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.