MND.TO - Mandalay Resources

[Patmo]

Miners, especially juniors, were hit pretty hard in 2013, and could present some buying opportunities. I tried to find the best, cheapest company I could and Mandalay is the one I came up with (it's not the cheapest but it's the best imo). It has around $300million market cap, and producing assets in Chile and Australia, as well as a new project in the pipeline in Chile. Both regions are currently well regarded in terms of having low political risks. It mines gold, silver and antimony.

 

There are a lot of REALLY cheap junior miners out there right now, but they're all issuing equity out of their asses at reduced share prices. The main selling point for Mandalay is that management is heavily invested (CEO alone has 25million shares excluding options), and it shows in the decisions they took over time. For example, they DON'T issue equity out of their asses, in fact they bought back shares when the share price hit its low of $.75.

 

Their operational expertise seems more than adequate as well. They maintained a clean balance sheet and posted a profit at reduced gold prices, thanks to pretty low all-in costs. They're not the only one around who was able to do that, but one of 2 that could do it, again, without issuing stocks out their asses.

 

Trying to precisely value miners is super duper tough business, so I just compared a few metrics to companies that I felt were similar. My goal was to ensure a fair price, and derive my margin of safety from the superior management (THAT HAS SKIN IN THE GAME!), similar to moat investors but betting on mgmt quality instead of moat quality.

 

For example, I looked at EV/P+P resources (gold equivalent oz, where silver is /65, and I excluded antimony from Mandalay, I'll try and update to include it later). It's at 570, some comps were as low as 150 and some close to 4digits. 2k13 ROIC is 40% (better than any miner I looked at IIRC), and EV/EBIDTA is 5 (not a terribly relevant stat since mines have a limited life, but still, I'm looking for yardsticks that show me the company is trading at a reasonable price). Production and sales have healthily grown every year since inception.

 

Junior mining is certainly not a "wonderful, wonderful" business, in fact it is quite crappy. But the company itself is as "wonderful, wonderful" as a miner gets. To summarize the key points:

-Clean balance sheet

-Still scraping together a profit despite reduced prices

-Operating in countries that are recognized as politically stable

-Not diluting shareholders' ownership by issuing equity out their ass

-Top management is heavily invested (this is extremely good imo)

-Price is not out of whack

 

Tell me what you think, and thanks for reading. Looking forward to learn from your inputs.

 

[DTEJD1997]

Nice to see another shareholder here!

 

I've managed to book a nice gain in Mandalay Resources.  It is one of the junior miners I was buying in Nov/Dec last year.

 

I agree with your findings.  These guys are EXCELLENT operators.

 

I would add a few points though:

 

A). The have a set dividend policy of 6% of gross sales.  I really like this.  In flush times the dividend goes up, in lean times it goes down.  A fixed percentage of sales will insure the shareholders will receive something and will keep management focused on the task at hand.

 

B). The company has paid out almost as much in dividends as they raised in their initial offering.  How many other companies, mining or otherwise can claim this?

 

C). They recently completed a $60MM debt offering on relatively advantageous terms.  I suspect this will be used to build out the new Chilean property.

 

D). If they are making solid money at these low prices, what kind of money will they be making if gold goes up 10%-15%?

 

E). Interesting antimony kicker

 

I think MND is an excellent choice for a junior miner. 

 

There are others out there though...

[DTEJD1997]

Hey all:

 

Earnings came out yesterday.  They were $.02/share.  It appears to be largely what the "street" was expecting as the stock is down a fraction of a penny at opening today.

 

I would say it appears that they are operating their mines quite well...just not making as much money as they did as metal prices are down from a year ago period.

 

If prices jump back up, these guys could make a lot of money...

 

We'll see.

[Patmo]

If you transpose the .02 linearly, you'd get a 8% earnings yield (assuming $1pps). I'm quite satisfied with this considering the depressed gold pricing.

 

At any rate, I'm not too concerned with the quarterly earnings reports for this company. I'm more excited to see what will transpire 5-10 years down the line as the cards play out.

 

In the meanwhile, here's a couple 5 minute interviews with the CEO, Brad Mills.

[no_free_lunch]

This a definitely an interesting stock.  Probably the best gold miner I've seen.  The one issue I see is that the main gold mine (I believe it's in Australia) has what looks like about 4 years of reserves left.  That makes it difficult to value.  I know they are looking at increasing the reserves but am just wondering what their history is for that type of thing and for how long could they increase the mine life.  My main concern is that the cap-ex is fairly high and if they need to keep opening new mines, then capex becomes just an expense and they are on a tread-mill.  The historical record is that they have been able to grow production but I just want to make sure it isn't about to flat-line.

