our various operations. As a result I will do the same for my commentary.

Australian Operations:

For December 2011 quarter gross cash receipts were just over $1 million, with further trade receivables of $941,644. This obviously doesn’t look like a great figure but I have previously commented that it will not be until the end of the June quarter where we see results that represent a fully operational plant. The company all but confirmed this in the announcement by stating that the stockpile of partly-processed salt slag is expect to take 3 months to reduce. That would take us to the end of March 2011, we then need three months of full operation which takes us to the end of June, before the results are released in July.

On another positive front the customs paperwork issues with the AL80 have been resolved with the first shipment to depart by the end of February 2012. This has obviously been a trying process, but it was important that it was overcome to ensure that MHM is able to deliver on their stated profitability targets.

Finally, the salt crystalliser is facing some delays. This is not an issue for the Australian operations; however they do need to get it sorted for the American operations. They have plenty of time though as this would not need to be installed for another 6-9 months at a minimum.

American Operations:

The summary of the American operations is pretty much a re-hash of old information. The purchase of the building is however, expected to be funded from existing cash reserves. The purchase price is $835,000.

The update also included new information of the financial projections associated with the project. The preliminary budget estimate is US$25 million for the construction of a 250,000 tonne per annum plant. The targeted earnings, once operating at full capacity will be $25 million per annum. MHM also expects the plant to operate at full capacity (250,000 tonnes) within 12 months of commissioning. In case you missed that MHM stated 250,000 tonnes, not 200,000 which was the lower estimate they had previously provided.

The announcement then goes on to talk about the financial impacts which I have previously mentioned. It is clear that a capital raising is the least preferred option. And when you consider that the 24.3 million options that will expire on 31 August 2012 will generate $4.86m, plus our current cash position of circa $5 million and increase in profitability from this point forward (with full operations at our Australian facility) it is clear that even if there was a capital raising it would be very minor.

The financing will be finalised following the completion of the plant design, costing and scheduling with are due in the coming months.

Silica Division:

For those of you who have been following my blog for some time you may recall that I stated a couple of months back that the Silica project was, in my opinion, 12 – 24 months away. There was then a news article shortly after which provided some speculation on the project and I changed my opinion to say news may be closer than we think. Well, it certainly is close. Perhaps less than six months away with the announcement stating that “MHM is actively engaged with corporate advisers and has a targeted timeframe of concluding any spin-off by mid-2012, depending on marketing conditions”.

Obviously such as statement would not be made unless MHM thought they were close to finalising a deal. I will provide some further analysis on what this deal may be worth to MHM holders shortly.

Exploration Projects:

As the market has previously been information MHM is looking to divest all other exploration projects. This will save MHM $300,000 in expenditure per annum.

Link to announcement.

Media Speculation on MHM Metals Silica Project

The other day I wrote an article titled “Where Do I See MHM Going in 2012?” where I speculated that any significant news on the Silica Project is at least 12 – 24 months away. Anyway today there was an article in The Advocate which may shed some additional light for investors in MHM. I don’t think it necessarily means any new is close-by as getting a project of this scale off the ground will certainly take time, but it is interesting to see media speculation.

The article mentions growing investor interest in a major Tasmanian silicon smelter – possible at Port Latta and then goes on to mention MHM Metals recent announcement where they stated that they continue to “engage numerous expressions of interest” for developing a silicon smelter in Tasmania. Now these news articles are nothing new, there have been a couple in the past and MHM itself has used the line that it is talking to numerous parties for some time now.

However, what strikes me as different is the more open stance of management with Simon Wells saying that due diligence was taking place on more than one site and that the most important aspect is the cost of delivered electricity to the site. This seems to suggest that there is a little more going on than meets the eye, because in my opinion you don’t start worrying about site location and power supply requirements, etc until you have someone who is at least committed to seriously exploring the project/take off agreement.

