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AIM listed EMED (EMED) has been on the point of starting to build a huge copper mine in Spain for ages. But getting the consents needed seems harder than finding a 17 year old virgin in Romford. And EMED is still not there. Hence, having tipped the shares at 14.75p back in July 2007 and with the stock at 9.625p today I look like a bit of a schmucko. Apologies for that. However, I had a long chat with CEO Harry Adams this week and I sense that we are almost there and that now would be a good time to buy. Here is why.
You may think that I’d be bearish about a copper mine given my well known view that China is about to suffer a terribly hard crash landing as the bubbles burst. Certainly there may be volatility over the next year but the point is that the world has underinvested in new copper mines for generations and it takes 20 years to bring a mine from start of discovery to production. So with demand still growing ( albeit slowly over the next 18 months I suspect) there is a supply/demand imbalance that cannot be met. That underpins the price ( now around $3.75/lb).
EMED specific – will EMED ever get all its permits. I would have thought that with youth unemployment at nearly 60% and old uneconomic mines in Spain being shut as the Government pulls subsidies, as part of the austerity programme imposed by the Evil Empire, the Spaniards would have been gagging for such a project. But I guess the fact that the place is a bureaucratic nightmare with no sense of the importance of creating real ( i.e. private sector) jobs explains why it is such a mess in the first place. But hopefully there are signs of change.
Harry says that three licenses are needed before he can start commissioning his mine: Administrative approval, Environmental approval and project approval. All three are in a sense linked. And he told me that “progress has been in line with what we said at the start of the year.” Indeed I am drawn to the fact that EMED used to say that it aims to start production at the end of 2013 (give or take 6 months). It now says that it will start production at the end of 2013. It is increasingly confident. Why?
Firstly because the Government has said in writing that it will give a decision in 2012. Secondly because there has been a sea change among local landowners. They used to be anti the mine. Then EMED bought their land paying something up front with three quarters of the consideration due when approvals were given. Now they are all pro the mine. Funny that.
So, assuming EMED finally gets approval what are the maths of this mine? It will cost give or take $10 million, $200 million to get the first of three old mines in the permit up and running. Goldman Sachs and a Chinese partner have already arranged ( subject to permitting) for debt/offtake finance of $190 million. So EMED ( which has c£2 million in the kitty) has flagged that a relatively small fund raising ( I guess £20 million would do) will happen once permits are received.
Mine one has just over 500,000 tonnes of recoverable copper ( although this could almost certainly be expanded by further drilling). Assuming a $3.50 copper price and a 14 year mine life this mine would chuck off $150 million ( call it £90 million free cashflow a year). It is perfectly possible that an increased resource could see output go from 40,000 to 60,000 tonnes per annum. Given operational gearing that would come close to doubling free cashflow. But let’s work with the lower number.
EMED should in theory repay the debt it takes on within 18 months. Thereafter everything is for shareholders. At 9.625p the market cap is now £114 million. Add in £20 million for the fund raise and you get £134 million or 1.5 times free cashflow (using base case production and a copper price below today’s price). I would have thought that for a long life project with real expansion potential a fair value is a multiple of c5 times which would imply a price of c32p.
The huge discount to fair value reflects the permitting issue, the potential Spaniard in the works. Get the permits and EMED should race ahead. It is a binary bet and I think one very much worth taking.
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