 

[no_free_lunch]

Mandalay put in an offer today to a Swedish gold miner (elgin mining) today.  Stock briefly dipped on the news and in the process I became an owner of the stock.  I went back and forth between buying this company and just buying a gold mining index.  I saw that Einhorn just invest in GDX so perhaps I should too.  However, I am really impressed with this companies management and ability to grow and post profits in a time where most other gold miners are losing their shirts. 

 

With this transaction I like that the mine is in a very politically stable country.  I like that they are buying right when the indexes are at multi-year lows (more or less).  Elgin's all in mining costs are just below the current price of gold so they are very leveraged to any increase in gold price or decrease in expenses and in fact Mandalay expects to be able to implement cost cutting measures.  One thought experiment on the purchase: elgin is expected to do 44-49k production, with all-in costs of $1050-1200.  If Mandalay can keep the costs at the $1050 level, and if gold gets back to the $1600 point which is the low end of the range for back-half 2011 & 2012, then at 44k production they are throwing off $24M in earnings per year, vs a purchase price of $60M.

 

[ItsAValueTrap]

This takeover strikes me as bizarre.  Elgin Mining seemed like a short to me because Elgin was mining at a loss.

[WolfOfMainStreet]

http://seekingalpha.com/article/2255013-an-acquisition-from-left-field-for-mandalay-resources

[DTEJD1997]

http://seekingalpha.com/article/2255013-an-acquisition-from-left-field-for-mandalay-resources

 

The comments section of that article brings up an excellent point...That Mandalays's dividend should be going UP.  MND has a policy to pay out 6% of REVENUE.  If they increase their revenue, the dividend should also be rising too.

 

I have confidence that if gold stays level OR goes up, MND will do very well on their acquisition.

[Patmo]

This takeover strikes me as bizarre.  Elgin Mining seemed like a short to me because Elgin was mining at a loss.

 

MND's story is that it turns around distressed projects, I'm not sure about Costerfield but Cerro Bayo was in a similar position when they started working on it. Now it's operating past its initial expected life with low costs. I'm not thrilled nor disappointed by this acquisition, it's about par for the course to me. Although there is a small part of the deal I would like to understand better. The $5 million bridge loan can be converted to Elgin shares at .155 per share? Is that only in the event that the acquisition falls through?

 

Honestly I just treat this company as a jockey stock. I invest in the people running the company like someone who invests in John Malone or good old Warren & co. I feel like the mining industry is the perfect environment for this since nobody has any inherent competitive advantage, the best player wins the game.

 

At anything under $C.90 the market pretty much prices it as a valid going concern with little to no growth. MND has a 5 year (which is also lifetime) average ROE of 20% using little leverage, and is small enough to keep scaling at those levels for a while. I tried valuing MND using current estimates of mine life and resource reserves, but I just threw it out the window. I think the bigger picture is more important here. All I can think is that I get a thoroughbred at the price of the average horse down at Steve's barn. Whether that thoroughbred breaks its legs or wins the Kentucky derby is up to the pony now.

 

[Patmo]

http://seekingalpha.com/article/2255013-an-acquisition-from-left-field-for-mandalay-resources

 

The comments section of that article brings up an excellent point...That Mandalays's dividend should be going UP.  MND has a policy to pay out 6% of REVENUE.  If they increase their revenue, the dividend should also be rising too.

 

I have confidence that if gold stays level OR goes up, MND will do very well on their acquisition.

 

Before taking on the loan for this acquisition, even low gold prices were good for MND in my opinion. My initial idea was that MND would "outsurvive" other miners in hard markets so the worst it got the more excited I would have gotten since MND would be one of the few left well positioned to participate in the resulting upswing down the line. Debt naturally changes that, but I doubt the likelihood of a pure crash, and short of that there should be no issue.

[WolfOfMainStreet]

Looks like a good company in a troubled industry. I haven't done too much digging yet, I'll probably do a thesis sometime in the next week or so. Might open a position. Does anyone know if there is any screener that will show me all in sustaining costs? Are there any other similar metrics do look at when considering mining companies?

[Patmo]

Good news once again in drilling results:

 

http://www.mandalayresources.com/wp-content/uploads/2014/01/MND_July_9_2014.pdf

 

 

[DTEJD1997]

Hey all:

 

MND released sales figures for the quarter...

 

ALL of their metals prices are down from the year ago period, especially silver.

 

HOWEVER, gold production has increased significantly y/y.  A big part of that is the inclusion of Bjorkdal.  Costerfield also increased production.

 

The end result is that it appears sales were about $51.53  million vs. 44.21.

