Smallcap Materials Pick: PolyMet Mining

It’s that time of the year again: time to take some profit off the table and sell the big losers. It’s also time for our year-end special report highlighting our best smallcap ideas for the upcoming year.

We have divided this special edition into EIGHT major market sectors and name our single best-of-breed small cap for each sector, along with a handful of other interesting names to watch. The eight sectors include: 1) Materials; 2) Energy; 3) Industrials; 4) Services; 5) Consumers; 6) Healthcare; 7) Technology; and, 8) Telecom.

In the Materials sector, we chose an interesting and soon-to-be-permitted mining stock with huge U.S. copper and nickel reserves. Here’s our research thesis and long case for PolyMet Mining Corp. (amex: PLM):

Betting on PLM Permits... Put Your Shrinking $USDs in the Ground

The tremendous swings in volatility over the last few months have many investors scratching their heads. At times, banks and lenders seem on the verge of collapse while soaring commodity prices reflect the ever-shrinking U.S. dollar. What is an investor to do?

We suggest taking your shrinking dollars out of the bank and burying them in the ground. Not literally of course, but it's time to think about diversification and long-term risk. PolyMet Mining Corp. (amex: PLM) is a mining development company yet to begin commercial production, but very far along in the permitting and development process.

PLM owns 100% of its assets that include one of the world's largest known undeveloped non-ferrous metal projects containing big reserves of copper, nickel, cobalt and precious metals. PLM has also purchased a very impressive, processing plant (the Erie Plant) capable of processing 100,000 tons per day. Along with the plant, PLM owns a significant amount of related infrastructure including a railroad connection to the project, a 120-railcar fleet, locomotive fueling and maintenance facilities, water rights and pipelines, large administrative offices on site and approximately 6,000 acres to the east and west of, and contiguous to, its existing tailing facilities.

PLM has "Proven and Probable Reserves" valued at nearly $4.5 billion and "Measured and Indicated Resources" valued at nearly $9.0 billion, but trades at a $400 million marketcap. From several different angles, we believe PLM has anywhere from a 3-22 times upside in the long-term, yet the risks of final permitting and lack of Wall Street awareness has the stock trading at extremely low valuations.

We see three major catalysts in 2008 that could double or triple the stock if the news remains positive. The first is the delayed publication of the final Environmental Impact Statement [EIS] from the State of Minnesota which is expected by the end of 1Q08. The second is another boost in reserves, also expected by the end of 1Q08. The third is final permitting which could happen as early as 4Q08.

Positive news on these three fronts should move the stock sequentially higher from current support levels culminating with a potential move to $6-9 per share (+106-209%) upon the completion of the permitting process by the end of 2008. Beyond that, it's all about production and reserve valuations. We believe PLM could then become a very attractive acquisition target for mining conglomerates globally, and at a huge premium to current valuations.

Disclosure: None

Comments

[TIRED:]

very good on plm i own more tha 10000 shares of plm i think it is priced to low i beleive plm will go much higher i am buying many more shares january 2 2008 thank you for publishing this article keep up the good work thanks

2008 Jan 01 12:16 PM

[Yasnu:]

Having lived in the area that PLM is doing the preliminary work to actually begin mining I find that this article covers the progress very well so far. Through past press releases they have announced the hiring of many of the key management personal for this project. We are waiting on the final permits which should be forthcoming this year.

2008 Jan 04 10:35 AM

[Atticvs Res...:]

"3-22 times upside in long-term".

PLM has 157m fully diluted shares. At the current stock price of $2.73 that's a market value of $428m. 3x = $1.285bn and 22x = $9.4bn. These are big numbers. If possible pls explain how you get these valuation parameters.

2008 Feb 21 08:47 AM

[Atticvs Res...:]

I've taken a stab at my own valuation. Valuing 182mt Provable & Probable reserves and 422mt Reserves plus a further 121mt of possible Reserves (might or might not be economical, I don't know) all using near-current mineral selling prices I get a total of $28bn. An acquirer might buy this using an assumed Net Income figure of 15% working off profits spread over 20 years of production and then apply a 10% npv factor, this being; 15% = $4.2bn and npv = about $2bn.

PLM anticipated in 2007 that the mine would require up-front capex & additional infrastructure of $350m in order to get the project up & running. That was at 2007 prices. And just as I used near-current sales prices for valuing the underlying reserves of PLM we must also adjust upwards this $350m to reflect commodity price increased (iron & steel etc) betwen 2007 and 2009 when they expect to incur that capex, thus a capex figure of $500m is more correct. The company had assued in 2007 that it could fund this capex by bank borrowings. Given credit market tightness in 2008 I think the best case now is that this $500m would be funded via convertible debt using a 5/4 ratio, i.e. equivalent to $400m fully diluted shares in current money.

Thus the fully diluted equity in present terms becomes ~160m shares that already exist plus approx 140m new (convertibles) shares equivalent to fund the $500m capex = total 300m shares fully diluted.

Dividing the $2bn Net Income NPV above by 300m shares gives a potential buy-out valuation for PLM of about $6.66 per share. It would be higher if the company can fund the $500m capex using more debt. On the other hand the approvals are not yet in place....

All in all this gives a much more sober picture than I had hoped to uncover and my maximum upside of $6.66 is a long way short of the potential mentioned in Greg's article above. We all like to uncover investments with hidden potential and I'd welcome any further insights people may have, especially if I've omitted something important.

2008 Feb 22 08:47 AM