Metro Mining that’s a queer name. So what do they do Scoonie, mine stuff in the city or something?

Its just a name. They are an ASX listed company with a m/cap around $220m that mines bauxite 100km north of Weipa in North Queensland. Last year they shipped about 4.6wmt to China and this year with improved logistics they hope to ship around 6.5wmt.

So what. Why are you telling me about this?

Because there is opportunity. They are a company that has been beaten up and nearly went broke with COVID and a cyclone. With their backs to the wall were forced to raise money on very unfavourable terms. However they are pulling out of this trouble with an increasing share price and a $44m cap raise last week. The cap raise will be used to pay down junior debt of around $21m and the remainder to broadly de-risk the whole operation.  Post the raise MMI will have net debt of $60m and cash of $22m. I think wisely management have, with the cap raise traded reduced risk for more a diluted future share holder return. 

How much money will they make?

You can look at the MMI website and do the maths yourself, but all going well this season (due to the northern wet they only work about 9 months of the year), they could be selling on a PE of around 3.5. Lot of factors and assumptions go into this of course but this is obviously cheap. It gets better, they can earn more in the following year with modest spend to further improved logistics. It is of course all about squeezing more volume out of what you have. 

Bauxite in North Queensland. Sounds like a shit load of trouble to me.

You are correct, there are all sorts of risks. Some are listed below:

i)                        MMI is highly dependent on the bauxite price.  The bauxite from this region has a higher silicone content than most other producers particularly the world’s major producer, Guinea and receives a lower price. Also MMI don’t further beneficiate on site so it sells at a discount to what otherwise would be the same material mined by neighbour RIO at Weipa. Bauxite prices have recently been in an uptrend with prices up around 40% since January 2022. Who knows what will happen in the future.

ii)                      The operation appears to be highly dependent on two or three Chinese buyers.   Bauxite like all bulk mineral commodities has specific specifications that help determine price and can act to make the product very refiner specific. A long way away from gold that can be sold at your local shopping centre. CEO Simon Wensley contends the need for the Chinese to diversify their resource base (mainly Australian versus Guinea), works in MMI’s favour.

iii)                    The whole operation is highly weather dependent. Since there is no natural deep water port, the bauxite has to be barged out and loaded onto ships out at sea. It is not just the rainy season that is the problem, it would seem you get a swell more than about 2.5m they you cannot safely load from the barges to the larger ships. Rain can be make handling material troublesome.   

iv)                    Foreign exchange position. (Last year they lost $6.4m).

v)                      Freight costs are huge. Out of last years cost of sales of $222m, $51m of this was freight costs. This is a big figure and how this might play out in the medium term who knows. During COVID increasing freight costs were a major problem for MMI. 

What else?

i)   A way to think about is it is roughly analogous to iron ore in the Pilbara. RIO and BHP got there first and pegged all the best ground. The likes of FMG, MIN and others have been able to make good money with the second rate country the majors left behind. Similar with MMI.  RIO grabbed all the best located bauxite around Weipa back in 1961. And over the years they have put in hundreds of millions worth of infrastructure. So have a much better operation. MMI are just babies (malnourished) living off the scraps. They are a low cost producer, but their high silica content means they can only attract a low price for their product. 

ii)   The current reserves have a life of mine of around 10-12 years. The CEO indicated they are currently working on converting resources. (An obvious course of action and potential a weak part of any buy thesis unless they can this figure get up)

iii)    Weipa is a tough place to operate with a lot of regulation and even though it is remote there remains a great deal of scrutiny, especially around environmental legislation and indigenous matters.    

iv)    Labour is a problem, with turnover running at about 25% in 2023.

v)     The new management have been there about 2.5 years. Chair Doug Ritchie has 4.4m shares, earnt $148k in 2023 along with 11.5m performance rights. CEO Simon Wensley earnt $610k base salary in 2023 with further share based payments of around $440k.

vi)    MMI has accumulated tax losses that should see them not paying tax for the next two years. These don’t appear on the balance sheet for accounting reasons however the CFO is adamant they are available for MMI to use.  

vii)      Underneath the bauxite there is serval metres of Kaolin. This has been mined in the past and is being investigated however is not a priority. Too much to be done getting the bauxite business working properly, and may be just pie in the sky.

What are the blokes running it like?

Well some unkind people have called them a bunch of deadbeats on the basis they have been there over 2.5 years they have not delivered on what they said they would.  I think this is very unfair. They have achieved a lot of very difficult milestones and have had more than their share of bad luck.  

Senior managers are ex-RIO. They have clearly been in and around the bulks business for a while and clearly saw the opportunity to have a go themselves.  The CEO Simon Wensley seems to be operationally right into the weeds and does not come across as a quitter.

Eh, anything else?

I spent some time talking with Simon earlier today at the RIU Resources conference in Sydney and went through what I saw as the risks that were worrying me. Short term, there are two key determinants of whether they will make money. (i) Logistics - digging it up and getting it onto the ship and (ii) Selling the stuff - price they can get from the Chinese refiners.    

A key logistics risk is the Ikamba, the transhipper. It is onsite now and this month working. Trucks, loaders, screens, barges and to some extent tugs are all pretty commonplace and with enough cash can be bought. However getting good operators is always an issue for the land based equipment.   Interestingly, the international crew on the trans-shipper are so grateful to be on Australian wages and conditions they function as highly motivated and stable team members.  Was satisfied with the answers provided around the Ikamba in relation to breakdowns, spares and maintenance.  Nothing is certain though.

On the relationship with the customers, two major Chinese refiners underpin sales to 2026. There is incentive for existing customers to continue to use an existing supplier in their refineries.  A sudden change to feedstock can cause problems.   Security of supply and having a diversity of suppliers is also very important to them.  MMI talk more on this in their cap raise material. More generally on trade with China whether you be a bauxite exporter, wine maker or lobster fisherman, there will always be that thought in the back of your mind that things can go bad very quickly.    

So what is it worth?

Well, it’s hard to say, it is trading at around 0.04 cents and last year they lost money. They do want to start rewarding shareholders with a dividend in the next two years, once they have further reduced debt and got the whole thing running smoothly.

Most the majors BHP,RIO and FMG sell on a forward consensus PE of around 10 to 12. It has had a bit of a run in the last few months. However it would not be unreasonable to see it trading on a PE of around 5 - if management can prove themselves to the market. So in time, say around 12 or 18 months it is very possible the stock could double.

Oh, right. You, think it could double.   And you want me to put my money in a pissant dirt digger located in some swamp in North Queensland! Listen Scoonie, you need your arse kicking to a point and kicking off mate!

Well maybe. But I’m not asking you to do anything. It’s your money, do what you like.