 

My opinion is that MND.to is one of the best mining companies out there...

[influx]

After all, no wonder GMT is insider buyer

 

The questions are:

1.whether they have a staying power at current gold prices or EVEN if they go lower because ultimately they depend on the commodity price?

2.what is your time horizon and what kind of profit are you looking at to make it worthwhile?

 

 

[DTEJD1997]

Hey all:

 

I forgot to mention that certain costs should be lower than the year ago period.  I am thinking primarily of diesel costs, which should be fairly significant.

 

I would also hazard a guess that a guess that equipment rentals and labor costs might also be slightly less.

 

The other thing I forgot to mention is that the dividend should also be going up.  Remember, the dividend is based off of revenue.

[influx]

The other thing I forgot to mention is that the dividend should also be going up.  Remember, the dividend is based off of revenue.

 

This makes no sense in my mind, to be based on revenue...the logic I see is that it should be based on the net income and the prospects of roic when allocating that extra capital to dividends or projects/elsewhere.

 

what do you think?

[DTEJD1997]

The other thing I forgot to mention is that the dividend should also be going up.  Remember, the dividend is based off of revenue.

 

This makes no sense in my mind, to be based on revenue...the logic I see is that it should be based on the net income and the prospects of roic when allocating that extra capital to dividends or projects/elsewhere.

 

what do you think?

 

A dividend based off of revenue makes perfect sense to me...especially in the mining sector (depleting assets).  It forces management to have discipline.

 

If the dividend is based off of net income...you can play all sorts of accounting tricks.  I've seen companies increase sales many fold, only to have no (or little) net income.  What is the point of more sales then?

 

Management lays it all in the annual reports.  Check it out.

 

 

[influx]

thanks, I will do.

 

the question in my mind is, if it is based on revenue, they may have no income. how are they going to pay a dividend, let alone "guarantee" it in the future? am I missing something?

[Patmo]

thanks, I will do.

 

the question in my mind is, if it is based on revenue, they may have no income. how are they going to pay a dividend, let alone "guarantee" it in the future? am I missing something?

 

That's the point, it forces them to keep costs relatively tight and discourages empire building to a certain extent... I don't see the complexity here

[Patmo]

I feel compelled to bring this company up again. A safe and cheap investment, one of my favorites. Not a lot of people like this idea, I'm guessing because "gold doesn't produce anything".

 

To reiterate some basic points:

• Operates with a value investing mindset. Purchases underperforming projects at a discount and brings them up to par with operational expertise (as evidenced by strong operating AND financial results, not hocus pocus bullcrap that appears typical of debt-fueled rollups *ahem valeant, ocwen*)
  
• In line with the value investing mindset, the company has a history of tight/aggressive capital allocation: Remains prudent and disciplined with their cash, yet pounces when opportunities arise.
  
• Trading at 11x earnings at cycle trough makes it a cheap enough investment imo. Most other gold producers are still cash flow negative.
  
• Safe location of projects a key criterion in the company's acquisition process
  
• Mgmt incentives in line with shareholders, company CEO Brad Mills owns a large stake in the company. History shows relatively shareholder friendly conduct and a very high degree of transparency in FS disclosures.
   
  

[sculpin]

I feel compelled to bring this company up again. A safe and cheap investment, one of my favorites. Not a lot of people like this idea, I'm guessing because "gold doesn't produce anything".

 

To reiterate some basic points:

• Operates with a value investing mindset. Purchases underperforming projects at a discount and brings them up to par with operational expertise (as evidenced by strong operating AND financial results, not hocus pocus bullcrap that appears typical of debt-fueled rollups *ahem valeant, ocwen*)
  
• In line with the value investing mindset, the company has a history of tight/aggressive capital allocation: Remains prudent and disciplined with their cash, yet pounces when opportunities arise.
  
• Trading at 11x earnings at cycle trough makes it a cheap enough investment imo. Most other gold producers are still cash flow negative.
  
• Safe location of projects a key criterion in the company's acquisition process
  
• Mgmt incentives in line with shareholders, company CEO Brad Mills owns a large stake in the company. History shows relatively shareholder friendly conduct and a very high degree of transparency in FS disclosures.
   
  

 

Why has West Face been selling their position over the last few years? They are smart guys - if Mandalay was undervalued it would have made more sense for them to push for the sale of the entire Company at a premium as opposed to them going to the market with secondary offerings.

[Patmo]

I feel compelled to bring this company up again. A safe and cheap investment, one of my favorites. Not a lot of people like this idea, I'm guessing because "gold doesn't produce anything".

