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Palladon Ventures: Poised for a Good 2011, and a Great 2012 14 comments
Palladon Ventures (pllvf.pk) is a Canadian firm with an interest in several mining projects in Utah and Nevada. The largest project is a storied iron mine located in Cedar City Utah that has reserves of over 170 million tons, making it the largest (and one of the only) iron ore reserves in the Western United States. The mine, called the Iron Mountain project, would potentially produce 2 million tons of 67.5% concentrated grade iron ore pellets per year for potentially a 40-50 year stretch. Palladon has already secured rail and ship contracts, and has also found a buyer of at least 1.2 million tons of previously mined run-of-mill ore. The purchaser is none other than China's largest steel manufacturer, Hebei Iron and Steel. If Palladon can meet its goal of shipping up to 2 million tons per year starting in 2012, then net earnings could potentially exceed Palladon's current share price of $1.15 (share price as of close of market on 2/25/10). This article will look at the history of the Iron Mountain Mine, the recent developments surrounding Palladon Ventures and CML Metals, and will conclude with a discussion on valuation and risk.
Brief History: 1849 - 2004
Iron Mountain is located in the South West corner of Utah close to Cedar City, see the map below. The mine was first discovered by Mormon pioneers in 1849, and was used for commercial production for several years till significant discoveries in the Mesabi region of Minnesota flooded the market with a more economically viable iron material. The Iron Mountain project sat idle until the early 1900's when a renewed interest in base materials like iron ore for construction projects occurred. In 1923 the mine was reopened, and produced over 4 million tons until it shuttered again in 1942. After a short mothball period, the plant was reopened during World War II, and produced over 60 million tons before closing again in 1961. During this phase, the plant sold the majority of it's iron ore to a steel plant built in Provo Utah, that was subsidized by the U.S. Government. The steel plant was eventually jointly owned and operated by Geneva Steel and U.S. Steel (X).
From 1962 to 1995, the Iron Mountain project mined and shipped approximately 9 million tons that was mostly purchased by the steel plant in Provo. By 1987, U.S. Steel sold it's ownership stake in the plant to Geneva, and Geneva also acquired the rights to the Iron Mountain project around the same time. Also, of note during this period from 1987-1995 is that the Gilbert Development company became the Iron Mountain mine operator. After 1995, the steel company saw major headwinds, and eventually after a series of bankruptcies finally shut down operations for good and filed Chapter 11 in 2002. In the bankruptcy filing the Iron Mountain project was spun off as a separate company called IOM, which was eventually purchased in full by Palladon Ventures.
Brief History: 2005-2009
Palladon Ventures led by CEO John Cutler acquired the Iron Mountain property with the hopes of making the iron pit a viable business again. Palladon felt that they could bring the pit back on line by 2006, and potentially sell 1 million tons a year of mined iron ore there after. Palladon had again enlisted the Gilbert Development Company to help run the operations of the mine. Unfortunately, despite Palladon's best efforts macro economic headwinds and difficulty with logistics hampered the company from being able to sell their iron ore.
Palladon's plan in 2006 was to sell 12.9 million tons of stock piled 40.2% grade iron ore to customers abroad at a rate of 1 million tons a year. Gilbert Development would be in charge of trucking the ore to a rail road spur that connected to Cedar City's rail road station. Upon arriving at Cedar City, the ore would then be shipped by Union Pacific to a port on the West Coast. Once at the port the iron ore would be stored in a warehouse, and then would be loaded onto ships owned by China Kingdom International, and sent off to a Chinese steel firm. In order to make this plan work, the company had to build the railroad spur, strike a deal with Union Pacific and China Kingdom International in order to secure carriage, secure a port in California, and make sure to find a customer willing to purchase the low grade iron ore. Additionally, Palladon had to do further diligence on it's iron ore properties. In order to get all of this done, Palladon took on a great amount of debt at a high interest rate.