The article also reminded me of something I previously overlooked. MHM is engaging corporate advisors. In my opinion the most likely outcome is a joint venture or spin off of the project as MHM does not have the finances or the man power to oversee two large expansion programs (silicon smelter and US salt slag projects) at the same time. So if MHM are engaging with corporate advisors then they clearly have some idea of what the project will involve and need to shore up the financial side of things to progress it further. Corporate Advisors are not cheap so you don’t just appoint them to advise you for the sake of it.

Overall it is certainly an interesting article and in reality it throws up more questions than answers. As I have previously said I think this project should be viewed as extra cream on top and with the timeframe associated with the project too hard to predict I think the focus of the market will remain on the US salt slag project.

Where Do I See MHM Going In 2012?

MHM Metals had a tough year in 2011, with their share price hammered throughout August and September, combined with the delays they faced in bringing their Australian operations up to full capacity and later than expansion into the US.

Out of all of my holdings this stock has probably given me the most cause for concern, but on a long term fundamental basis I am still very bullish on its prospects (hence my recent purchase of additional shares). I’m not 100% sure if 2012 will be a year of strong gains in the SP as we will only be moving towards production that will commence in 2013. I think the ability of MHM to appreciate will be largely tied to the movement in the overall stock market. It is also likely to remain fairly volatile until we can get some runs under our belt and steady figures from our Australian operations. I would not expect these figures to show a clear picture until the end of the second quarter in 2012 as we still have a backlog of partly processed salt slag to clear that will take 3 months.

In regard to the issues I will be keeping a close eye out on. These are the key points that come to mind:

1.    Information on the financial projections associated with our first US plant. Expectations are for EBIT to fall in the range off $20-$25 million and until we get confirmation of these figures it will be hard for the market to value MHM accurately.

2.    Confirmation on funding. MHM Metals have stated that their preference remains for non-dilutionary funding, however until the money is secured it will always be a threat that remains in the back of the mind of holders. I feel the chances of dilution will increase if we actively pursue a second or third plant in quick succession.

3.    Details of any future expansion plants. Whether it be a second plant or the increase in capacity of plant one, this business is all about volume. To really generate the gains I am aiming for MHM needs to follow a continuous expansion plan. So far the management team seem to be towing the line in this regard so hopefully they keep running with it. This does however impact on point two, as the more expansion we undertake the more funding we need. It is therefore important that management find and maintain the fine balance between the two.

4.    The identification of any salt slag landfill that can be processed in the US. The identification of suitable landfill is basically like finding money for MHM and will help run the plant at its maximum capacity while generating additional returns.

5.    News on the Silica project. As per my recent notes on the MHM Monthly Update I think this news is at least 12 – 24 months away. If anything is to happen I expect it will be in the back end of 2012.

On top of that it would be encouraging for the share price to lose some of the volatility that has been a trademark of its recent performance. This may be aided by the international and Australian road shows that will be taking place in early 2012, as well as, the research provided by brokers who have indicated they are interested in following the stock.

MHM Announcement: Monthly Update

Yesterday MHM released a company update. As is to be expected with these monthly announcements most of the information contained in the report is just a re-hash of past announcements. It is however, well worth reading as there are always snippets of additional information provided.

Some of the most important information is about our Australian Operations. Now the company has continuously stated that an EBIT of $8.6m should be achievable from the plant once everything is up and running and we are able to process the salt slag landfill. We can now put a clear time frame on when this should occur with 24 hour processing commencing in January 2012. It is then expected to take three months to clear the back log of partly processed landfill. So by the end of Q2 2012 we should have one full quarter (April – June) of the plant operating at capacity and processing all material (Sim and Alcoa contracts, as well as landfill).

We also received some important information relating to the export of AL80 and why it has been delayed. Basically it is a bureaucratic matter than Impex Metals (our customer) has been trying to handle. MHM has now assumed responsibility for finalising the custom documents/process so hopefully it will be resolve shortly. A poster on Hotcopper was also able to shed further light on this issue. In a nut shell Customs classify the AL80 as a “waste Product” because it is generated from a waste stream (salt slag). Whereas, Impex and MHM view it as a commodity because it has an economic value. As a result the product basically needs to be re-classified. Management also stated that other options are available to sell the AL80, although they are not as profitable.

