- AABB is up +4,130% since I initiated coverage in December 2020.
- AABB is positioned to benefit from the confluence of a bull market in commodities and gold, and general bullishness towards decentralized methods of commerce.
- Following blowout earnings in Q1, AABB is sitting on $103MM of cash and bullion, and they have significant catalysts in the pipeline through the rest of 2021.
- If they successfully execute their business model, AABB will experience cost benefits that place them leaps and bounds ahead of competitors.
Asia Broadband Inc. (AABB) is a vertically-integrated junior resource miner and explorer with mining operations predominantly in Latin America. Since I initiated coverage on AABB in December of 2020, the share price has rocketed 4,130%-- and as much as 12,100% at its highest close-- and met all the price targets I initially outlined.
When I introduced my investment thesis on AABB it was trading below 1x current year earnings—a shockingly low valuation. While AABB is no longer considered a “deep value” investment in my opinion, it is still fairly priced relative to peers, and, with a stout balance sheet, it is well-positioned to realize significant forward growth.
Asia Broadband kicked off 2021 with a bang, reporting a record high $13.168MM net income for FY2020—a 146% increase Y/Y—and subsequently reported $67.76MM for Q1 2021.
*2020 Net Income normalized by subtracting $10MM line item for “equity subscription”
The sharp increase in Q1 is attributable to a sale of their mining property in Guerrero, MX—a deal that provided the company $52MM in cash, $30MM remuneration in gold bullion, and a 28% equity reassignment back to the company from their JV Partner. Year to date, this was the largest mining M&A transaction in Mexico.
*2020 Assets and Liabilities normalized by subtracting $10MM liability for “equity payable” and $10MM asset entry associated with “equity subscription”
While this transaction divested of their only producing mine, it has also freed up substantial liquidity on their balance sheet to fund additional projects. AABB has demonstrated they know how to execute efficiently and make prudent use of their resources…
…and management has wasted no time attempting to expand the operation. After announcing the company had agreed to terms to sell their project in Guerrero, they announced on January 26th they were allocating a $10MM capex commitment to build mining facilities and infrastructure access to the company’s high-potential property in Colima. A little over a month later, Asia Broadband announced they had signed an LOI to purchase a turnkey mining property in Jalisco, MX—featuring a 50 ton/day processing facility on site--and five weeks later they announced another LOI had been signed to purchase a turnkey mining property in Nayarit, MX featuring a 200 ton/day processing facility and indications of bonanza-grade gold.
Additionally,AABB announced on March 26th they had launched a gold-backed cryptocurrency (AABBG.X) on the Ethereum blockchain, and they plan to release a proprietary cryptocurrency exchange around September of this year. Incorporating this fintech element to a mining operation is fascinating from a valuation perspective, but it also has incredible application potential.
It is no secret investors have shown interest in alternatives to FIAT currency as a medium of exchange, and gold is globally-recognized as “sound money”, and it has been for thousands of years. It is, however, impractical to use physical gold as a medium of exchange in a world that conducts transactions electronically. By tokenizing their physical gold inventory, AABB has combined the liquidity and decentralization of cryptocurrencies with the sound money features of gold. Also, since the contract is tied directly to their physical gold inventory, the coins in circulation can only increase as their above-ground gold reserves increase through mining production.
This also introduces the prospect of significant operational advantages. Under normal conditions, a miner can only sell each ounce mined one time; on the other hand, Asia Broadband—via a 2% transaction fee each time the contract is exchanged—turns each ounce mined into a recurring revenue stream (at least on the gold sold through their digital sales vertical). Additionally, since they retain the gold at secure facilities, Asia Broadband does not need to take a haircut from mints or wholesalers; hence, by issuing the gold at spot price through the electronic vertical, Asia Broadband may naturally benefit from improved margins by selling direct-to-consumer the way that consumers likely prefer to be sold to (electronically). This layers in a third benefit whereby, by improving the company’s net margin per ounce, they can pursue discounted mining properties that may otherwise be viewed as having uneconomical mineralization.
The addition of a proprietary crypto exchange, while not directly adding value to their mining operation, directly adds value to income and cash flow via a 2% pass-through fee on all transactions conducted on the exchange. A 2019 report stated total crypto transaction volume for the year was $13.8 Trillion (with a “T”); if Asia Broadband captures even half of one percent of that transaction volume, they would clear $69 Billion of transaction volume and $1.38 Billion in transaction fees. Understand, even one-tenth of that would be $138 Million; it’s easy to see how capturing even a small fraction of total market share could rapidly add value to AABB’s shareholders.
Asia Broadband also has first-mover advantage. While AABB is the first to market with a mine-to-token product and will naturally serve as a beta test to miners everywhere, Mark Bristow, CEO of Barrick Gold (GOLD), acknowledged in a recent interview that gold miners need to evolve in a way that makes use of blockchain technologies. The fact that an executive at the world’s second-largest gold producer acknowledge the merits of improving fungibility of gold via smart technologies speaks volumes as to the readiness of industry-wide adoption.
As for fair value of the stock, Asia Broadband closed business on 05/21/2021 at .1861 PPS. It is very difficult to estimate current year earnings because, as expected, they reported abnormally-high earnings in Q1, but will likely report significant expenses throughout the remainder of the year via property acquisition costs and development costs tied to the exchange. It’s also difficult to estimate, at this stage, the kind of volume the exchange may attract through EOY, or what level of production we may anticipate even if they close on the properties in Nayarit and Jalisco. Hence, in my opinion, it is prudent to look out over a 3-4 year period and incorporate plausible earnings growth rates. After all, if you are purchasing shares in a venture-stage company with a significant cash position accumulated through operational efficiencies, but currently lacking a consistent revenue-producing asset, you are naturally purchasing the prospect of forwards earnings growth.