(Source: Palladon Ventures)
Luxor Capital Group stepped in and provided the capital for Palladon to continue with its plan. Palladon was able to build the necessary Rail Road Spur, and was able to negotiate with Union Pacific to secure rail road cars and transportation of freight. Palladon was even able to find a port in Oakland, where China International Kingdom would ship the iron ore to a customer in Asia. Unfortunately, production got pushed back, and then the 2007 and 2008 financial crisis occurred. Production got pushed even further back, till finally in 2009 the company was able to set up a contract with Hebei to purchase a modest amount of iron ore. Then at the last minute, the port of Oakland said that it could not provide a location to store the iron ore. Without storage facilities at the port the deal fell through.
The fallout from this reshaped the company. Palladon scrambled to come up with a new plan, and asked SRK consulting group to help them come up with a plan (see links below for SRK's recommendations). The plan recommended that Palladon take on even greater debt to construct an iron ore concentrator as well as a Direct Reduced Iron plant. This plan also fell through. Luxor grew impatient, and eventually took charge and asked Palladon to hand over the reins of the company. In the wake of the debt restructuring A new joint partnership was formed called Comstock Mountain Lion Metals, or CML Metals for short. The partnership allowed Palladon's debt to be retired in exchange for a 78.7% stake in CML. Dale Gilbert of Gilbert Development became the CEO of CML Metals, and Palladon was relegated to a 21.3% stake in CML. John Cutler and one other staff member were allowed to remain on at Palladon, but all other corporate officers were asked to leave. After the reorganization Palladon had two employees, no debt, and a cash burn rate of approximately $30,000 a month.
After taking control of the company CML wanted to change direction, but only slightly. CML's plan was to build an iron ore concentrator on site to take advantage of the large deposits of taconite at Iron Mountain, however CML had no interest in building the DRI plant. Similar to the 2006 plan, CML was hoping to improve the logistics, and sell the concentrated iron ore to the Asian market. The concentrator would cost about $65 million, but would potentially allow CML to ship out 2 million tons of iron ore a year. Before CML would buy and build the concentrator, they would first have to prove that they could follow through with the shipping logistics.
Current Events: 2010 - Present
In the first quarter of 2010 CML Metals signed a two year agreement with China Kingdom International to ship 600 thousand tons a year of the stockpiled iron ore to China's largest steel company, Hebei Iron and Steel. The stockpiled iron ore is referred to as run-of-mine ore that is a lower quality iron ore with an average grade of 40%. Because of the low quality of the ore, and the previous difficulty with logistics the iron ore was scheduled to be sold at a reduced rate for the first 6 months, and then the price could be renegotiated every 6 months thereafter till the contract expired. Akin to the previous plan in 2006, the iron ore was scheduled to be shipped out from Cedar City via the Union Pacific to California's Port Richmond. After a few shipments in the fall of 2010 CML looked to expand their search for additional ports that could handle over 100,00 tons of ore a month. Since the port of Richmond can only handle boats with a maximum capacity of 55,000 tons, CML sought out the Port of Stockton. In contrast to Richmond, Stockton can load ships up to 80,000 tons. As of the winter of 2011, Stockton seems to be CML Metals primary shipping choice, and the Port of Richmond will serve as a backup.
According to Palladon's Q3 report CML shipped their first 50,000 tons of iron ore from the Port of Richmond In September. To date, approximately 250,000 tons have been shipped out from port Richmond, making CML and Palladon by proxy profitable for the first time. Additional shipments will most likely be sent out from the Port of Stockton, as CML has indicated that it would like to ship 100,000 or more tons of iron ore a month.
(Source: onearth.org, cargo vessel at Port of Stockton)
Regarding train carriage, according to Mike Root on trainorders.com, 4 sets of trains a week will be leaving Cedar City as of February, 2011. Each set will have 75 rail cars that can hold 130 tons each. If there are no hiccups in production or shipping then CML will have the ability to sell 10,500 tons per train set, 42,000 tons a week, and 2,184,000 tons a year. You can find Mr. Root's discussion here: www.trainorders.com/discussion/read.php. Since ships at the Port of Stockton can be loaded to a maximum capacity of 80,000 tons, CML will need to load a ship every two weeks with iron ore to meet their 2 million ton per annum goal. Fortunately, the port of Stockton has a daily vessel log that tracks the ship and cargo coming in and out of the port. Again, since CML runs the only iron mine in the Western United States, any ship carrying iron ore can be attributed to CML. You can find the daily vessel log here: www.portofstockton.com/Daily%20Vessel%20Log_Files/Daily%20Vessel%20Log.htm
Unfortunately, the Port of Richmond does not have a daily vessel log.
