Asia Broadband: A Literal Gold Mine
Long/Short Equity, Contrarian, Long-Term Horizon, Portfolio Strategy
Seeking Alpha Analyst Since 2020
Summary
- Asia Broadband has achieved impressive success in a short amount of time.
- Their unique vertically-integrated approach, in conjunction with secular tailwinds, will be tailwinds to help them build on recent success.
- My analysis suggests there is significant share appreciation potential over a 1-3 year horizon.
- Asia Broadband is traded OTC, and as such carries risk. Please do your own due diligence.
Asia Broadband (OTCPK:AABB), through its wholly owned subsidiary Asia Metals, is focused on the production, supply, and sale of precious and base metals primarily to Asian markets. For a junior miner AABB has a shockingly clean balance sheet, and it has managed to become quite profitable in the past year. They have achieved impressive success in a relatively short amount of time, and my analysis suggests there is significant upside potential over the next 1-3 years.
Let us begin by reviewing some of AABB’s key financial metrics:
As you can see, assets have steadily been accumulating while liabilities have been falling (more on this to follow).
Moreover, AABB has gone from net losses in 2016 – 2018 to turning a profit in 2019 and 2020. Take note, brokered mineral sales have eased off because they have only reported data for the nine months through September 2020; this does not include Q4!
Through September of 2020 AABB has recognized $11 Million in gross profits, and they project full year gross profits of $14MM. While the profitable history is limited, 2019 profit margin was 79.5%, and 2020 YTD is 77%; applying the lesser margin to projected profits would yield Net Income of $10,780,000 for FY2020. With 1.13 Billion shares outstanding and 2.50 Billion shares authorized, the projected resulted would hence be $0.01 EPS—$0.005 if wholly diluted. With a current PPS of only $0.0045 (as of 12/18/2020 close) that is a P/E multiple of 0.45x the outstanding shares. It is worth mentioning AABB has recorded a YTD non-cash D&A expense of $1.325 Million, which, if added back to net income, would represent a +13% increase.
Now, I am not a fan of straight-line assumptions, and I believe it is prudent to make conservative estimates when evaluating a fair PPS. Let us reduce the YTD 77% profit margin by -15% and assume the actual margin when reported is closer to 65%. That would still produce Net Income of $9.1 Million and EPS of $0.0081 (0.00405 if wholly diluted), resulting in a current P/E multiple of 0.55x—far too low in my opinion. Applying a conservative price multiple of 8x earnings would yield a target price of $0.0324 - .0648; that would be a 7.2x – 14.4x upside on its own.
It is worth mentioning one of the reasons AABB has been able to keep a clean balance sheet is by chronically diluting ownership through equity issuance and convertible notes:
In my opinion this serves shareholders well; not only has this permitted AABB to finance projects with limited interest expense, but it places financiers in a position whereby they have a vested interest in maintaining the young operation as a result of their own sunk costs.
Moreover, there are compelling reasons not to abandon ship:
In addition to the demonstrated sales efficiency over the past 4 years, the technical aspect of the mining operation has been remarkably successful. According to Investopedia, World Gold Council categorizes 8-10 grams per ton as a high-quality mining location. In a June 2020 press release, AABB’s final assay reported drill results as significant as 11.6 – 13.2 grams per ton.
The true value in AABB, though, is in their vertically integrated approach. Not only does AABB conduct exploration and mining operations, but they conduct sales operations and, as the name would suggest, they sell direct primarily to Asian markets. Asian markets are the world’s largest for physical Gold and precious metals; India is the largest market globally for jewelry-related Gold demand, and it is well-documented that China has been aggressively accumulating Gold reserves over the past decade:
It is also widely-thought that China would like greater economic independence from the USD, and the best way to enhance confidence in the Renmibi is via Gold backing.
Moreover, China’s central bank—and central banks globally—have increasingly expressed affinity for digital currencies. In my opinion, digital currencies backed by fiat currencies serve no purpose on their own, and truthfully there is no value in replacing existing currencies with a digital substitute alone. An argument goes that creation of a digital currency can be limited to a predetermined supply, and as such it mimics the scarcity of Gold. I disagree with this assessment, because there is nothing to prevent the predetermined supply from later being augmented; believing otherwise is predicated on faith in central banks, of which I have none.
Enter AABB, who, in the last week and half, officially engaged a developer to create a branded Gold-backed cryptocurrency coin. This is particularly interesting because, while Gold-backed cryptos exist, to my knowledge the developers/sponsors have only been precious metal dealers—not the miners. The vertical integration has enormous value here because AABB quite literally has direct influence over the money supply, indirectly becoming a pseudo-central bank—a concept I outlined two months ago in a Seeking Alpha blog entry.
