We initiated coverage of AIM listed Minco on August 10th 2005 at 13.75p with a buy stance. The company continues to deliver on all fronts and at 14.5p the shares fail to discount the underlying value in this company, based on our cautious estimates and assumptions
Minco was floated on AIM in 2001 by serial Irish entrepreneur Dr John Teeling as a play to explore for zinc and, to a lesser extent, gold in Ireland. In July 2003 the all-paper acquisition of Orca Gold passed control of the entity to Roger Turner and Matthew Dorman and shifted the focus of the company to silver exploration in Mexico.
Minco's lead project is a tailings recovery process at Laguna Zacatecana where a bankable feasibility study has now been completed by Micon. It suggested that the capex needed for this project was $21.6 million and that using a 10% discount rate it had a base NPV of $23.9 million and an upside valuation of $30 million and that production should start in 2006. This study does not encompass tailings from around the lake and hence our estimate of the NPV of Laguna is higher at 22p per share.
Minco also has a 50% stake (with the scope to attain full ownership) in the Minera Sisa exploration project also in Mexico. Early drilling results on the silver/gold/copper concession were announced in November and were very encouraging. Further extensive work will be undertaken in 2006
Of the Irish inheritance from the old Minco, the asset with the greatest upside is the Pallas Green zinc exploration project where Minco has a 23% stake in a joint venture with Noranda which is undertaking a 9,000 metre drilling campaign during 2005. The latest results, published in November were very encouraging and Noranda now has four rigs on site and is accelerating its exploration plans for 2006 - a budget of 1 million Euro has been allocated for drilling and Minco asserts that it already has enough data to indicate that the project is commercially viable. We believe that Minco will, at some stage, look to realise the value of its shareholding and we believe that this, alone, could easily be worth 8-10p per share to the company.
The appeal of Minco is its Mexican silver assets which underpin a valuation significantly in excess of the current share price - our fully diluted valuation is 27.3p per share (with Pallas Green and Minera Sisa accorded a minimal value) - and offer the prospect of generating significant cashflows from 2006. Minco is the purest "silver play" on the London market and on the basis of Laguna on its own it is significantly undervalued. Pallas Green and Minera Sisa offer the potential for a significant and unexpected bonus. Our stance remains buy.
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