After the first two years of cash burn, Asia Broadband began delivering positive returns on equity in 2017, with an average return of 42% (including Q1 of 2021). With current equity of $105.4MM, the company would need to deliver $44.3MM in net income this year to repeat a 42% ROE, which would be a 225% Y/Y improvement to net income. I actually don’t think that’s too far away from what may be reported, but I’m also aware a healthy chunk of that may be attributed to non-recurring income from gain on sale of property. However, it does give us some context.
Let’s first take a scenario whereby in 2025 we can look back and identify a 75% Y/Y net income growth rate from 2020. Using a PEG ratio, $1 is still relatively cheap when valued on forward growth estimates:
How would AABB deliver $216 Million in terminal earnings, and a sum of $473.6MM net income over 4 years? On the existing infrastructure at Jalisco and Nayarit, if running a full capacity, Asia Broadband could ostensibly deliver a sum of up to $69 Million net income over 4 years, with an NPV of $49.5 Million.
That comes in a little lighter than what we’d like to see. However, given the health of their balance sheet, it’s not unreasonable to think they may look to expand existing infrastructure. So, between the two properties, let’s say they increased the capacity by 33% (either by improved infrastructure, or improved mineralization):
That minor adjustment is sufficient to improve AABB’s net income, but only at higher gold spot prices. While I think $3,000/oz is reasonable, it doesn’t provide much of a margin of safety. However, this scenario also excludes any income from success with their proprietary coin exchange. If we add in the exchange production and assume a modest .0007% market share ($100MM notional volume), we inch modestly closer to justifying $1.00 PPS at an average gold spot of $2,500/oz:
Taking things a step further, if we assume Asia Broadband captures even 0.01% of global notional crypto volume, we find that is sufficient to justify $1.00 PPS using PEG ratio with an adequate margin of safety to boot:
Now, for a more speculative outcome, assuming AABB managed to grow their net income an average of 150% per year over the next 4 years, shares are ostensibly cheap at $2.00 PPS valued on PEG, and by 2024 the stock would ostensibly be considered deep value on a trailing P/E basis. This essentially implies the stock would migrate from a “growth” stock to a “value” stock by year 4:
How could we justify this pace of growth? If we assume AABB captures just 0.50% of the global crypto volume, their results by 2025 would blow away any of the options previously presented:
In fact, on a summed basis, that would be the equivalent of their earnings growing at an annualized rate of 210%. Now, to be clear, the notional value of 0.50% of global crypto volume is approximately what Coinbase has previously recorded, so it is ambitious to think AABB will be able to catch up.
However, that is where first-mover advantage has its value, and as attention turns to gold in the coming years it stands to reason the narrative supporting AABB may pick up steam. A great example of this is Mexican social media site, Quepasa Corp., back in 2010— which was arguably the heyday for social media companies. Facebook was only considering its IPO at the time, and there were no other publicly-listed social media sites on the market to meet investor demand for the “next big thing”. When institutions got whiff of Quepasa—even though they were an inferior product to Facebook, Twitter, etc.—the stock rocketed over the course of just a few months:
So, in summary, the bull case is as follows:
• AABB has a strong balance sheet with 99% Equity to Assets
• Junior gold miner/explorer with a successful track record in a gold-rich region
• First-mover advantage; first mine-to-token mining company with a live Ethereum-based smart contract and a proprietary exchange going live in Q3-Q4
• Still unknown, possibility of strong institutional interest and retail FOMO once word gets out.
• Lots of uncertainty; room for significant upside surprises
• Leverage to commodity bull market and expected higher gold prices
• Leverage to overwhelming retail and institutional interest in digital assets; asset-lite nature of revenue vertical lends to rapid scalability.
The bear case:
• Venture stage company, could find itself struggling to gain traction in spite of an excellent idea.
• Lots of uncertainty; room for significant downside surprise
• Crypto regulation or shift in sentiment could impair the prospects of what may be their most scalable revenue vertical.
• They may fail to find substantial gold deposits on new properties or existing infrastructure could be inadequate.
• Unaudited financials
Following the initial entry of this write-up, Asia Broadband released two new pieces of information that materially affect my forward projections. The first pertains to preliminary drill results at their prospect property in Nayarit, which returned mineral concentration as high as 10.4 g/t. In my personal opinion, should they complete this transaction, this will be their "flagship" property; the other prospect property in Jalisco delivered less promising results, and if they move forward (which I believe they will), I believe it would be as a speculative project to gain cost-effective leverage to the underlying spot price (i.e. cheap land that will appreciate markedly if gold prices go higher). For this reason, I also believe they will target an additional acquisition this year.
The second piece of information was just released today, 5/27/2021, announcing intent to retire 107 million of the outstanding shares. Moreover, they stated, "AABB expects to retire additional shares to the Company treasury in the near future with the ongoing plans to continue the shareholder value initiative." Given this verbiage, it stands to reason they do not intend to maximize the authorized shares.
Given these two additional pieces of information, I now feel comfortable outlining my own projections and interpretations of fair value. As a reminder, my most prudent estimate naturally must be based on 4 year forward growth, because we do not have a baseline to infer Y/Y numbers. We do, however, have some precedent as to the company's use of capital and operational efficiency.
Also, based on research I have done regarding gold and its relationship with industrial inflation, I believe it is not unreasonable to infer an average point-to-point spot price of $3,500/oz. over the next four years. Still, yet, I am incorporating a variety of spot prices for the sake of comparison, and the fair value results are dictated below:
Analyst's Disclosure: I am/we are long AABB.
I am long 4,500,000 common shares and 100,000 restricted shares of Asia Broadband Inc.
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