From a purely narrative perspective, one can see how the puzzle pieces fit together here for achieving rapid adaptation of a flagship coin in their respective markets, achieving multiple revenue streams, or pursuing licensing agreements and royalties.
Now, let us do some guesswork and conjecture to see how this could apply to AABB’s share price:
At present, Gold trades just shy of $2,000 per ounce-- $1,886.80 to be exact. Given the expansion of global M2 and the extent of negative real rates I do not think $2,500 in the next year is unreasonable. I do not think $3,000 is unreasonable in one year even. But, in the interest of prudence, let us start with $2,500 in one year’s time—a 25% increase.
A 20% year-over-year increase in sales is not unreasonable for a company in high-growth mode—in fact, 2019 YoY was 77%, and 2020 projected is 108%-- so let us say AABB organically increases gross profit in 2021 from $14 Million to $16.8 Million, and let us say as a function of Gold increasing 25% gross profit is increased another 11%. That results in projected gross profit of $18.648 Million in 2021. If the same 65% profit margin assumption is applied the projected Net Income becomes $12.121 Million.
Now, AABB is working with Waters CPA group to produce audited financial statements for OTCQB up listing compliance. This would undoubtedly improve confidence and visibility—an ideal time for an equity raise.
Let us assume AABB issues all authorized shares (2.5 Billion), fully-diluting existing shareholders, and let us say they authorize another 500 Million to boot. Fully-diluted EPS would hence be $0.00404 – 0.00485.
Now, if Gold prices really do go up 25% and if AABB successfully up lists, I would be comfortable increasing the earnings multiple to 11x Net Income, which delivers a price target of $0.044 – 0.053, and is approximately a 10-12x improvement on today’s PPS.
With no dilution, PT is $0.1180—a 26x multiple on today’s PPS.
This analysis ignores that AABB is a micro cap stock, and mania bidding plus structural tailwinds afforded by low liquidity and high short interest could move the price stratospherically.
If Gold were actually to go up 50%, a real possibility in my view, using the same assumptions we get price targets ranging from $0.059 – 0.1297 and multiples over current price ranging from 10.86x – 28.82x, and a resultant market cap of $146.55 Million.
Finally, we can evaluate some “best case” scenarios that assume AABB’s recent stated financials are indeed indicative of what an investor may expect the company to repeat over the next 1-2 years. Recall I made conservative assumptions about growth rates and profit margins (20% and 65% respectively), but let us instead take recent financial statements and apply those to forward earnings.
Asia Broadband’s YoY gross profit changes from 2017 – 2020 are 1,149%, 1,272%, 77%, and 108% respectively. If we assume 80% YoY gross profit growth, 75% profit margin, and 11% adjustment for a 25% increase in gold price, we get the following figures:
Or, if we assume AABB’s growth from 2018 – 2020 represents a trend, we could apply a 115% organic growth rate and come up with the following:
This also assumes no success with Gold-backed cryptocurrency, either, which I do not have an objective way to model into the projections. I suppose at the least there could be free cash flow generated from an ICO, and conceivably one could envision augmented access to funding markets if third parties suddenly have a vested interest in scaling the use of the currency. Remember, the CBOE crypto indexes go live next year so this is not an unfeasible outcome. However, again, I have no objective way to model this, so I am excluding success of this undertaking.
These are all responsible assumptions and I believe they are conservative and tethered to reality.
Investors and penny stocks are anything but, so you may consider adding 2-3x these projections for possible speculative outcomes.
Now, the bear case:
In brief, as stated, this is a penny stock. As such, there is little transparency, and this is a small company. Asia Broadband shares a healthy amount of press releases, and while that may be interpreted as transparency on the part of management, it could also be interpreted as pumping up a tiny stock on unsuspecting investors. Asia Broadband is based in Nevada, they primarily distribute in Asia, they have more than one web domain, and they are jumping on the crypto fad which can grab the attention of unsophisticated investors. Not to mention, precious metal markets can be dubious in of themselves.
This confluence of factors reeks of fraud potential.
AABB has deeply negative free cash flow, and share dilution could accelerate beyond my assumptions. They could fail to secure additional financing altogether and be forced to abandon any or all projects.
You do not invest in penny stocks because they lack risk. You invest—gamble, really—because you know there is risk involved and you may be compensated proportionally for accepting it. As such, I assume 0% recovery should worst case scenarios play out. Those are the terms of the deal you must make with yourself if you engage in this type of opportunity.
I am long approximately 2.6 Million shares of AABB with an average basis of $0.0053.
Analyst's Disclosure: I am/we are long AABB.
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