Iron Mountain Reserves
According to a compilation of historic reserve studies, CML has approximately 172 Million tons of iron ore (see chart below for more details). The iron ore that is currently being shipped out to China is run-of-mill (ROM) ore that was stock piled from previous mining operations. There are approximately 12.9 million tons of the stockpiled ROM, which has an average grade of 40% iron. Because of the low iron concentration, CML has turned it's attention to the Comstock and Mountain Lion pits, which have taconite deposits with 51% iron content, and can easily be processed with a concentrator to form 67.5% iron ore pellets.
The Comstock and Mountain Lion deposits (CML in the chart below) have approximately 20 million tons of ore that will be processed and shipped out to China at a rate of 2 million tons per year. Furthermore, CML metals and Palladon have the rights to the Rex and A/B area deposits as well, which have reserves of approximately 111 million tons and 18 million tons respectively. The Rex and A/B deposits are all within a few miles of each other, which would allow CML Metals and Palladon to process the raw ore all at the same facility located near the Comstock Mountain Lion deposit.
(Source: September 2009 SRK Presentation for Palladon)
According to the 2009 SRK consultant presentation. The group estimated that the total cost per ton of iron ore would be approximately, $55.32. Please see the image below for the cost breakdown per ton mined.
Valuation Assumptions
The valuation analysis below assumes that the concentrator will be built, and that CML Metals will be able to ship out 2 million tons from Cedar City. I also assumed that the cost per ton would be $60 using a slight inflation from SRK's 2009 report, and that it would cost CML approximately $30 per ton to ship the ore concentrate from Cedar City to Port Stockton. Lastly, I used several price per ton projections from $100 to $225 spaced at $25 increments to allow the reader to judge how profitable Palladon may be if the concentrator is built and ready for production in 2012.
NPV of Comstock Mountain Lion Deposit
Potential M&A Target, or Future Royalty Company?
As you can see in the valuation above, it's very possible for 2012 earnings to exceed the current share price of around $1.15. It is the author's opinion that one of two paths will be taken by Palladon. Either Palladon will be acquired by an Asian steel company, or Palladon will turn into a royalty company. Due to Palladon's lean corporate structure (just 2 employees!), it's the authors opinion that the likelihood of one of these two scenarios occurring is very high.
In a previous article on iron ore I discussed how steel companies, particularly Chinese steel companies are being squeezed by iron ore miners. This is occurring for a multitude of reasons, but mostly because the Chinese steel market is fractured, and the iron mining industry is consolidated to 3 major players who own over 75% market share. Since Palladon already has a relationship with a Chinese steel firm, it may not be a stretch to imagine that Hebei, or another firm would like to purchase the mines. CML Metals would be attractive to a Chinese steel firm because they could essentially purchase the iron ore at cost, saving them the difference between the cost and the spot price of the iron ore. Which as of 2/25/11 was over a $90 margin!
It is also possible that CML may be taken over by another mining firm, like a BHP, Rio, or Vale. I think this possibility is less likely, as the mining firm may ask Gilbert Development to hand over the mining operations. Since this would impact Gilbert Development negatively, and the CEO of CML is Dale Gilbert, I think this scenario will not occur.
If CML Metals and Luxor do not find a buyer, then the other alternative is that Palladon will remain a 21.3% owner in CML Metals. As the 21.3% owner, they will receive a windfall of cash every quarter (see the above valuation) with no real growth opportunities, or ability to pursue growth for that matter. In this scenario the most likely outcome would be for Palladon to become a defacto royalty company handing out probably 80-90% of their earnings. If this were to occur, then Palladon would prove to be a very attractive revenue stream.