In regard to the US operations there was not a great deal of additional information provided. It basically summarised what we had been told via the earlier site selection announcement. MHM also confirmed that they continue to talk with a number of companies to secure additional contracts. A number of these companies are also likely to sign on once the plant is finalised.

The income projections associated with the US operations will also be released in due course. It appears that they cannot be released at this time due to the confidentiality agreements with our partners and the chance that they be identified by the volume of material provided under each contract. This is somewhat annoying because if the market cannot value our projects then it is likely that the SP will remain stagnant/under pressure for a little bit longer than I would like.

An Australian and International road show is however going to take place in early 2012 and this could offset the markets inability to value our operations appropriately. A number of broking houses are also interested in publishing research on the company.

MHM also provided an update on the Silica Division and Exploration Division. As usual the Silica division is going nowhere fast and is now, in my opinion, at least 12 – 24 months off. It appears as though the complex nature of the product, requirement for a large power supply agreement (for the future plant), additional feed and supply of charcoal needed for the process means that work on this project is anything but straight forward. Luckily I attributed no value to this Division of the company during my research/analysis and it is now something to place in the “bottom draw” and consider as a bonus if and when it comes off.

Finally management have made a decision to divest the exploration projects. This is very positive in my opinion as not only was it taking up time, but draining $300,000 in wages each year for the Geologists/exploration staff. I would not expect a significant amount of money for this project (if at all) and we may just retain a free carried stake in lieu of cash. Either way removing this project from our books will give management even more time to focus on what is important: Our US expansion and salt slag/black dross recycling efforts.

Listen to Ben Mead Speak About MHM's New US Plant

MHM: If It Was Such A Good Announcement Why Did The Price Go Down?

I have just posted my thoughts on the MHM US site selection and incentive announcement below. I do however, want to talk about the share price movement, because at the moment it appears as though it will close at around $1 or down almost 10%, and some of you may be wondering why I can call the announcement positive when the price goes down so much.

Well a couple of days ago I posted my thoughts on the upcoming announcement and in that post I said that it was quite good that the share price had not risen too much. At the time it was around the $1.00 - 1.04 mark and I felt that if is could hold that level it would mean that there was not too much “short term money” coming into the stock. Everything was looking good on that front until yesterday when some strong afternoon buying pushed the share price up 7.39% to $1.09. As a result there was probably an element of “buy the rumour, sell the fact” taking place today.

But what else happened? Well the most obvious thing is the US and Euro markets taking another dive, but on a company level I think the announcement failed to “excite” short term holders. And really these are the people who would be pushing the price up on a day like today because most long term holders are already set and/or are happy to accumulate over time (not just on one day). I do however want to clarify the word “excite”. Just because it wasn’t exciting for short term holders, does not mean that it was not positive. I just think it told us/the market what we had already expected.

In my earlier post I listed a couple of things that could have resulted in some “excitement” and a spike in the share price. These included:

1.   Any solid confirmation of financing or that no capital raising would be required.

2.   Anything that mentions a second plant or a potential upgrade to plant one happening in the future.

3.   If the value of the cash/land/contra incentives exceed more than 10% of the plant construction cost (i.e. >$2m).

4.    Any other incentives that may provide cheap financing or long term tax benefits (10 years plus).

These were not predictions, but information, that if mentioned, could have put some fire under the share price today. If we review the list we didn’t get any mention of financing, the announcement hinted at expansion but didn’t confirm it and incentives at the moment equate to less than 10%. We did however come close to number four, because the tax incentive does apply over a ten year period.

Without getting many of these big, new statements it was likely that the share price performance would have been muted even on a green day for the ASX. Those who hold for the long term know the strength of this announcement and should not worry too much about the performance of one day’s trade in my opinion. Once news is released on the financing and construction timeframe I expect the share price will start to march on again.

