Tuesday, January 4, 2011

A Story With Twists And A Lesson

Abacus Mines is one of the few exploration projects to have an economical deposit. A pre-feasibility study of its flagship Ajax project has an estimated net present value of $872.4 million assuming copper is at $2.50 per pound and gold is at $950/oz. The estimated internal rate of return is more than 25% at those prices. Both metals are much higher right now.

The estimated capital costs are well above half a billion; that was the sticker. Still, when copper mining giant KGHM (out of Poland) announced it was joint-venturing Ajax from Abacus, you would expect cheering to spread throughout the shareholder base. After all, the capital costs were daunting; having a giant onside would make Ajax one of the few economical deposits to become a real mine.

When the joint venture was announced, Abacus was at 37 cents. You'd expect it to have gone higher once it was clear that they'd be extracting money from their project.

As it turned out, exactly the opposite took place. A selling panic hit the stock, because KGHM's share would have amounted to 80% of the project.

The shareholders were evidently expecting a better deal. Although the joint venture was approved, the stock ended up bottoming out at 15 cents even though Ajax's 20% would amount to an NPV for the company at $174.48 million. The capital costs are figured into the NPV calculation.

Given that Abacus has 176.49 million shares, its NPV would be at about a buck per share at the above prices for copper and gold. And yet, except for a copper-enthused spike, the stock's been languishing in the 20-30 cent range. As I post this, it's trading at 27 cents.

If there's any lesson in this ditty, it would have to be "financing is really hard to come by." That's why other exploration companies with economical deposits nevertheless languish. By the terms of the deal, Abacus still has to come up with about $70 million for its share of the capital costs - even if it can get the funds through a loan from KGHM, which can certainly self-finance its share.
Here's a one-year chart of Abacus from Stockwatch. The drop on the left-half side, over by a third, marks the reaction to the joint venture:

Disclosure: I don't own any Abacus.

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