The only way to justify the current extremely low market cap of Morien Resources (TSXV: MOX) is to value the Donkin Coking Coal Mine in Nova Scotia at only $115 million. We know that $300 million was spent since 2015 developing Donkin and bringing the mine into production. The main infrastructure of Donkin was developed in the 1980s by the Nova Scotia government. Including the original infrastructure built by the Nova Scotia Development Corporation it would cost a minimum of $600 million to replicate the Donkin Coking Coal Mine's infrastructure as it exists today.
An additional $50 million was spent on Donkin between 2006 and 2011 by its former 75% owner Xstrata together with Erdene Resource Development (TSX: ERD) who owned 25% of Donkin at the time. In 2012, ERD spun off its Canadian assets into a new publicly traded company MOX. In 2013, Glencore acquired Xstrata for US$62 billion. In 2014, Chris Cline acquired the Donkin Coking Coal Mine from Glencore/MOX and placed it into a private entity named after his daughter Kameron Coal. Today, Kameron Coal has an extremely experienced management team and is led by their new President/CEO Michael Beyer who was previously the President/CEO of Chris Cline's largest coal company Foresight Energy from 2006 through 2015 when Chris Cline sold 50.01% of Foresight for US$1.4 billion valuing the company at US$2.8 billion.
MOX closed Friday at a new 18-month closing high of $0.55 per share, but remains extremely undervalued with a market cap of $28 million (USD$22.15 million)! After subtracting $5 million from MOX's market cap for its cash position and Vulcan Materials (VMC) Black Point Aggregate Project royalty, MOX is only receiving $23 million (USD$18.19 million) in value for its 2%-4% gross production royalty in the Donkin Coking Coal Mine!
All royalties in producing mines are worth at least 10X revenue based on full production capacity. In comparison, the average coal mining stock is trading with an enterprise value of approximately 1X revenue. This makes royalties in a coal mine 10X more valuable than an equal amount of equity in that same coal mine. Based on MOX's minimum royalty in the Donkin Coking Coal Mine's production of 2%, MOX's royalty in Donkin is equal in value to owning a 20% equity stake in Donkin.
At $0.55 per share, the current $23 million market value of MOX's Donkin royalty is giving the Donkin Coking Coal Mine an implied value of $115 million. We know for a 100% fact that Donkin is worth many times more than $115 million. If you read Donkin's 2011 technical report by clicking here you will see that it was given a Net Present Value using an 8% discount rate of $1.06 billion! At current record high coking coal prices if a new technical report was conducted today, Donkin's NPV would well exceed $1.06 billion!
NIA always prefers to be very conservative when calculating the value of an asset and we will assume no increase in Donkin's NPV from the recent increase in coking coal prices to new all-time highs that far exceed coking coal prices from one decade ago. A valuation for MOX's gross production royalty in the Donkin Coking Coal Mine equal to 20% of the mine's NPV of $1.06 billion would value MOX's royalty at $212 million. Including $5 million in total additional value for MOX's cash position and Black Point Aggregate Project royalty, MOX deserves a market cap of $217 million.
MOX has 50.91 million shares outstanding, which means a market cap of $217 million will value MOX at $4.26 per share!
With estimated average annual production of 2.75 million saleable tonnes, Kameron Coal will likely earn annual revenue from Donkin of $1.008 billion (US$797.5 million) based on the new all-time high Hampton Roads coking coal price of US$290 per tonne. MOX's royalty is worth 2% on the first 500,000 tonnes of quarterly production and 4% on all quarterly production exceeding 500,000 tonnes. At 2.75 million tonnes produced/sold per year, MOX's gross production royalty will average 2.54545%.
With average annual production of 2.75 million saleable tonnes, MOX's Donkin gross production royalty could generate $25.658 million per year in royalties for MOX. A valuation for MOX's Donkin gross production royalty of 10X annual royalties of $25.658 million would make MOX's Donkin royalty worth $256.58 million. Including $5 million in total additional value for MOX's cash position and Black Point Aggregate Project royalty, MOX deserves a market cap of $261.58 million.
MOX has 50.91 million shares outstanding, which means a market cap of $261.58 million will value MOX at $5.14 per share!
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