I began this evaluation of Jubilee Metals Group PLC (“JMG”) (OTCPK:JUBPF) with a unfavourable bias. The market has proven them no love this yr and the share worth is down greater than 50% on my earlier constructive article on the corporate. I’ve by no means had any qualms about giving an organization a unfavourable evaluation if it was deserved.
Few corporations survive when the pawpaw hits the fan. Even fewer corporations survive when the pawpaw hits the fan on many fronts. JMG managed rather more than surviving. They held on to tread water on Revenue, stayed worthwhile, invested closely in enlargement, elevated manufacturing, and made important progress on their strategic plan. Pretty good.
I advised the story of the corporate in my earlier article right here. I defined their development technique and the transfer to copper manufacturing. I additionally reviewed the monetary historical past and progress of the corporate. My expectations for JMG on operational efficiency in addition to the commodity worth targets have been optimistic however with the pawpaw within the fan in infrastructure, manufacturing, and on commodity costs no positives have been realized, and the share worth suffered.
The market harshly punished JMG for occasions principally exterior to the business as the basic business and development technique are usually not readily understood from monetary reporting. I’ll shift my focus to the monetary knowledge and the monetary numbers of the expansion technique on this article. More about that later.
So, what have been the papaws?
Price collapse in Platinum Group Metals (PGM).
The three most vital minerals within the JGM PGM basket are Platinum, Palladium, and Rhodium. Here are the worth charts.
The platinum worth has been in decline since early 2021, primarily reverting to the imply of round $900 per ounce. Both the platinum and palladium costs are totally dominated by the demand for autocatalysts for inner combustion engine-driven vehicles. The worldwide shift to electrical automobiles, which don’t want autocatalysts, poses a critical worth and demand danger to each platinum and palladium which may’t be mitigated. Hydrogen fuel cell technology (the video is price watching) has not but reached maturity the place it will probably positively impression worth formation or fill the autocatalyst demand hole. The consequence is that each platinum and palladium costs will stay below stress till gasoline cell demand can displace autocatalyst demand (if in any respect).
The palladium worth has taken a fair worse beating with most of that beating impacting the JMG FY2023 reporting interval.
The unbelievable windfall income in rhodium are actually additionally up to now with the worth collapsing from a excessive of almost $30,000 per oz in March 2021 to commerce round $4,000 per oz presently. Again, a superb chunk of this drop took place through the JGM FY2023 reporting interval. Autocatalysts are additionally the dominant supply of demand for rhodium however much less so than platinum and palladium.
JMG is effectively placed to climate the demand decline within the PGM basket. It shall be a sluggish course of and given the low-cost manufacturing of JMG, will see different suppliers exit the market lengthy earlier than profitability at JMG fails. We’ll talk about it additional when trying on the numbers.
Decline in copper costs and a collapse within the cobalt worth.
Let the charts inform the story.
The drop within the copper worth has not been as dramatic as the worth collapse of cobalt and the copper worth remains to be holding the upper floor. The copper worth bounced again to above $3.5 per lb when it examined the draw back. Cobalt, nonetheless, collapsed from over $80,000 USD/T to round $30,000 USD/T which noticed JMG shut the cobalt circuit and place it on care and upkeep till cobalt costs get better.
Electricity provide shortages from ESKOM, the South African authorities enterprise electrical energy utility.
The woes of ESKOM are well-known to all buyers in South Africa as its failures have impacted all the pieces within the economic system. It appears that the electrical energy provide has now stabilized at a comparatively low stage eradicating some provide uncertainty although “reliability” isn’t a phrase suitable with ESKOM.
“For the first time, every longer-term measure of PAR – the monthly average (PAR-28), quarterly average (PAR-91) and yearly average (PAR-364) – have all converged at around 79%. “It means that South Africa’s power availability has stagnated at around stage 3 – or 5 hours of outages per day – over the medium and long terms,” Jordaan mentioned.”
New low for load shedding in South Africa.
