Strong copper focus at Metorex finds favour

[miningmx.com] — – METOREX may not yet be able to match BHP Billiton’s 48% profit margin, but its margin is growing faster, showing why this mini – indeed, fast becoming midi – mining house is attracting increasing attention from investors at home and abroad.

Since 2004, Metorex’s cash mining profit margin (admittedly, not quite the same thing as BHP’s measure by Ebitda) has risen steadily from a mere 7% to 35%, and it would be fascinating to see Metorex’s Jackson Pollock chart, as BHP’s Chip Goodyear describes the graph that tracks his company’s consistently rising group margin against the wide fluctuations for individual commodities.

One caveat is that Ebitda of R918m in the latest year includes about R200m on the sale of Wakefield Coal, which is nonrecurring, and accrued in the second half.

The group put together by chairperson Simon Malone and CEO Charles Needham now has a market cap of R6.9bn, and though the share price of R21.90 is more than 25% off the high of R29.50 – and, surprisingly, 4% off Thursday’s opening price, substantially under-performing a firmer resources market – it’s still 10 times the range that prevailed as recently as late-2004.

Some 54% of the equity is now held internationally, mainly in Spain (by Metorex’s partners in the Vergenoeg fluorspar mine), the UK and US. Management and associates own only 20%, giving a free float of 80%, and JSE trading volumes in the June quarter were an admittedly abnormally high 78% of the equity. There are no fewer than 7 150 shareholders, though 250 investment funds own 58% of the issued capital.

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Much of the group’s activities are in Congo (Kinshasa), but Needham assures me that though all are now subject to review, none are actively challenged. He’s confident that the new regime is pragmatic and reasonable. Indeed, the briefing document puts exposure to the Congo as the first bullet point in the investment case for the company.

The year to June 30 saw busy corporate activity, but most concerned the mopping up of subsidiaries. Exceptions were the reverse takeover of Pan African Resources, to create a separately listed gold mining company, which Needham says analysts prefer, as gold companies are rated differently; and the agreement to acquire 38.7% of AIM-listed Copper Resoures Corp (CRC), first of the larger type of acquisitions that will be needed to supplement organic growth in future.

The other key to Pan African is that it will allow the cash flow from Metorex’s ageing and limited Barberton mine to be applied to Pan African’s exploration prospects.

Including Wakefield, copper/cobalt contributed 44% of Ebitda last year, coal 36%, fluorspar 13%, gold 9% and antimony/gold (from the Consolidated Murchison mine) 2%. Don’t ask me why that adds up to 104%, but in any event the proportions will change this year with the sale of Wakefield and takeover of Pan African.

Apart from the always erratic Cons Murch, virtually all the various properties and projects had a good year. Needham is particularly positive on the long life, high grade Ruashi copper/cobalt mine in Congo, just 10 km from Lubumbashi and (so far) presenting few technical problems.

Metorex is looking for continued earnings growth this year, whose magnitude will depend in part on how the new projects (especially phase two at Ruashi) go, and the extent of the recovery at Cons Murch. HEPS of 110.5c in FY2007 are a far cry from the 2.2c of 2004, though this includes the Wakefield disposal.

First-half earnings from continuing operations were 48c a share, against 108c for the full year, so that the second-half 60c is a fair base for future projections. On that basis, it will be disappointing if FY2008 does not generate well over 150c. That hardly seems to justify today’s weak share price.