Saturday, March 17, 2018

Why I am bullish on AMAL

This post is quoted and based on an analysis done by someone at InvestingNote, and I have trouble finding the link; if you are the original writer, please let me know so I can give credit to you.

Stage 1 production = 155,000 tpa

Stage 1 production with Lithium Fine Circuit (LFC) = 220,000 tpa (Taken from the interview with TAW CEO) by end of 2018

Stage 2 production with LFC = 440,000 tpa (Taken from the interview with TAW CEO) by Jun 2019

Production rate will be almost 3 times the rate of stage 1  production. The timeline is realistic and I trust Mark Calderwood in delivering it based on the track record.

P/E is based on price of S$0.395.

Stage 1 - During Stage 1 production which is now, the project will be generating a gross profit of (US$880-US$429) x 155,000 = US$69.9m or S$91.6m. AMAL gets 50% which is S$45.8m. At current price, we are trading at 4.78 times PE ratio.

Stage 1 (with LFC) - Upon addition of LFC by end of this year, we will be looking at a production rate of 220,000tpa and All-In-Sustaining Cost (AISC) should drop to about US$342 per ton according to the PFS. Project gross profit will be about US$83.4m or S$109.2m. AMAL gets 50% which is S$54.6m. At current price, we are trading at PE ratio of 4.0 times.

Stage 2 production is the highlight. (expecting double production to 440ktpa according to Mark Calderwood)

Using contract price of US$880 per ton, assuming we increase Life-of-mine significantly, our All-in-sustaining-cost should drop significantly and be comparable to Altura Mining which is about A$316 per ton according to their DFS. So as a rough guide, we can use A$316 per ton or US$248 per ton for calculation for stage 2.

Gross profit should be estimated at US$195.9m or SGD256m. AMAL 50% share is S$128m. PE ratio at current price is 1.7 times. To put it in another word, it means that if AMAL were to trade at just 10 times of its stage 2 production earnings (in future), the price ought to be around $2.31.

Several Catalysts coming up
- Binding Tantalum offtake with HC Starck (March 2018)
- Bald Hill Reserves upgrade (April 2018)
- Lithium Fines Circuit (By end 2018)
- Stage 2 2nd DMS plant (By June 2019)

(end of edited quoted post)

Addedeum by Marksman

Correct me if I'm wrong...

a) First of all, the above seems to have calculated pricing the share using gross profit to calculate P/E and hence share price. If the production cost above includes all other expenses (such as building the fines circuit and 2nd DMS plant), then he should be referring to net profit instead, otherwise the above calculation probably has to be tweaked in favour of a reduction.

Having said that, this does not affect my opinion on AMAL and I see strong upside.

b) Tantalum Offtake with HC Starck
Secondly, the above also has not seemed to include sales of tantalum concentrate?

The ex-CEO once mentioned sales of the tantalum offtake can cover the production cost of the spodumene concentrate.

HC Starck has entered into a non-binding agreement to purchase a minimum of 600,000 lbs of tantalum in aggregate from April 2018 to 31 December 2020, while AMAL and TAW continues to be in discussion with other third parties for excess tantalum concentrate. (link here)

As there is no established contract price for this offtake at the moment, I'll annualise the production rate above and base the expected revenue off a range of tantalum concentrate price.

600,000 lbs from April 2018 to 31 December 2020 = Approx 232,250 lbs annually.

Price (USD/lbs)
Annual Revenue from Tanatalum Sales to HC Starck (USD)

If sales from all tantalum offtake is sufficient to cover production costs, then based on stage 2 production cost, overall tantalum production rate should be at least over 10x this amount?

c) Other things to look out for:
- Price of Lithium. Burwill's contract is 5 years. After the 2-year fixed price of USD880/ton, they will renegotiate the price. I expect Lithium price to remain bullish and add further upside thereafter.
- Forex. The strength of AUD and USD will probably also play a part.
- The strength of Burwill as a company, being the only customer for their Lithium concentrate.
- AMAL's direction going forward. What is the business direction beyond owning Bald Hill Mine?

Disclaimer: The above should not be used as a decision to solicit buy/sell activity. Use all information at your own discretion and DYODD

Thursday, March 15, 2018

Afterthoughts - Alliance Mineral's CEO getting sacked, and commencement of production

So as of 1st March 2018, the CEO of AMAL has been sacked. What do I think?

It's unfortunate for the CEO, what with the business being months away from finally generating revenue... but when key business partners and other substantial shareholders no longer wants to deal with the business as long as Pramoko remains the CEO? Not a hard decision to make. The sentiment in forums and the price movement suggests positivity.

How will it affects its ongoing business in the immediate term? Tawana is operating the mine, so nothing there, business as usual.

In the longer term, I am curious what will change going forward:
  • Pramoko was looking to expand AMAL towards involvement downstream. This was something I am highly interested in. Would the CEO head towards the same direction? Or will he/she look to continual involvement upstream?
  • Will the CEO be one of the substantial shareholders, or will they look to bring someone else from the outside?
Production finally commenced, this is one of the key moments we have been waiting for! Next up would be delivery, ramping up production further, more resource upgrades, getting their maiden revenue (not counting Burwill's advance payment) from first shipment, commissioning the fines circuit and second DMS plant to further increase output, sales of tantalum concentrates etc. Thoughts of these makes me feel stoked, like a cat on catnip. :D

Disclaimer: These are my own personal view it should not be used as a decision to solicit buy/sell activity. Use all information at your own discretion and DYODD. I remain bullish and vested for the long-term.