MHM: US Site Selection & Incentives Announcement

MHM Metals announced the location of their site US processing plant this morning. Contrary to most speculation the plant did not end up being located in Tennessee but ended up further north in Russellville, Kentucky.

There are a lot of positives to take from the announcement. Firstly the 115 acre site which MHM have selected is correctly zoned and has some existing buildings in place. This will help minimise the construction timeframe and may also allow some costs associated with the project to go through as “repairs and maintenance” rather than capital expenditure. From an accounting point of view this is beneficial as it will allow costs to be offset against profit, instead of being capitalised over time.

Secondly, the announcement details how this site was chosen because there is over 350,000 tonnes of salt slag and black dross produced within an economic radius, with the rail link offering the potential to expand this further. This clearly underlines the potential to increase the capacity of the plant over time and I would not be surprised to see a 300 – 400,000 tpa plant there in the future. MHM also mentioned that the original site they considered in southern Tennessee was close to two large salt slag producers, however the continuity of supply was in question as they operate on shorter term contracts. As a result it appears as though management took the more prudent approach by locating the plant in an area where demand should exceed supply (of the plants initial capacity).

Thirdly, management lived up to their word with both Local and State Government representatives, including the Governor of Kentucky, attending. They were on hand to detail the incentives that will be available to MHM. These include tax incentives of up to $825,000 through the Kentucky Busines Investment program and a $250,000 infrastructure grant The City of Russellville, Logan County and the Logan Country Industrial Development Authority. There is also the potential for further incentives to be forthcoming and I am sure that the company will be pushing for these now that the plant has been announced. All up I think the incentives came in where most people expected. For a $25m outlay to get circa 5% in grants is not bad at all.

Lastly, it is important to mention the number of aluminium company’s operating in the area and the access that we will have to a skilled workforce. Our operating costs will also be fairly good in my opinion as a number of articles have mentioned wages around the $12odd mark, considerably lower than what we would be paying in Australia.

My post above really does not do the announcement justice as there is a fair bit of information to take in. As a result I would recommend that you all take the opportunity to read it and do a quick Google search of some of the articles that have been written over the last few hours.

MHM also plan to release a conservative timeframe shortly. Note the use of the word “conservative”. I think management are finally learning to under promise and over deliver in regard to announcements and projections they make. The plan capacity also remains 200-250,000 tonnes with a budgeted cost of US$25 million.

 Link to announcement.

Why Tennessee would be a great place to do business (For MHM)

I have done a little bit of research into Tennessee, their Governor and why it appears to be a great place to do business. Obviously we don’t have solid confirmation yet of where MHM will locate their plant, however, I feel it is important to get an insight into the local business environment in which we may operate.

Firstly, a huge problem in politics all around the world is the fact that many leaders have ZERO business experience. As a result they have been bought up in the world of text books and economic theory that have very little relevance to the day to day operation of a business and its growth plans. Now I am not sure if MHM have spoken directly to the Governor of Tennessee, Bill Haslam, however it is very pleasing to note that from the age of Thirteen Bill got a job pumping gas at a family owned service station, which exposed him to the day to day operations of a small business.

Later in his life, and after completing University, he moved to Knoxville and managed the family’s small chain of gas stations. When he joined the company, Pilot Corporation, had only 800 employees, when he left it employed more than 14,000 in 39 states. This demonstrates (to me at least), the Bill has a pretty good understanding of how a business operates and the challenges it faces. Even if he has not spoken to MHM directly, I expect that his leadership/manage style would be reflected through the offices of his government. He entered politics in 2003 as the Mayor of Knoxville and was re-elected in 2007. In 2010 he ran for Governor and was elected on 2 November 2010. As a side note the each Governor is appointed to a four year term and can have a maximum of two consecutive terms. If MHM are in fact being supported by Tennessee and therefore the Governor, this is quite pleasing as he has only been in office for one year and could potentially be there for another seven.

