I will be honest, out of all of my holdings MHM is the one that concerns me most at this point in time. Not only because of the drop in the share price, but also because this US expansion seems to be dragging on a bit. Originally MHM had informed us that we would be building the plant by now, so clearly they are at the very least 6 – 12 months behind schedule.
So why is this occurring? I think some evidence can be gained from recent comments made by management in regard to the US’s view on aluminium recycling operations. In the past many companies have made the claim that they can provide a cost effective recycling solution, but so far none have been able to live up to expectations. This has created a sense of mistrust surrounding these processes and as a result the US smelters are very wary.
I think this also extends itself to the way the contracts may have first been approached. For example MHM says we will process the material for $x and you can keep the products created which can then be sold for $x, offsetting the cost of processing the salt slag. In this situation the supplier of salt slag is taking all the risk. If they are unable to sell the recycled products, or re-use them in their own processes (even though our Australia plant has proven these products have value) then the cost of recycling is considerably more than just dumping it all in landfill (which is currently the norm for these companies).
To overcome this issue, MHM either needs to convince them of the process or tackle the contracts in a different fashion. For example maybe lower the tolling charge (the payment for each tonne of salt slag processed) by a certain percentage, say 50%. But then take 50% from the sale of the recycled products. In this situation the risk is shared by both parties. After a year or two of operation when the US salt slag producers are satisfied with the process we can revert to our preferred contract methods.
Anyway, onto the quarterly report. I will break my thoughts and opinions down into the same headings used by MHM in their report:
Australian Aluminium Operations
The Australian operations are still yet to complete a full quarter under normal operating conditions. Profitability was affected by added costs associated with commissioning and upgrades to the plant.
They also have a stockpile of partly processed salt slag that needs to be processed before they can get onto the 160,000 tonnes of Aloca landfill. Once we clear this backlog profits are expected to increase.
On a positive front, the closed loop 24 hour operation have commenced and is expected to reach full capacity within the next two weeks. As a result the December Quarter should give us some solid figures which we can bite into in some more detail. Moving forward the company will operate three shifts, two processing the back log of partly processed salt slag and one shift processing new material.
We also have the AL80 shipment being held up by customs. Like the rest of government controlled agencies they never have any urgency to complete anything. Hopefully this fixes itself in the near term.
The only other area of concern is that salt evaporation pons and the salt crystalliser are still being/will be constructed. As a result the next couple of quarters may not show the true profitability of the operations. I.e. more waiting may be required.
US Operations
Most of the information contained in the first 4 or 5 paragraphs is similar to what we read in last month’s update. As a result I will not go over old ground.
Where progress has been made however, is with the site selection and MHM has signed a conditional purchase contract. This indicates to me that the company has a firm understanding of the companies who are likely to sign supply agreements as it is important that their operations are close to our recycling plant. Information about this site will be provided after an environmental study and confirmation of government grants and incentives.
“The company also confirmed that the location would support a plant capacity of 200 – 250,000 tonnes per annum, and potentially higher in due course.” This is the first I can recall the company hinting at possible expansion at the plant. This could indicate the operations will be consolidated at one larger plant, as opposed to operating two, or that management believe additional suppliers will sign up once the technology is proved on American soil.
Finally we have another date to look forward to, with the company expecting to hear back on their grants submission by mid-December. The trademark registration may also be confirmed by years end.
Silica Project Update/Other Silica Opportunities
This continues to be a side-show to the main event (aluminium recycling), however I am starting to become even more bullish on the potential of this project to deliver gains for shareholders. This follows some recent commentary in local newspapers about a silicon smelter development which “MHM chooses to refrain from comment”.
The drilling campaign did hit a high purity quartzite zone; however further drilling will be required to confirm a JORC compliant resource. The company is also examining a number of other lump silica and silica flour opportunities in Tasmania and mainland Australia. With the company stating that “The addition of silica resources in an advanced stage of exploration would complement the Cape Sorell silica prospect and strengthens the case for a Tasmanian silicon smelter.”
The company also stated that “Investors should note that MHM does not intend to make any such acquisitions until further milestones for the Tasmanian silicon smelter concept are met, and/or offtake negotiations become more advanced.”
These statements lead me to believe that there is a desire by a party to develop a silica smelter, but they are unwilling to rely solely on the Cape Sorell Project. As a result addition opportunities need to be acquired. Furthermore I don’t believe this will be a quick project/negotiation to finalise, but will continue to progress in the background.