JMG has been shielded from these ESKOM blackouts till the 2023 FY reporting interval resulting from an association that they won’t undergo any blackouts except blackouts attain stage 6. The phases rank from 1 to eight primarily based on the quantity of load shedding required with stage 1 the bottom and stage 8 the best. ESKOM, for the primary time, crossed the stage 6 threshold within the 2023 FY reporting interval. JMG has applied backup electrical energy provide measures to mitigate towards ESKOM failures. Electricity provide stabilized at round stage 3 is nice information for JMG giving them a buffer as much as stage 6.
Water and electrical energy provide stresses in Zambia.
JMG has secured a non-public provide of water in Zambia to supply for all its water wants and has additionally secured an electrical energy provide from the Zambian utility to resolve this matter. I’ve beforehand mentioned the extent of poisonous mining waste in Zambia and the Zambian authorities is eager to help JMG to scrub up this historic environmental calamity.
“In developing countries such as Zambia, large areas have been affected by past and ongoing mining and smelting of minerals, resulting in chronic exposure to heavy metals by soil, water, plants, animals and humans. It has been reported that human exposure to excess heavy metals might result in several health disorders, including skin lesions, cardiovascular disease, cancer of different organs, and reproductive defects.”
Evaluation of heavy metallic contamination in copper mine tailing soils of Kitwe and Mufulira, Zambia, for reclamation prospects, Dusengemungu, L., Mubemba, B. & Gwanama, C., Scientific Reports, Nature.com, 4 July 2022.
It is predicted that JMG will get ongoing authorities assist in Zambia for its development technique.
Inflation, leading to cost pressures.
Production cost pressures are effectively managed however each the chrome and PGM business segments present manufacturing cost will increase although JMG has lowered operational prices again to 2018/19 ranges. Production cost per unit within the copper business has declined as economies of scale and efficiencies, even at these low ranges of manufacturing, are achieved.
Significant prices to supply backup electrical energy options.
The use of diesel turbines as backup electrical energy had a direct and telling impression on manufacturing prices on the PGM business. The expectation of the electrical energy provide stabilized at stage 3 will alleviate the necessity to use a backup electrical energy provide.
Higher leverage mixed with larger rates of interest resulted in larger finance prices.
The mixture of decrease costs, constrained manufacturing development, and better prices whereas sustaining capital expenditure to advance the expansion technique has elevated using interest-bearing borrowings and along with larger rates of interest has materially elevated financing prices. It is attention-grabbing that the majority of the funding prices have been reported within the chrome and PGM business segments.
Exercising traditionally issued share warrants diluted EPS.
JMG has ceased its warrants funding technique and has indicated that it’ll fund its development technique organically with out going to the market to dilute shareholdings. The variety of shares in challenge has stabilized.
The solely company-specific pawpaw was the historic warrants issued. All the opposite papaws have been exterior to JMG, they usually had no management over these exterior developments but responded effectively and efficiently to all of the challenges.
Financial reporting
JMG’s monetary reporting is consistently enhancing, they usually anticipate to shortly introduce quarterly reporting which is able to give us a front-row seat to the unfolding development dynamic. I’ve carried out a whole revision of the sooner monetary mannequin given the improved reporting. The new mannequin aligns with the JGM divisional business strategy of primarily three businesses in a single. The chrome business, the PGM business, and the copper (and cobalt) business.
The Financial Statements are usually not but absolutely embracing this divisional strategy and I needed to reconstitute them within the monetary mannequin with important digging into the Annual Financial Statements to realize the separation of the businesses particularly given the coverage of JGM to cross-subsidize between the businesses and to report in that format.
This separation of the businesses allowed me to isolate and pinpoint the delicate variables that can outline the long run success of JMG. The strategic vital variables are so as of precedence:
- The copper business. This is the expansion way forward for the corporate. The gross revenue margins on chrome vary from round 13% to round 16% and given the volatility in commodity costs are on the decrease aspect, although to not be ignored given the volumes. The PGM margins are nice however declining, prices have been growing, and costs have been falling. It is predicted that these developments will proceed within the PGM business. The copper business, nonetheless, is predicted to pattern on larger gross revenue margins, larger commodity costs, super operational development alternatives, and economies of scale on prices. The chrome business is a comparatively secure and mature business, the PGM business is a sundown business, however the copper business is a dawn business. I’ll return to the copper business after the state of affairs evaluation.
