Editor's Note: This is the second part of a two-part analysis of Zenyatta Ventures. Read the first installment here.)
Now let’s talk risk because any stock with this much potential still has risk to get there and many of these numbers are still assumptions. We’ll need more drilling to prove everything out, including and not exclusive to, tonnage. Not to mention, there is always market risk, which needs to be kept in mind as well and even if our price targets are ultimately hit, this will be a very volatile ride indeed! That said, I am very confident we’re in the ballpark with our numbers and when we see engineers/analysts plug in numbers from a Preliminary Economic Assessment, they will be similar, if not even more robust, due to the fairly conservative nature of how we plugged in our assumptions. I.E. we assume the $150MM mine build out eating the costs all at once versus over time, which is more realistic.
Let’s do 2 more exercises and look at the numbers with 10MM tonnes of ore and also 30 Million tonnes, these being our low and high cases of analysis. I honestly think our mid case scenario of 20 Million tonnes of ore is conservative but certainly 10 Million should be utilized as a real “downside” scenario. Clearly, with the depth and consistency of the pipe mentioned above that we are open at depth and can simply drill deeper to increase reserves, the upside on tonnage is realistically also open even above our high case of 30 MM tonnes. It doesn’t really matter for now because even if we use 10MM or 20MM the stock is going to trade much higher. Also, in our numbers above, we used after tax numbers but likely analysts will use pre-tax in some of their models, leaving upside. We are taking a 38% tax rate into consideration, which may vary in reality, but I think is reasonable to use.
** Eric Here: I am only publishing the 30MM tones analogy because, quite frankly, the 30MM tonne scenario is now the very LOW case. 10-20MM are obsolete and proved to be too conservative.
Tonnage: 30,000,000
5% Grade and 90% recovery rate equals a finished product of 1,350,000 tonnes
Selling price: $9,000 per tonne
Cost of Production: $1,000 per tonne
Life of mine: 15 years
Tonnes per year sold: 1,350,000 divided by 15 years= 90,000 tonnes per year (this is less than 7% of the synthetic/high purity graphite market)
Estimated profit per year: pre-tax $720,000,000/$518,000,000 after tax
After tax NPV @ 10% discount rate- $3.9 Billion
NPV assuming a $150 Million Capex/mine startup cost: $3.75 Billion
NPV based on 57 Million shares outstanding: $65 per share
Internal Rate of Return: 345%
**Back to current comments:
There are several things that stand out to me that I think we can tweak in terms of PEA expectations. #1 the tonnage is much higher and I think we can use 50-60MM very safely. However, I think the engineers may take a more conservative tone on annual production. Let’s cut the production marks in half from these two scenarios and you have 30,000 and 45,000 tonnes annually. Keep in mind that this automatically doubles the mine life from 15 to 30 years and I’m speculating the minimum mine life we see will be 40 years, which is way more than enough.
The other tweak I would make is with recent confirmation of being able to sell into very high end markets we should see an average selling price between $10-$12,000 per tonne. So, use $11,000 average and double the cost structure to $2K per tonne (I still think it will be under $1k per tonne) and you’re looking at $9,000 per tonne in PROFIT. Even the lowest case is $270,000,000 pre tax annual income and just under $200MM net cash flow per year. The very realistic 45,000 tonnes per year is $405,000,000 pre tax profit and over one quarter of a Billion $$ in annual net cash flow!
There is no doubt in my mind that we will have between 1.5 and 2 million tonnes of finished product here as 50MM tonnes with a 90% recovery rate and 4% average grade is 1,800,000 tonnes. If you take that number and divide it by 45,000 tonnes of annual production, you have a 40 year mine life, which is incredible. If there’s ample demand in the marketplace and they can sell twice that amount annually, you’re still looking at a 20 year mine life and then if you want to take the cost down to $1k per tonne, you’re approaching $1 Billion per year in pre tax profits. Put a 10X PE on those numbers and your calculator might break!
