Metro Mining starts to motor ahead of transformational DFS
It appears that investors are finally starting to realise the underlying value in Metro Mining Ltd’s (ASX:MMI) bauxite operations with company shares surging 13% under high volumes on Thursday.
The volumes traded up till mid-afternoon on Thursday were similar to those recorded over two days in July when the company’s shares increased more than 20% from 11.5 cents to 14 cents.
Management continues to deliver on the production and sales fronts at its Bauxite Hills project, and it would appear that the retracement from 14 cents can mainly be attributed to volatility in global equities markets.
Production for the three months to September 30, 2019 was the strongest since operations commenced, laying the foundation for management to meet its full-year guidance which is in a range between 3.3 and 3.5 million wet metric tonnes (WMT).
Mining and haulage is benefitting from excellent machine availabilities, the barge loading facility is now sustainable at higher levels, and ship-loading rates have been assisted by better productivity and returning vessels that have previously performed strongly.
Consensus forecasts on the rise
There was an uptick in consensus forecasts in the last week, suggesting that analysts have started to factor in this strong production outlook.
Consensus forecasts provided by Stock Doctor point to earnings per share of 3 cents in fiscal 2020, implying a PE multiple of approximately 4 relative to the group’s current share price.
The heavily discounted PE multiple appears to be unjustified, and not surprisingly the consensus valuation gleaned by Stock Doctor from the brokers that cover Metro is 36.5 cents.
While a near 200% premium to the company’s current share price may sound too good to be true, it should be noted that the company was trading in the vicinity of 30 cents per share in February 2018 as mining was about to commence.
It could be argued that Metro’s investment metrics are far better today than they were in 2018 given the group is producing at full tilt and on the verge of delivering its first full year of production at nameplate capacity.
Consequently, Metro offers strong earnings visibility, assisted by the fact that offtake agreements are in place and the company has sufficient reserves to support a mine life out to 2037.
DFS could be a game changer
Significant upside will be gained if the company is successful in upgrading the project’s production capacity to 6 million tonnes per annum.
This hinges on a definitive feasibility study that has largely been completed and will be released to the market in coming weeks.
The DFS is a much anticipated development and arguably one of the most significant share price catalysts in the company’s history.
Should Metro be able to double production it will not only provide a substantial uplift in sales revenues, but the benefits of scale should see a proportionately higher increase in the bottom line as margins increase from already robust levels.
Perhaps the recent share price action is being driven by expectations of a positive DFS outcome.
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