- Production volumes. The infrastructure difficulties harm most in manufacturing development. JGM imported the inefficiencies of governments into their business. It remains to be on my Wishlist that JGM would apply the identical innovation ethos which they apply to their manufacturing circuits, to implementing long-term electrical energy provide options away from reliance on authorities provide and away from expensive short-term options corresponding to utilizing diesel electrical energy technology back-up to mitigate authorities provide shortages. The finest answer would nonetheless nonetheless be to have a stabilized dependable electrical energy provide from ESKOM beneath stage 6 load-shedding.
- Cost inflation. JGM has unbelievable manufacturing cost benefits which principally protect them from cost inflation however an excessive amount of cost inflation and people benefits will disappear. Cost inflation mixed with a lack of economies of scale manufacturing benefits, as was skilled in FY 2023, are extremely disruptive.
The severity of commodity worth drops was by far an important variable and the impression of infrastructure disruptions and cost pressures was a lot much less. Still, JGM carried out significantly better than what the market is giving them credit score for, which shall be illuminated in presenting the outcomes of state of affairs evaluation utilizing the brand new monetary mannequin.
JGM Share Price Valuation Scenarios
It is the aim of the monetary mannequin to interact in “what-if” eventualities to ascertain life like expectations for share worth efficiency. The enter variables shall be outlined by the acknowledged targets of the state of affairs. The eventualities will run for five years from FY 2024 as much as and together with FY2028. It is deliberate to do that analysis on a five-year foundation as all of the methods in play are long-term methods with a have to look past short-term fluctuations and occasions. The eventualities are tethered to actuality and won’t be examined as outliers. The monetary mannequin meets my high quality requirement, and I’ll due to this fact submit it on the finish of this text in your obtain. You can then check your personal “what-if” eventualities, additionally interrogate and audit the info and math used within the building of the mannequin.
The first analysis shall be my “Preferred Scenario” by which I outline the chrome business as mature however nonetheless having scope to develop, the PGM business as stagnating and more and more topic to cost pressures however PGM costs have dropped to ranges the place provide shall be constrained and keep away from additional worth declines, and the copper business as rising into JMG targets and past with reasoned copper worth will increase resulting from important long run copper demand development.
The second analysis shall be a “Negative Scenario” by which I nonetheless comply with the final divisional business traits, however the chrome business grows slower than anticipated and chrome costs decline slowly over the interval with stagnating slow-growing prices, the PGM business in decline with falling manufacturing and decrease costs in addition to larger prices, and the copper business nonetheless in a development pattern however at a slower tempo.
The third analysis shall be a “Positive Scenario” by which the chrome business experiences good development inside a mature business profile with honest worth and cost escalations, the PGM business stagnates in a low development with larger prices typically setting, and the copper business rising robustly with larger costs achieved and strong economies of scale cost reductions achieved.
I’ll talk about my most popular state of affairs intimately and the choice eventualities simply briefly on the premise of the income and revenue charts. You can uncover them in full by downloading the mannequin and investigating the choice outcomes whereas additionally testing your personal eventualities.
Results: Preferred Scenario
The logic builds higher when one begins on the business segments. There is nothing out of the peculiar in regards to the enter variables which I had used. None of the enter variables are outliers, all are affordable and consistent with historic knowledge on the markets and JMG. Discussing every enter variable exterior the mannequin won’t be helpful, it is all available within the obtain.
The significance of the chrome business as an anchor may be very clear when trying on the chrome business phase. The capability to increase in direction of 2mil tons every year manufacturing is usually in place so the one shock right here is how strong the expansion potential in chrome nonetheless is. The vulnerability within the gross revenue proportion can be effectively demonstrated so defending profitability in chrome is essential.