Risks
While the above valuations look compelling, they do make assumptions that may not come true. For instance, worldwide iron ore demand could potentially decrease from current levels, which would undermine Palladon's future profitability. Additionally, it is possible that Credit Suisse may not extend the second tranche of capital to CML Metals and Palladon. If this were to occur, it would greatly impact the ability for CML and Palladon to make a profit, as they would only have the 12 million tons of low grade iron ore left to ship, and be forced to find another creditor or further dilute shareholders. Furthermore, issues with supply chain could occur. For instance, problems could occur at a Port, the Rail Line could be damaged due to a force majeure, or the concentrator could have mechanical issues which would temporarily curtail production rates.
It should also be noted that Palladon is a micro cap stock that trades on the Canadian Venture Exchange, and also as an ADR on the Pink Sheets. In both cases each issue is somewhat illiquid, and investors should be aware that margins between ask and bid spreads can at times be wide. It is not uncommon for spreads to be .02-.05 so please proceed with caution. Lastly, management may potentially have difficulty securing customers for their iron ore resulting in material impacts to profitability. It is the authors opinion that these risks are minimal, but should still be considered before taking a position in Palladon Ventures.
Conclusion
Further Reading:
Chinese Miners Urged to Boost Overseas Investment
www.brecorder.com/business-a-finance/industries-a-sectors/4383-chinese-miners-urged-to-boost-overseas-investment.html
Palladon's 2010 Q3 Financials and Managment Discussion
www.palladonventures.com/i/pdf/2010-Q3-MDA.pdf
SRK's 2009 Presentation to Palladon
www.palladonventures.com/i/pdf/PowerPoint_w_Numbers.pdf
SRK's 2009 Report for Palladon
www.palladonventures.com/i/pdf/PEA.pdf
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long Palladon Ventures through its ADR PllVF.PK
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This post has 14 comments:
a nice and well-explained analysis.
The biggest risk I see after reading your article and glancing over the Q3 MDA of Palladon is additional dilution of the stake in CML. Palladon does not have the money to participate in further cash calls of CML and would either lose even more of its CML stake (after already losing 80%) or have to raise capital in the markets, which would dilute current stockholders.
Do you happen to know who the largest shareholders of Palladon are?
Thanks for reading the article. You raise an excellent point, and it certainly is a very real risk for current shareholders. My personal feeling is that the recent fundraising of $70.5 million should be sufficient to buy and construct the concentrator. The breakdown of the fund raise was $5.9 million ($5.5 of which will go towards Palladon's share of the concentrator) $20 million from CML Metals, and $45 million from Credit Suisse handed out in two tranches, the first of which has been distributed. Additionally, the run-of-mine ore has made CML and Palladon profitable without the concentrator being on-line. Management, which seems trustworthy to me, mentioned that the company will be marginally profitable in Q4, and very profitable in 2011. This should hopefully ease any capital concerns for Palladon, particularly because their cash burn rate is around $30,000 and as of Q3 they had enough capital to keep themselves running through June or July of 2011. However, if for some reason the concentrator is much more expensive than management thought, or there is some issue with the run-of-mine logistics, then yes Palladon could find itself in a situation where they would have to dilute current shareholders. I'm hoping that scenario doesn't happen.
As far as the largest shareholders in Palladon is considered, I'm fairly certain that Luxor owns a good deal of Palladon's shares, but I can't remember where I saw that. I will do some digging and get back to you. Thanks again for your thoughts Clemens!
My name is E J and I have a substantial position in the cml project dating back over two years. I believe comparisons should be made when assessing an investment, especially its asset value and location. There are iron ore companies with similar share structures such as Alderon, Mcarthur, and Adriana trading multiples greater than Palladon, trying to get to where we left. In my humble opinion the forementioned companies are not over valued, the fact is, Palladon is under valued. If there were nothing to compare this cml project to then my sentiments would be similar to what I read on the blogs.
The percentage of ownership is irrevelant to me as long as the shares on that cml project are the same to all involved. I will refer you to the history of TWA in making a point. Meanwhile, I like Cutler, Luxor and Gilbert for the direction this organization is taking.
