MINMET PLC FTSE MNT

Abbo,

I am on record as having said that I do not intend to sell any Minmet shares below £10 [unless I have to!]. In this post I am setting out the sort of operation I expect Minmet to be running when it is at £10 per share – or £5b market capitalisation. Please suspend your disbelief while you read it !

The first play is the zinc find at Sungem; I believe this will be sold for cash, probably within a year, and the price will be a multiple of Minmet’s present market cap. This will not make a vast difference to the price, but will provide ample capital for gold mining the Cuiaba District. If Sungem does not perform so well I think some of the other prospects will; though this would probably delay the process. In any event the mines Investec used as an illustration have a six month payback; so it is possible to increase production rapidly with little more capital introduced.

I am taking a gold price of $270, and an operating cost [complete] as estimated by Minmet, of $70, giving a convenient $200 per ounce. However I have worked with $180 to leave a little safety margin.

Throughout this post I have used a very conservative estimate of a grade of 1 g/t – stated as such by the Chairman at the 2000 AGM. Personally I think the grades will be significantly higher – especially if they are “cherry-picked”, but I have ignored these thoughts.

To make a profit, net of tax at 25%, of $720m, we need to mine 5.3m oz per year. At 1 g/t this involves mining 167m tons of ore; or 455k tons per day. This is a considerable amount. However I know of one mine where they are shifting 80k tons a day, using 3 loaders and 7 trucks, so we should be able to do it with 20 loaders and 40 trucks; presumably these would be working to more than one mine.

The other key question is how long can we do it for? I have worked out, from published data, that the total potential gold in the Cangas district, again at 1 g/t, is 1.2b oz. At 5.3m tons/year this would last for 225 years. And then there are probably 3 more districts of the same prospectivity.

With this long mine life I would expect a P/E of 10. Thus the annual profit of $720m would capitalise up to $7.2b. or £5b; or £10 per share.

I would expect a dividend of 50p per share; giving a 5% yield, covered twice.

Given the large amount of gold available, and an investment payback of 6 months, I would be very disappointed if the company did not grow by at least 20%/year for a few years. This would give a PEG of 0.5 – indicating a rather attractive buy.

How long will it take to get there? Sorry – my crystal ball has glazed over at that point. A matter of years, not months, though. However as more and more data comes forward – as it is about to start doing shortly – we will be able to predict with ever-increasing confidence, and I expect the share price to react favourably.

Richard