“We are already putting out guidance for 1.45 million tons of chrome concentrate in our current financial period with an aspirational target of breaching 2 million tons of chrome concentrate, it will make us the biggest, if not, one of the biggest in the world in producing chrome concentrates.”
Earnings Call, 11 October 2023.
The firm made it clear in its earnings name that they’re conscious of the gross revenue vulnerability and mentioned its technique to enhance the gross revenue margin. JMG historically produced chrome on contract at mounted margins however they’re altering the strategy to extra versatile profit-sharing preparations, with extra worth danger however probably a lot larger margins.
“So that means higher margins that’s with a fixed margin arrangement and as we increase further going forward towards 2 million, we are targeting that all these additional tons of chrome being placed in the market will be placed at market prices and much higher margins.”
The stagnation in each income and profitability of the PGM business is obvious within the numbers but it’s going to nonetheless make a considerable contribution to each for the intervals below evaluation. Note additionally the numerous enhance in web finance prices allotted to the mixed chrome and PGM businesses.
The firm steerage on the earnings name for the manufacturing of copper is 5,850 tons for FY 2024. I’ve projected 5,456 tons for FY 2024 and but the income and revenue contributions from copper are already skyrocketing. JMG’s fast longer-term development goal to capability is 14,000 tons of copper manufacturing however they’ve additionally introduced a modular copper manufacturing enlargement technique.
The modular enlargement technique is effectively defined within the AFS FY 2023, web page 24.
“Jubilee developed breakthrough modular circuit designs targeting the recovery of copper from these reefs;
– Modular circuit design offers potential for rapid deployment based on learnings form the South African operations;
– Modules range from 15 000 to 50 000 tonnes per month processing capacity at lower capital of US$ 2.5 million for a 15 000 tonnes per month module;
– Modules targeted as part of Roan upgrade with two further modules considered under current long term offtake agreements being negotiated.”
My projections for the copper business are conservative and might simply be exceeded but are nonetheless spectacular. Profitability shall be distinctive.
The potential for enlargement in copper manufacturing is almost with out restrict at current because the annual manufacturing footprint of JMG within the copper market is minute in comparison with for instance the highest ten copper producers.
Freeport-McMoRan produced 1.53 million metric tons (“MT”) of copper in 2022 in first place with Antofagasta in 10th place producing greater than 646,000 MT of copper in 2022. Top 10 Copper-producing Companies (Updated 2023), INN, Melissa Pistilli, Apr. 18, 2023.
The JMG focused 14,000 tonnes is a drop within the ocean presently which speaks to the potential to roll out many manufacturing modules earlier than they’ll even problem for the quantity ten spot.
Copper demand can be heading in a route of severely constrained provide.
“Copper supply gap
According to McKinsey, global electrification is expected to increase annual copper demand to 36.6 million tonnes by 2031, compared to the current demand of roughly 25 million tonnes. However, the consultancy firm forecasts copper supply to be around 30.1 million tonnes, leaving a gap of 6.5 million tonnes by the start of next decade.”
The world copper market is getting into an age of extraordinarily massive deficits, Rick Mills – Ahead of the Herd, Mining.com, July 25, 2023
The last level I wish to make on the copper business is in regards to the expertise and IP owned by JMG. This is the sturdy moat that Warren Buffett is all the time searching for. JMG has captured this chance with in-house IP and expertise honed by expertise. Processing mining waste with such low copper content material profitably is a technological problem not but overcome by any potential competitor. JMG hogs this house with not even a competitor on the horizon. The reverse is quite true, bigger producers are more and more seeking to JMG to course of marginal reserves and reefs of notably chrome deposits given their confirmed competence and excellence on this subject.
Consolidating the segmented businesses exhibits the expansion potential even from this low base of decimated costs. The state of affairs doesn’t cater to any commodity market stresses or provide shortfalls which could possibly be a major further tailwind. Any such developments will contribute further windfall income for JMG.
JMG is predicted to quickly develop income from £141mil to £415mil. Profitability is predicted to shine with EBITDA rising from £24.5mil to £147.8mil. The share worth is predicted to exceed the magic 10x a number of from the present worth of round £0.06 (you may most likely get it beneath 6 pence presently) to achieve £0.68 per share.