E J
Thank you for your comment. After reading yesterday's press release I feel very confident that PLL will have earnings of close to $1, potentially more, by the end of 2012. PLL now has 3 purchasers locked into long term contracts at prices above the Platts 62% benchmark. The potential to ship 2 million tons of concentrate looks like it is very close to happening in 2012. Eventually I'll try to update this post to change some of the details. Thank you again for reading, and good luck with your position.
James
1st) There are share purchase options and share purchase warrants for the directors of the company. Wouldn't this dilute the value of the public shares when they are exercised??? It seems like a lot of shares to award a board that up to this date has done nothing substantive for shareholders. Board members can purchase the shares at 40 cents per share. It seems like quite a large discount compared to the market price.
2nd) I saw on a website Jared Sturdivant is actually listed as a director on a prior board.
www.palladonventures.c...
Wouldn't this bias Mr. Sturdivant's views on the Palladon?? Is he currently still on the board, and if he isn't on the board, why did he leave????
3rd) I'm curious to know how you (you--James Duade) became familiar with Palladon?? Do you have a personal connection with anyone currently on the board, or who were members of the prior Palladon board of directors???
Thank you for reading and commenting. I'll address the issues you bring up here.
1) You bring up a very valid concern regarding the recent share raise which allowed Palladon board members and insiders (of which I'm not one, nor do I know any--but more on that later) and other investors as well, to participate in purchasing shares at effectively .70. The share raise amounted to effectively 8.5 million shares, of which insiders bought about 2.5 million. Those shares, could potentially be sold as early as May 28th. The share raise was conducted so as to allow Palladon can participate in constructing the concentrator. It's possible that those shares will flood the market, and drive down the price of Palladon, and this is certainly a risk. However, I personally think that the shares are very cheap as is, and any selling will be an opportunity that I would love to participate in.
2nd) I don't know Mr. Sturdivant, and was unaware that he sat on Palladon's board of directors. If you feel strongly about this I would encourage you to pose this question on his article, as that seems like a fair question if you have evidence to suggest that there may be a conflict of interest. Just to be clear, I really have no idea if there is a conflict or not.
3rd) Since you asked I'll give you the details, but they're not that exciting. In early February I wrote a piece on iron ore called "Stocks to Benefit from an Iron Ore Bull Market", and in mid February someone who read the article contacted me to mention that they liked the article and mentioned if I ever heard of Palladon Ventures. I replied that I hadn't heard of them, but that I'd take a look. I did some digging, and some more digging, and about 30-40 hours of diligence later I decided that it was a good buy for me. I made my first purchase on February 23rd for a $1.17, I made my second purchase on March 11th at $1.26, and my third and last purchase (so far) on March 23rd at $1.51. My total position amounts to a measly 2,000 shares. As you can see the position is pretty small by any means, but I'd love to add if it gets cheaper.
Thanks for the questions.
Cheers,
James
I honestly hope my perception of this is wrong, but when Palladon keeps repeatedly, again and again, releasing new shares to themselves at a lower price than what the market currently values them, somehow this seems abusive.
Terrific analysis, did you have any other stocks you'd like to pimp today???? This isn't football. But I imagine your investing is something near to a weekend binge in Vegas looking at sports lines. Don't forget your pom-poms for the next shareholder meeting
Management at Palladon is definitely a wild card in my opinion, but the fundamentals of the CML deposit, and the recent developments ushered in by CML Metals are very encouraging in my opinion.
Thanks, Doug
Unfortunately I haven't heard anything since the January news release. A few pictures were posted on CML's website in early February, and the facility looked as if it was very close to being ready for concentrate production. A few weeks ago the port of Stockton announced that they were adding a mile of rail road track at their facility which would enable them to double their export capacity for coal and iron ore (see link below). My hope is that CML is already shipping concentrate, and has chosen to remain silent on the matter for the time being, but that's just a guess. I'm sure there will be a news release sometime soon.
http://bit.ly/HfZ2am
Best,
James
Any additional insights into Palladon at this time? Besides Luxor, have you ever seen a list of shareholders of Palladon? Any other large shareholders come to mind?
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