Tasmanian Exploration
The gold prospects (Hill 99) are not of the VHMS type and are more likely to be structurally emplaced in an over thrust nappe. This increases the geological risk associated with the project. As a result more prospective targets will be prioritised ahead of Hill 99.
Furthermore “drilling programs and other costly exploration expenditure has been curtailed by MHM until 2012 so the company can focus on its Australian and US aluminium projects”. This is clearly a step by management to ensure they have sufficient cash reserves for our US expansion.
Overall there was not a great deal of new information and progress continues to proceed at a slow rate. I remain cautions at this stage in the company’s ability to achieve project milestones by the dates set by management, but remain confident in the long term benefits of the technology.
was trying to google something else but found your blog accidentally
ReplyDeleteactually about 4 months behind the schedule as the construction suppose to be started 2nd half of this year and operation begins 2nd half of 2012.
RE: Australian Aluminium Operations
I would want them to ship the al80 as this's the large portion of the $8.6m ebit?
RE: US Operations
this is what I thought too, the government grant will always come last as they have to sorted out the supply contracts and plant location and most important the cost before they can submit anything to the government.
RE: the other
not too important right now, imo
@erichmj
ReplyDeleteYes, I was probably getting a little abit ahead of myself with the time frame. However, even if we get the site selection confirmation this site of Christmas it is unlikely that construction will start until late Jan - early Feb at the earliest. (The months seem to roll by very quickly these days)
In regard to the AL80 it is a shame it hasn't been shipped, but hopefully if it is cleared within a month we will see this income included in the Dec Quarterly. Once they get the first shipment off the process will be straight forward from there and income on this should be fairly consistent.
I agree that the AU & US Salt Slag operations are the most important. I have however, written at length on these issues recently (especially with MHM moving to monthly reports). For this post I decided to write a little bit more on the Silica and Tas Exploration projects even though they are only the "side show" otherwise my blog may have become a little repeatative.
I do however have a positive outlook on the Silica op's and think it could deliver some good upside to exisiting shareholders.
In my valuation I for MHM I attribute no value to the Silica project or Tas exploration. If either of these come off I will consider it the "cream" on top, rather than the main cake.
Thanks for commenting
The last RBMG report with target price A$4.27 assumed US$70m capex for three processing plants to be built in US with annual combined capacity of 520,000 tonnes.
ReplyDeleteBased on the figures quoted on the quarterly that the first plant is expected to have 200,000 to 250,000 tpa which is about 38.5%-48% of the assumed capacity in "one" plant. And what was the capex for one plant in US? US$70m/3 = US$23.3m
Now the future cash flow projection, it estimated that the EBITDA for 520,000tpa would be around A$100m, this is equivalent to A192.3/t. Then for 200k-250ktpa the estimated EBITDA would be A$38.46m to A$48.075m.
I know these are just estimated figures, reality might be different to it, but even the estimated EBIDTA reduce by 50% it still closed to A$20m so I don't see any reason that MHM can't secure debt finance for our US expansion.
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btw, do you have idea of what is the fair market price for AL80/t? I'd read from ORD's announcement that aluminium oxide price is about 14% of aluminium metal price.
@erichmj
ReplyDeleteThanks for commenting again. I have been meaning to post my valuation notes on MHM for a long time. So far I have only put notes on KGL up on my blog. Hopefully I will get them up in the next couple of weeks.
I do however agree with your figures and expect capex to come in at around $25m odd per plant (give or take a little). If this is the case then yes MHM should be able to cover the cost by a mixture of debt plus existing cash reserves.
In regard to EBITA this figure is a little bit more "clouded" IMO. Seeing as we appear to be having trouble signing the Americans on a tolling agreement. I wouldn't be surprised if EBITA was a little lower and/or relied on us selling the recovered products on the market (i.e. incomes fluctuates a little more).
Once the first plant/contract is out of the way we should be able to prove the technology works to the Americans on America soil. (even though our Aussie Ops have already showed the Tech works).
MHM have circa $7m in the bank and positive cash flow from the Aust Plant. A loan should be easily achievable. The only instance I can see a cap raising being needed is if we get the go ahead for two plants in quick succession and even then it would only be fairly small IMO.
Sorry, I dont have any figures on AL80. I am waiting for MHM to have the stuff shipped and a more steady stream of income from the product coming it. I will then base my cals off that information.
Talk soon,
Investorpaul