So that is a little bit about the Governor and his past, but where does he see the state going. Well the top priority of the state is “jobs and economic development”. But more importantly it is stated that Bill’s administration wants to make Tennessee the No. 1 state in the Southeast for “high quality jobs”. In my opinion MHM’s operations certainly fall into this category for a number of reasons. Firstly, it is environmentally friendly (green) and should therefore be welcomed by the community and secondly it has an endless supply of material (as long as there is aluminium/aluminium recycling there is opportunity for MHM).

Okay, so that gives some confidence that MHM would be located in a good state if indeed Tennessee is the location of our plant, but what about the incentives? Well luckily in the past year Bill has already shown his commitment to sustaining industry in the state. Admittedly these are larger projects but recent grants have been handed to Electrolux for a plant near Memphis and Wacker Chemie for a plant in Cleveland. As another side note it is a funny coincidence that his Wacker plant will manufacture hyperpure polycrystalline silicon for use in solar and semiconductor industries (this is the same company that MHM was previously in discussion with about an offtake agreement with their Silica projects in Tasmania, another I am not suggesting there is any link with the above). As a result there is already precedent for incentives associated for new industries entering the state or company’s looking to expand their operations.

Finally Bill Haslam also favours a conservative state budget and keeping taxes low in order to create and maintain a business-friendly environment. All positives in my opinion.

Some Thoughts on MHM's Upcoming Press Conference

On Monday in America (Tuesday Australia), MHM will be holding a press conference with local and senior state government officials to provide information on their new US Salt Slag/Back Dross Processing Plant and the associated government grants and incentives. For those of you who are on Hotcopper you may have seen some of my posts on this, however, I feel it is important that they also rate a mention on my blog.

Firstly, I am anticipating a fairly strong batch of incentives and grants. I think the incentives will be more strongly weighted towards tax concessions and items that do not require the government to cough up money in advance, but once converted to a dollar benefit these will be fairly significant in my opinion.

The reason why I believe this is the case, and why I think the market is underestimating this potential, is because in Australia we are so used to politicians being invited to an event to cut a ribbon, say a few nice words and mention that the government is going to spend $x on a major road upgrade nearby that should have been done 20 years ago (i.e. hardly any direct benefit to the actual company). However, in America, each state is very independent and they are all crying out for jobs. This is especially true in many of the original manufacturing states that have been hit hard over the last 10 to 20 years. As a result the governments main concern in these areas is generating jobs, as this will keep the people happy and them in a job.

Inviting “senior state officials” in America amounts to a lot more than just having your local State MP (Australian) come down to your school. Furthermore what Politician would associate themselves with a project that isn’t going to bring massive benefits to the area or would be met with a backlash from local residents.

A couple of other points that are worthy of consideration in regard to the grants and incentives is the following:

·         Old industrial America is dying. Take a look at the car industry over there. Each of the major producers (GM, Ford, Chrysler) have all faced major financial problems at some point in the recent past. To say that you are opening an “old industrial plant” is good, but saying that you are opening an environmentally friendly, “new technology” plant that essential has an infinite supply of material/life (Aluminium can keep being recycled) is a lot better both from a re-election, jobs and environmental stand point.

·         The Politicians invited to the event and who took a part in the negotiations will no doubt be happy to mention how they bought an “environmentally friendly” operation to the state and will use it in any upcoming elections.

·         The rail access to the plant was the game charger. Instead of building two or three plants in separate states MHM can consider doubling or tripling the capacity of plant one. As a result the state can keep all of the jobs to themselves, instead of seeing MHM spread them out across one or two other states. This ensured that MHM had a stronger position from which to negotiate in my opinion.

Finally, I wanted to comment on the potential of this announcement to move MHM’s share price. Obviously no one has a crystal ball and with Europe still in a mess it is a very volatile market, but some things I will be looking out for that may have the potential to surprise the market (and help push it a little higher are):

1.    Any solid confirmation of financing or that no capital raising would be required.

2.    Anything that mentions a second plant or a potential upgrade to plant one happening in the future. (especially with the rail spur/access on the property).

