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.
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