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MWE.TO - Mawson West Ltd.


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i cant see the article on vic because iam now member.

it is possible that you copy a few paragraphs from the article into this her?

 

would be great. thank you :)

 

Is anyone else interested in this one? It looks bizarrely cheap. I made it one of my larger holdings.

 

Here's the VIC write up: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/105706

 

The biggest issue for me is the fact that it's located in the Democratic Republic of the Congo. Even so, it's so damn cheap I couldn't resist.

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Yes:

 

I've been following this one for a while...I have a small position in it.

 

It is certainly one of the cheapest companies that I am aware of.

 

If this thing were in the western world, it would be trading at multiples of where it is at.

 

I think they will be putting up some good numbers for the upcoming quarter.  Physical production is up (lbs. of copper, oz. of silver), which should more than offset the lower prices of the metals.

 

The CEO seems to "grok" running a mining company.

 

Their balance sheet is rapidly de-levering and strengthening.

 

If they keep going at the pace they are, they can't stay at this low a price.  Could they?  Could a company trade for a 1.5X P/E and no debt, and have almost the entire market cap of the company in cash? 

 

I guess we'll find out!

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i cant see the article on vic because iam now member.

it is possible that you copy a few paragraphs from the article into this her?

 

would be great. thank you :)

 

 

tombgrt is right, the idea is public now. I was going to attach a pdf of it but I figured that wouldn't be fair to VIC as they probably want people signing up.

 

If they keep going at the pace they are, they can't stay at this low a price.  Could they?  Could a company trade for a 1.5X P/E and no debt, and have almost the entire market cap of the company in cash?

 

I don't know! When I first looked at it and computed some rough numbers, $60mm enterprise value, probably $20mm in cash coming in Q4 as they process the copper that they have ALREADY MINED that's just sitting there, and then they have a bunch of very high quality ore bodies that have existing infrastructure already in place AND there's a fabulous management team. Lawdy lawdy!  :o

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Democratic Republic of the Congo

Last time I checked, there was some armed fighting occurring in the country.  The politics there are actually pretty complex. 

 

There are a number of different ethnic groups.

There has been a history of armed conflict and coups within the country.

Some of those who committed genocide in Rwanda fled to the DRC.  There are hostilities between those people and the Rwandan government.  There have been conflicts on the Rwandan border.  Rwanda's armed forces crossed the border and Rwandan soldiers killed some of the genocidaires in mass killings (generally considered to be illegal).  When there was a rebellion in the DRC, Rwanda provided support for the rebels.  (The rebels did not win.)  There are people in the DRC who have hostility towards Rwanda because Rwanda supported the rebels.

 

There's even more to the story.  The former colonial powers are involved too (some of them supported the Rwandan genocide), as is the US and the UN.

 

This is not a politically stable country.  It likely will not be politically stable in the future.  It has expropriated Canadian mining assets in the past.

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Yup, it's definitely difficult to handicap. Recently there was news of a concentrate ban but that has been delayed until the end of the year: http://www.mineweb.com/mineweb/content/en/mineweb-fast-news?oid=197635&sn=Detail

 

Also, the governor of the province where Mawson's mines are located has said that he will not enforce the ban: http://www.mineweb.com/mineweb/content/en/mineweb-fast-news?oid=197635&sn=Detail

 

And the company responded here: http://www.nasdaq.com/article/mawson-west-not-affected-by-potential-drc-copper-ban-but-shares-plunge-nearly-9-in-early-trade-cm238171

 

In the DRC you're dealing with a bunch of people that don't give a damn about property rights. At the recent Grant's conference Klarman was asked a question about investing in Russia. He responded with something along the lines of, 'There are opportunities in Russia but since they don't respect the rule of law you have to account for the risk through position sizing.'

 

One other bit for thought is that Tiger Resources (Ticker: TGS.AX) also operates in the DRC and trades at much higher multiples than MWE.TO. I think this is a case of a company deserving a discount but not nearly the one that it's trading for now. Imagine trying to explain this idea to someone. Right when you get to the part about the DRC most people would think, of course it's cheap it's in the DRC. But actually it's incredibly cheap even compared to other DRC operators.

 

I see a couple analysts follow this. Clarus Securities has a price target of $1.90 as of October 8th and Paradigm Capital has a PT of $2.00 as of August 15th. I don't generally pay any attention to analysts but they're usually not THAT far off. If an equity price target on an unlevered company is 3.5X the trading price, that says something. What exactly it says I'm not sure.  ;D

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The rebels seem to be defeated:

http://www.bloomberg.com/news/2013-11-05/congo-s-m23-declares-end-to-rebellion-after-government-victories.html

 

As far as a possible copper concentrate export ban is concerned, I got the following Information from CEO Bruce McFadzean in an email conversation in April:

 

"We do not believe we are impacted by the concentrate ban for the reasons we released to the market in April and we continue to export concentrate in line with our licenses under our mining convention. In addition, we produce a sulphide concentrate which cannot be treated in the DRC smelters which are all oxide concentrate processors. I was in the DRC on a government relations tasks last week and have again been reassured by government officials that we are excluded from the ban which was targeting other parties with typically high concentrate moisture levels. We are still being issued export licenses and we continue exporting concentrate as normal. We could never economically build a smelter as we receive +96% of Cu spot price and 90% of Ag spot price from our concentrate sales and we generate our own electricity from diesel generators which is very high cost power."