3.    If the value of the cash/land/contra incentives exceed more than 10% of the plant construction cost (i.e. >$2m).

4.    Any other incentives that may provide cheap financing or long term tax benefits (10 years plus).

There has also been some speculation about whether or not we will go into a trading halt on Friday (today) or Monday. I guess it is always possible, but I have my stock and am happy either way and look forward to what should hopefully be a good Tuesday.

MHM Purchase & Going Camping

Sorry I have not updated my blog much this week, but I am going camping this weekend and have been rushing to finish all my work in time. As a result the weekly report (week ending 2 dec) and monthly report (for November) may have to wait until next week.

Anyway, I posted on twitter yesterday that I bought some more MHM shares and wanted to write an article about it as well. I know that I have missed a lot of the run up (from the mid 50's) but it was always my intention to buy more and I decided to bite the bullet yesterday. I ended up doubling my holding in the company at an average price of $1.01, which was pretty close to the low for the day.

We have less than eight trading days to go until we get to hear about their US expansion via the press conference and I feel it is better to be on the train (and pay a little more) than miss it altogether. I also wanted to comment on the reasons why I missed such a large part of the run up. What happened was I became "fearful" which I know is a really stupid reason, especially considering the amount of research I put into my stocks, but when the share price is getting hammered it is really hard not to question if you have made the right decision. As a result I decided to wait until the first plant was confirmed and information received on how it was financed. I anticipated that if this announcement came in the low 60's or 70's I would still be able to jump on at around 80-90 cents and average down my buy price to approximately $1.

Unfortunately nothing is ever that straight forward and we only received details of individual contracts. I probably should have used this as a queue to jump in, but I hesitated. I will strike this down as a lesson learnt on my long term investment journey and try to be better prepared for these situations in the future. We could well see some weakness in the share price over the next weeks/months, but I remain positive on the company's long term potential and do believe that the announcement next week will be positive from a fundamental point of view. Hopefully it is strong enough to push the share price higher and into profit on this position.

Time to get back to work, camping awaits me tomorrow afternoon. I am not looking forward to being cut off from my computer and hope there is reception so I can at least use my iphone.

Some Simple Figures on MHM

I have been meaning to post some figures and information on MHM for some time now so I apologise that I have not got around to it until now. However, with MHM securing a number of contracts for their US plant I think now is an appropriate time.

The basis of these notes is just to provide a snap shot into the potential of the company. I could certainly break down the individual figures in more detail, however, until we get the specific details of each contract that may be a little bit immature.

Firstly the Australian Plant is projected to provide $8,600,000 (pre-tax). This includes the income/profit we will generate from processing the salt slag contained within the landfill feed (over a five year period). As we are unable to accurately predict whether we will get additional feed or run the plant at a reduced capacity in the future (i.e. In year 6 onwards) I have used a PE of 10 for these operations. It will probably also be another quarter or two until we see the full impact of the plant running at 100% capacity so in order to be conservative I will only take 80% of this figure or $6,800,000. Minus 30% tax this equates to $4,760,000.

Now, in regard to the US operations the general understanding is that we operate on a margin of approximately $100 per tonne. For a 200,000 – 250,000 tpa plant that would equate to $20 - $25 million EBIT. This figure can be further supported by an announcement made in October 2009 that stated “The process capacity in North America is expected to be in the region of 150,000 to 200,000 tonnes per annum giving a potential profit margin of USD 20 million to USD 30 million per annum.” I do however recognise that there have been delays with our US expansion and note that the company stated it was hard to convince our US partners of the potential our technology. As a result I will take the cautious approach again and assume we only received 80% of this figure, which equates to $80 per tonne or $16 - $20 million EBIT for the US plant. After tax (at 30%) this equates to $11.2 – 14 million.

To calculate the value of the US project I am going to use a capacity of 200,000 tonnes per annum and the discounted figure of $11.2 million NPAT. Now normally you would apply a larger PE as it is a high growth company/operation. I am however going to do something different. I am only going to apply a PE of 10 on the US plant. I am doing this because two of the three contracts are only for one year and as such there is no security of income from those companies beyond that period. Please, however keep in mind that I fully expect these companies to move onto a tolling agreement in the future and am only stating this to show why I am using a lower PE for this calculation.