Monday, March 12, 2018

Dr Tee's Workshop - Post-event thoughts

I attended Dr Tee's Investing Strategies for REITs and Business Trusts with Business Outlook 2018 recently (as mentioned in a previous post).

He covered 5 of his 55 strategies and insights involving:
- Stock-picking
- Figuring out entrance/exit point that allows us to bridge FA, TA and PA to become better investors and/or traders.

The event name suggests otherwise, but it covers stocks of companies beyond that as well. Additionally, he has also shared some stock analysis and market outlook for the year 2018.

Among the strategies and insight covered during the workshop involved:

1) Looking at the optimism level of stocks or indices in relation to:
- Sector (e.g. For a oil-related counter, you will also look at oil prices)
- Region
- The world to determine entry and exit for investors and traders;

(Source: Ein55)

2) Screening and picking "Giants", companies that will be resilient during tough times;

3) Dream Team concept on a stock portfolio:
- 40% defenders (resilient and defensive stocks);
- 40% midfielders (growth, undervalue investing), and;
- 20% strikers (crisis investing, cyclic investing, short-term trading, momentum trading)
- Finally, with Goalkeeper being your cash.

 (Source: Ein55)

Beyond his half-day events, he also hosts 5-day workshops and full courses that is 5 months or longer as well. These classes would cover more of his 55 strategies in-depth.

(Unfortunately, I'm in a situation where I need to save up money for the next few months. Otherwise I would have enrolled in his 5-day course).

It was a fruitful session worth many times more than the $12 I had paid. Given the opportunity, I would love to attend more of his courses.

Post-event, I am reflecting on my current portfolio. Should I do drastic changes to my strategy or my current portfolio, and then apply what I learnt? :)

His website is: Do take a look! (And if by any chance Dr. Tee reads this, thank you sir, I really appreciated the session!)

P.S. Dear readers, I'm wondering if there are topics that are at this point still not easily found online. Have any in your mind? Do write in to me via comments section! I can take a look at it!

(I've edited for easier readability on 14-3-18)

Sunday, March 4, 2018

Effect of Compounding on Principle Amount (and Ongoing Fund Injection)

It is well-known that the formula to calculate the effect of compounding on a principal amount is this:

(Principal Amount) x (1 + percentage of returns or interest per time unit)^(number of time unit)

So not withstanding fluctuations in returns or the commission fee charged, if an investor has put in a principal sum of $100,000 on a stock that gives 6% dividends annually and then reinvests into the same stock over a period of 5 years, his principal sum would have grown to $133,822.

However, this can only be applied to the case of starting out with a principal sum.

If you are actively periodically injecting funds into say, a Index Fund or an endowment plan, the calculation method is slightly different. The same applies to when you are paying off a long-term loan, such as a housing loan. Again this assumes no fluctuation in the percentage of returns or interest.

(Total Principal Amount) x (1 + percentage of returns or interest per time unit)^(number of time unit/2)

Notice the number of time unit is divided into 2. Remember how area of a triangle is calculated? You had to multiply its base by height and divide the result by 2.

(Source: Khan Academy)

The principle is the same - the number of time unit is divided by 2. This is to account for the reduction in effect of compounding on the funds that are injected later on (in the case of putting money into endowment plan or index periodically) or the effect on the amount over time as you pay off a loan.

If you have taken up a $300,000 HDB housing loan at a 2.6% interest rate (assuming no change) over 25 years, and you plan to stick to paying it off regularly (no early partial or full repayment), the total effective amount that needs to be paid off would be:

$300,000 x (1 + 0.026)^(25/2) = $569,908.68

This translates into a monthly repayment of $1899.70.

How about a case where both the periodic capital injection and having a principal sum "initially" applies?

(Total Principal Amount) x (1 + percentage of returns or interest per time unit)^(number of time unit before maturity/2 + number of time unit after maturity)

You inject $3000 yearly into a 20-year endowment plan that gives a return of 4% and it has reached its 20 years maturity, and you have the option of withdrawing all of it now, draw down a small amount periodically, or not to touch it at all until later on.

You decided to let it continue growing, intending to withdraw all of it in another 26 years.

Principal Amount = $3000 x 20 years = $60,000

$60,000 x (1 + 0.04)^(20/2 + 26) = $60,000 x 1.04^36
= $246,235.95

Your periodic capital injection applies prior to maturity. Upon maturity, this becomes your "initial" principal base sum to calculate the amount with 26 years of further compounding after maturity.

This also demonstrate the effect of compounding after maturity of an endowment plan. I imagine unless the person is very confident of beating the returns of an endowment plan, it may be a better idea to let it continue growing if there is no need to touch this sum yet.

In a later post, I'll re-visit the case of paying off a $300,000 HDB Housing Loan demonstrated earlier, and the effect of early repayment on his total effective amount to be paid.

Stay tuned, and thanks for reading!