 

In my opinion, a higher tax on concentrate exports is much more likely than an export ban. Despite these political risks Mawson West offers a great risk/reward profile, as management seems to be capable and honest, the stock is extremely cheap, production costs are very low (grades are quite high) and the second mine (Kapulo) will probably start production in Q1 2014.

 

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I think there are plenty of countries/areas with greater political risk than the Congo.

 

Haiti, Venezuela, Cuba, North Korea, Sudan, Egypt, Yemen, Burma, East Timor, Cyprus, Detroit, Iran, Papua New Guinea, ZIMBABWE, Zimbabwe, Nigeria of course, Ghana, Pakistan, Kyrgyzstan, Zambia, Liberia, Mexico, Iceland, Somalia. 

 

I am sure that there are many others that I am leaving out.

 

Of course, there is a difference between perception and reality.  The Congo may be perceived to have great risk, but Mawon West appears to have been able to manage it, at least so far.  They are able to ship copper out of the country.

 

I very strongly suspect they hold most of their cash outside of the Congo.  This will be an offset to some of the politcal risk.

 

Perhaps a good thought exercise....at what price would you invest in a company like this? 

 

OR

 

Is there simply too much risk?  Perhaps there is NO point at which this might be a potential investment?

 

I guess everybody will have a different answer...

 

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I think there are plenty of countries/areas with greater political risk than the Congo.

 

Haiti, Venezuela, Cuba, North Korea, Sudan, Egypt, Yemen, Burma, East Timor, Cyprus, Detroit, Iran, Papua New Guinea, ZIMBABWE, Zimbabwe, Nigeria of course, Ghana, Pakistan, Kyrgyzstan, Zambia, Liberia, Mexico, Iceland, Somalia.

 

Mexico and Iceland are worse than the DRC, a country that has been plagued with armed conflict and has expropriated foreign assets?  You might want to rethink that.  ;)

 

If you read Mawson's filings on SEDAR, you can see that they are in various disputes with the DRC government.  I suppose some parts of the DRC government want to shake them down.

 

It never struck me as a good idea to mess around with countries with high political risk.  First, it takes a lot of time to understand the local politics (I haven't invested that time for the DRC).  Secondly, it always seems like a no-win situation.  If the mine is highly profitable, the host country will probably find a way to keep most or all of the profits.  So it's highly unlikely that there will be much upside.  And then there is more downside than politically-stable jurisdictions.  The expected return doesn't seem like it will be very good.  I'm not aware of companies that have made a lot of money from investing in high-risk countries.  Usually what happens is that the naive foreigners get fleeced.

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In October 2004, according to eyewitness accounts gathered by human rights lawyers, the Congolese Armed Forces (FARDC) ruthlessly suppressed a small scale uprising in the remote fishing town of Kilwa(iii) by a hitherto unknown group calling itself the Mouvement Revolutionnaire pour la libération du Katanga (Revolutionary Movement for the Liberation of Katanga, MRLK). Although the rebels put up no resistance when soldiers from the 62nd Brigade of the 6th Military Region arrived to recapture the town, between 70 and 100 unarmed civilians were killed, including many women and children. The soldiers are said to have been on an indiscriminate rampage carrying out arbitrary arrests and summary killings of suspected rebels and their supporters and subjecting those in detention to torture and beatings.(iv)

 

http://www.minesandcommunities.org/article.php?a=4241

 

In March 2010, Anvil sold the mine to Mawson West Limited.[4] The transfer would let Anvil focus on its larger copper projects, including the Kinsevere Stage II project expected to start commissioning early in 2011 and to produce 60,000 tonnes annually.[5] Mawson West reopened the Dikulushi mine in July 2010.[6]

 

http://en.wikipedia.org/wiki/Dikulushi_Mine

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Mexico and Iceland are worse than the DRC, a country that has been plagued with armed conflict and has expropriated foreign assets?  You might want to rethink that.  ;)

 

 

Mexico certainly has armed conflict going on right now.  By some estimates, close to 100,000 people have been killed in the drug wars between 2006 & 2012.  Mexico is in a very, very bad situation.  Many Mexican nationals have come here to Texas, I've heard crazy stories first hand...

 

While you are probably safe in Iceland, I've heard it is very, very difficult for investors to TAKE capital out of the country.  You can invest it in business in Iceland, but good luck in being able to take your capital out of the country.

 

So yes, I would classify BOTH Mexico and Iceland as problem countries.

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