Charting the income and revenue knowledge exhibits how the markets are misjudging the efficiency of this firm and over-emphasizing short-term developments which can be already on their method out merely because of already applied development methods.
The manufacturing development already introduced and guided for FY 2024 pivots the corporate again onto its distinctive development path. Revenue and income speed up relentlessly because the copper business positive factors traction whereas the chrome business anchors the corporate for development and stability.
Results: Negative Scenario
I repeat the dynamics for this state of affairs for ease of reference. The second analysis shall be a “Negative Scenario” by which I nonetheless comply with the final divisional business traits, however the chrome business grows slower than anticipated and chrome costs decline slowly over the interval with stagnating slow-growing prices, the PGM business in decline with falling manufacturing and decrease costs in addition to larger prices, and the copper business nonetheless in a development pattern however at a slower tempo.
The unfavourable state of affairs, which is pretty harsh, can’t derail the expansion technique however impedes its potential as will be anticipated if manufacturing is throttled and commodity costs restrained and lowered even in an inflationary setting. The share worth produced on this state of affairs grows from the present round £0.06 to £0.18 for under a 3x a number of enhance over the interval.
Results: Positive Scenario
The third analysis shall be a “Positive Scenario” by which the chrome business experiences good development inside a mature business profile with honest worth and cost escalations, the PGM business stagnates in a low development with larger prices typically setting, and the copper business rising robustly with larger costs achieved and strong economies of scale cost reductions captured.
The outcomes of the Preferred Scenario have been already distinctive so this end result is tutorial however nonetheless attention-grabbing because it reiterates the potential for considerably higher profitability ought to better-than-expected circumstances prevail. The share worth would advance to only in need of £1.00 for a greater than 16x a number of enhance within the share worth over the following 5 years to 2028.
Risks
The dangers confronted by JMG stay the identical as these mentioned above. JMG is a worth taker on its mineral manufacturing with no potential to dictate to the market at which worth they’ll promote and can all the time be uncovered to cost fluctuations. Infrastructure occasions will stay a danger, however it’s a manageable danger. Inflation and cost pressures are actual and JMG has proved that they’ll mitigate such dangers by efficiencies. Inflation is a double-edged sword that may additionally generate larger costs for the corporate’s minerals. The danger of rates of interest and leverage isn’t of any concern as but and ought to be greater than eradicated within the development technique however should nonetheless be saved below a watchful eye particularly in case the corporate faces extra headwinds.
Conclusion
I’ve shared the frustration of the market with the setbacks skilled by JMG. I closed all my holdings after they printed the operational update and took the loss. I’ve solely these days began to build up shares once more with nice care and cheeky bids. I felt a necessity to essentially uncover the monetary standing of the corporate because the reporting of web, cross-subsidized, costs will be complicated and opaque. I additionally wanted the warning of strong math-based modeling separating the assorted business models into better-understood entities. The outcomes of the monetary modeling shocked me. I didn’t anticipate a strong comeback. I half anticipated a slower restoration. I definitely didn’t anticipate the restoration already be “baked in”. The power of the copper business and the distinctive potential of the expansion technique have been one other constructive shock. JMG is knocking on the roof with its chrome technique however the blue skies inherent to the copper development technique have been inspiring. The monetary mannequin is available for obtain. Check the numbers. Check the logic. The numbers inform a narrative that 10,000 phrases in an article can’t. I’m comfy with my Preferred Scenario share worth outcomes and anticipate the share worth to no less than double (extra for those who get in beneath 6 pence) over the following 12 months and to go on to turn out to be a ten-bagger over the following 5 years.
Financial Model on Jubilee Metals Group plc for obtain
Share_Price_Valuation_Model_for_Jubilee_Metals_Group_plc.xlsx
Editor’s Note: This article discusses a number of securities that don’t commerce on a significant U.S. alternate. Please pay attention to the dangers related to these shares.