 

To reiterate some basic points:

• Operates with a value investing mindset. Purchases underperforming projects at a discount and brings them up to par with operational expertise (as evidenced by strong operating AND financial results, not hocus pocus bullcrap that appears typical of debt-fueled rollups *ahem valeant, ocwen*)
  
• In line with the value investing mindset, the company has a history of tight/aggressive capital allocation: Remains prudent and disciplined with their cash, yet pounces when opportunities arise.
  
• Trading at 11x earnings at cycle trough makes it a cheap enough investment imo. Most other gold producers are still cash flow negative.
  
• Safe location of projects a key criterion in the company's acquisition process
  
• Mgmt incentives in line with shareholders, company CEO Brad Mills owns a large stake in the company. History shows relatively shareholder friendly conduct and a very high degree of transparency in FS disclosures.
   
  

 

Why has West Face been selling their position over the last few years? They are smart guys - if Mandalay was undervalued it would have made more sense for them to push for the sale of the entire Company at a premium as opposed to them going to the market with secondary offerings.

 

How could I know why West Face has been selling... People come and go I guess. Not my cup of tea to invest based on speculations of what decisions others are taking to be honest.

[sculpin]

I feel compelled to bring this company up again. A safe and cheap investment, one of my favorites. Not a lot of people like this idea, I'm guessing because "gold doesn't produce anything".

 

To reiterate some basic points:

• Operates with a value investing mindset. Purchases underperforming projects at a discount and brings them up to par with operational expertise (as evidenced by strong operating AND financial results, not hocus pocus bullcrap that appears typical of debt-fueled rollups *ahem valeant, ocwen*)
  
• In line with the value investing mindset, the company has a history of tight/aggressive capital allocation: Remains prudent and disciplined with their cash, yet pounces when opportunities arise.
  
• Trading at 11x earnings at cycle trough makes it a cheap enough investment imo. Most other gold producers are still cash flow negative.
  
• Safe location of projects a key criterion in the company's acquisition process
  
• Mgmt incentives in line with shareholders, company CEO Brad Mills owns a large stake in the company. History shows relatively shareholder friendly conduct and a very high degree of transparency in FS disclosures.
   
  

 

Why has West Face been selling their position over the last few years? They are smart guys - if Mandalay was undervalued it would have made more sense for them to push for the sale of the entire Company at a premium as opposed to them going to the market with secondary offerings.

 

How could I know why West Face has been selling... People come and go I guess. Not my cup of tea to invest based on speculations of what decisions others are taking to be honest.

 

No this is important - why is the major shareholder selling? This should be a huge concern if you are an investor in this. Don't be so complacent.

[DTEJD1997]

I feel compelled to bring this company up again. A safe and cheap investment, one of my favorites. Not a lot of people like this idea, I'm guessing because "gold doesn't produce anything".

 

To reiterate some basic points:

• Operates with a value investing mindset. Purchases underperforming projects at a discount and brings them up to par with operational expertise (as evidenced by strong operating AND financial results, not hocus pocus bullcrap that appears typical of debt-fueled rollups *ahem valeant, ocwen*)
  
• In line with the value investing mindset, the company has a history of tight/aggressive capital allocation: Remains prudent and disciplined with their cash, yet pounces when opportunities arise.
  
• Trading at 11x earnings at cycle trough makes it a cheap enough investment imo. Most other gold producers are still cash flow negative.
  
• Safe location of projects a key criterion in the company's acquisition process
  
• Mgmt incentives in line with shareholders, company CEO Brad Mills owns a large stake in the company. History shows relatively shareholder friendly conduct and a very high degree of transparency in FS disclosures.
   
  

 

Why has West Face been selling their position over the last few years? They are smart guys - if Mandalay was undervalued it would have made more sense for them to push for the sale of the entire Company at a premium as opposed to them going to the market with secondary offerings.

 

How could I know why West Face has been selling... People come and go I guess. Not my cup of tea to invest based on speculations of what decisions others are taking to be honest.

 

No this is important - why is the major shareholder selling? This should be a huge concern if you are an investor in this. Don't be so complacent.

Could it be that they anticipated a major decline in the price of gold/silver?  Perhaps they needed money for some other investment that they think offers better value?

 

I have to agree with Patmo though...unless we've got inside information OR they announced why they are selling, we can only speculate.

 

What is not in doubt, is that management of Mandalay are some of the better operators in the industry.  Further, they have a better than average production profile, balance sheet & valuation.

 

Finally, they have a stated policy of paying out a certain percentage of REVENUE in the form of dividends.

 

This is one of my larger holdings...I am reasonably happy with management...I will be adding to my position on declines...