So based on the above figures we get:

Australian Operations:            $4,760,000      x 10     =          $47,600,000

US Plant # 1                            $11,200,000    x 10     =          $112,000,000

TOTAL                                                                                   $116,760,000

Okay, so that was for plant one and for a number of contracts being only one year long. If we fast forward around a year we can then apply some stronger numbers to the US operations and Plant Number one because it will be up and running and we should be renegotiating longer contracts with party number 2 and 3. In this instance I believe a PE of 20 + is applicable. You only need to look at some of the ridiculous PE’s thrown around on all kinds of retailers and other companies that are hugely susceptible to general consumer sentiment (and don’t benefit from lock in contracts) to realise that a PE at that level is not out of the question. However, to be conservative I will again take 80% of that figure and use a PE of 16.

US Plant # 1 (after 1 Yr)         $11,200,000    x 16     =          $179,200,000

I also suspect we will have our second US plant on its way by then. Obviously you cannot value it at its full value prior to it being build, but I would expect it to trade on a similar multiple as plant one for the first few years of its life. At this period of time I would hope that 50% of its future earning capacity is priced in at a PE of 10. This would therefore give the company a value of:

Australian Operations:            $4,760,000      x 10     =          $47,600,000

US Plant # 1                            $11,200,000    x 16     =          $179,200,000

US Plant # 2                            $11,200,000    x 10     =          $56,000,000 (discounted by 50%)

TOTAL                                                                                   $282,800,000

And finally if we fast track forward to a couple of years time we can examine MHM with three plants in the US and a small scale Aussie operation. For this we will use a long term PE of 12 on the US operations and continue to use a PE of 10 in Australia. We will also knock down the EBIT of the Australian operations to $4,500,000 ($3.15m after tax) to account for the loss of income from having no landfill to process and will continue to use 80% of the projected $20 million (80% = $16m, Less 30% tax = $11.2m) figure on all US plants. Also keep in mind that these plants are all 200,000 tpa not the maximum 250,000 tpa as stated by MHM. Based on these figures and three plants we would have:

Australian Operations:            $3,150,000      x 10     =          $31,500,000

US Plant # 1                            $11,200,000    x 12     =          $134,400,000

US Plant # 2                            $11,200,000    x 12     =          $134,400,000

US Plant # 3                            $11,200,000    x 12     =          $134,400,000

TOTAL                                                                                   $434,700,000

So by taking a fairly conservation approach (80% of projected EBIT, lower plant capacity and lower PE’s) we have a potential market capitalisation of $434,700,000.

Now to have some fun, lets assume MHM is able to hit the maximum figure on all of their targets. So let’s take three US plants at 250,000 tpa and lets assume these all generate the maximum EBIT of $25 million (or $17.5m after tax). Lets also assume they source additional feedstock or re-configure the Aussie plant to process other material so that it can continue generating their project $8,600,000 figure ($6.02m after tax). Finally I will run a PE of 12 over everything. Please note that this last example is pretty bullish so take it with a pinch of salt. This would equate to:

Australian Operations:            $6,020,000      x 12     =          $72,240,000

US Plant # 1                            $25,000,000    x 12     =          $210,000,000

US Plant # 2                            $25,000,000    x 12     =          $210,000,000

US Plant # 3                            $25,000,000    x 12     =          $210,000,000

TOTAL                                                                                   $702,240,000

On top of that MHM has their Silica operations and other mineral exploration division. You then have Europe and Asia to conquer next if you want to continue MHM’s growth story even further into the future.

As always please do your own research and consult a licence financial advisor. There are obviously a lot of milestones which must be hit in order for the company to deliver on any of the projections detailed above and that’s where the risk is. At the end of the day you really must believe in the technology and the management teams ability to deliver on their strategy.