Whats-Hot-or-Not
Periodically we publish our stock picks. Stocks that we like are “Hot” and listed below. Stocks not considered hot are removed.
Whats-Hot-or-Not
Buy EMED Mining $0.175 (EMED on AIM; EMD on TSX)
EMED Mining is a European Mining story. It has various projects in Europe, but the flagship is a copper deposit in Spain. This is an old Rio Tinto producing mine in a very depressed area of Spain. The mine was nationalized by Franco in the 1960’s, and given to the workers. Poor management, environmental issues, and the ever more depressed market for copper led to the mine’s demise and in 2001 the mine was put into liquidation. The property then went through a series of ownerships, but generated little interest.
In 1989 copper prices were around $1.50/lb, but as demand was weak, prices fell to around $0.75/lb in the early 2000’s. In 2004 copper prices dramatically rose to the $3.50 range, from where the value of copper fluctuates but seems to now have a permanent base in this range. The demand for copper became stronger and has remained so. EMED took over this site in 2006.
This mine is situated within the largest VMS system in the world, with large reserves and excellent potential. A VMS system is a natural geological formation that is host to many of the largest mineral deposits in the world. The company is further exploring the area and believes the mineable ore is much bigger than the historical resource.
The Uses of Copper
Copper has been used since the earliest recorded times for tools, currency and much more. In modern times, it is in ever higher demand and is a prime component of electricity production and transmission, building and construction, copper writing and plumbing, heating and cooling systems, telecommunications links, and is a component in motors, wiring, radiators, connectors, brakes and bearings used in cars and trucks. The average car uses 0.9 miles of copper wire, and 44 lbs in small cars, to 99 lbs in luxury and hybrid vehicles. Surprising numbers aren’t they? The demand for copper is strong and its uses are growing.
Copper Sources & Production
There are many predictions of shortages looming in copper, although we are not advocates of this prediction. The real issue, is as the richer and larger discovered deposits of copper are mining out, it becomes more expensive and difficult to extract copper from smaller and lower grade deposits. Current total world production is about 15 million tons/year, while copper demand is increasing by more than 575,000 tons annually and accelerating.
Globally, economic copper resources are being depleted with the equivalent production of three world-class copper mines being consumed annually. Although a number of new copper discoveries have been made during the past three decades, world discoveries of copper peaked in 1996. Many of the currently producing large copper mines will be exhausted between 2012 and 2017. Hence the sustained market price for copper, and future expectations of dramatic price increases. In our opinion, if something has a sustained price that is viable in today’s market at today’s price, one should not rely upon future expected increases in price. As we repeat, the future is indeterminable as unknown and unexpected events usually change what is expected.
So if a project is robust and profitable at today’s prices, with an adequate margin of safety, that is a company worth examining. EMED has such a project.
The Company
EMED has an outrageous number of shares outstanding – 1,177,000,000. It currently trades between $0.17 and $0.195 which means the market values the company currently at about a $215 million Market Cap. The large number of outstanding shares has depressed the stock so that it trades in the pennies, yet this company is worth more than pennies. It has a bright future, and could easily double or triple in value as it becomes recognized.
In 2006, the current Managing Director of EMED Harry Anagnostaras-Adams founded EMED and acquired the property. He has been striving since 2006 until now to bring this mine back into production. Along the way, he doggedly overcame numerous obstacles and now is poised to finally accomplish this goal. During this seven year effort, the company issued many more shares to involved parties than was ever contemplated, resulting in this enormous number of shares being outstanding. In spite of this, as the mine comes back into production, the Net Present Value (NPV) should be many times the current market cap, hence the “buy” recommendation.
It took a determined and dogged individual such as Harry to overcome all of the obstacles, but the reward is now finally in sight. After seven years of efforts to overcome environmental issues, land ownership issues, and a myriad of other issues, final permits are finally in sight.
The Rio Tinto Project, now EMED Mining
Unlike many junior mining companies, management is hands on, and senior management lives at the site. Unlike many mining projects, the local population supports the project and actually demonstrates in favor of the project. Spain has massive unemployment of 30% and this area is one of the worst at 50% unemployment. Jobs are simply unavailable for the local population, and the re-starting of the mine will provide large scale employment.
The project is now well advanced and awaits only the final government sign off. It will be an open pit mine, in the middle of excellent infrastructure, including roads, port, power and water. The initial plans are to process 9 million tons a year with an average grade of 1/2 lb copper per ton. Operating costs are estimated to be $1.56 / lb. With the current copper selling price of $3.50 / lb, the gross margins are very impressive. The other way to look at such a large profit margin, is that should the selling price of copper drop in half, the mine would still be profitable. Not many mining operations have that wide a margin of safety.
At an average sale price of $3.50 / lb, the operation should produce an operating cash flow of $135 million per year. A NPV calculation at a discount rate of 7.5% gives the project a NPV of $545 million (which is net of all CAPEX costs). Compare that to the current market cap of $215 million.
The mine is called Cerro Colorada and is only one of three mines on the property that were former producers. Once this mine is in operation, plans are to restart mines 2 and 3 in the future. The NPV of the company if these re-starting of the other mines is accomplished, is impressive, and dwarfs the current estimates. This could be an impressive company.
Cautions
While the company believes final government approvals are imminent, bureaucracy is always full of delays and uncertainties. Failure to obtain final approvals could put the entire project in jeopardy.
The banking crisis in Cyprus may cost the company some additional grief, with unknown results.
Investment Opportunity
Commodities are unloved in the market today, yet copper remains at the $3.50 price level. This is an opportunity. Once final approvals are received for the restarting of the mine, which could be imminent, the stock price will likely escalate strongly. Because the world has not invested in building new copper mines for the last 20 years, supply will be increasingly pinched, and price escalation is probable. An increase in the price of copper would be very beneficial for the stock price.
Re-starting of mines 2 & then 3 make the upside much greater. Add to this that the company has an excellent gold project in Slovakia, and a further project in Cyprus. Investing in a company that ‘hopes’ to go into production carries great risk, but this gamble is heavily weighted to the upside.
We may or may not have positions in the securities we name under ‘Whats-Hot-or-Not’. Whether an investment is made in a particular security depends on many factors, including portfolio balancing, timing, cash and capital reserves, asset allocation and numerous other factors. Readers are advised to do their own research on our picks and decide in light of their own circumstances, whether an investment is appropriate. Except for the historical information presented herein, matters discussed in this document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. This report is for information purposes only, and is neither a solicitation nor recommendation to buy nor an offer to sell securities. We are not a registered investment advisor nor a broker-dealer in any jurisdiction whatsoever. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data.