This stuff is reality folks. It may not end up being exact (in fact I know it won’t) but that’s what the PEA will help assess, even though the first blush PEA will be conservative. My numbers are meant to mimic that conservative nature, not to be disappointed by the engineers. So, what happens next? Well, we’re now less than 30 days from a 43-101. The biggest problem we have with this stock is two things: Not enough institutional ownership (aka too much retail) and lack of credible analyst coverage from bigger firms. I truly believe the 43-101 could be a game changer for the first problem. There are many institutions who have been introduced to Zenyatta and like it. But, their internal mandates much of the time requires a 43-101 resource to buy these stocks.
So, with that in hand, I do believe we’ll see new fund buying into the end of the year. Frankly, that’s what’s needed to go to $10….retail won’t do it. The second piece we could do without and still succeed but if Zenyatta takes steps to take this mine into production themselves, a big juicy financing does await some firm(s). Along with that will be big boy coverage. We may see some new coverage by smaller firms after the 43-101…we shall see.
Frankly, I hope the second piece never becomes an issue. This is because I still believe Zenyatta will be bought out and probably sooner than people think. I think there is better than a 50/50 average that ZEN gets acquired before the PEA is released in Q1 2014. Many possible end users/buyers of the company are now testing the product for their uses. It would not surprise me in the least if one of the larger entities that see how good this graphite is make an offer for the company. How much can we get is the question. I’ve stated that I wouldn’t entertain anything below $500MM, which is ironically right under $10 per share (our ultimate price target). It’s going to depend on price action to a degree between now and Q1 if this scenario plays out and if we leap back into the spotlight with a strong stock, the premium could be huge.
The biggest reason is because the goods are there. If Albany produces the higher end of our ranges, this could be the most profitable mine in Canada for the next couple of decades! Short term when looking at the daily chart of the stock my biggest concern is the lower highs and lower lows. This trend will need to be decisively broken on the upside before I get too excited. However, look at this thing of beauty below….the weekly chart:
I’m extremely confident that hanger we see from last week when it flushed to nearly $2 was the low. I’m anticipating another move short term well into the $3’s but met with some resistance at the lower highs down trend line near $3.40-$3.50. However, after some successful backing and filling, I think we make another run into/after the 43-101 and I would not write off the possibility of brand new highs before year end. The stock today is marginally higher than when we wrote the special report in February 2012 but look at how much additional data and color on the project we now have. This is clearly substantially larger than when we ran our numbers early in the year and the profitability/IRR is insane. By the way, my numbers in February were only for the East pipe and the analogies above are for the east alone.
In summary, Zenyatta overpowered its opposition with ease but was knocked down in round 5 with a lucky jab. Zen has dusted itself off and is now playing a little rope a dope but all I care about is whether or not this horse finishes strong (http://en.wikipedia.org/wiki/Zenyatta). Zenyatta the thoroughbred racehorse only lost one out of 20 races. We just had our first loss this fall but now I think it’s time to head back to the winner’s circle. The potential is there for the numbers walked through here to be bested considerably. But, even if we bank on our mid- range examples this stock will be trading in the double digits at some point. I believe individual investors have a unique opportunity to have some much confirmation prior to an inevitable rush of institutional investor’s post 43-101.
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Disclaimer: I am long Zenyatta Ventures and wrote this article myself. I am offering ideas for your consideration and education. I am not offering financial advice. I am not a financial or investment advisor and am acting in the sole capacity of a newsletter writer. I am a fellow investor and trader sharing his thoughts for educational and informational purposes only. This publication is a 100% subscriber supported. No compensation is received by the author from any of the companies mentioned for the recommendation of a stock in this service (if this changes or there is exception-it will be clearly disclosed to our readers). *Medallion Resources is a sponsor of GIL. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided on the Website is based on careful research and sources that are believed to be accurate, Mr. Muschinski does not guarantee the accuracy or thoroughness of the data or information reported. The opinions published on the Website belong to Mr. Muschinski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Muschinski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published on the Website have been prepared for your private use and their sole purpose is to educate readers about various investments. By reading Mr. Muschinski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Muschinski, Gold Investment Letter’s employees and affiliates, as well as members of their families, may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
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