While there were disruptions from extreme weather at the start of the year, the Bauxite Hills mine in Queensland wasn’t unduly disrupted.
It has basically been a good news period, yet the share price of 25 cents implies a substantial discount to the consensus 12-month price target of 31 cents.
First shipment to Xinfa
Consequently, this may be time to examine a stock that has been a well-deserved market darling over the last two years as it forged its position in the niche bauxite industry.
Management has met every milestone along the way from exploration to construction, production and export.
Regards the latter, Metro’s first shipment of 62,000 tonnes was shipped on May 7 to Xinfa Group in China, one of the country’s largest integrated aluminium companies.
Metro has a 4-year binding offtake agreement to supply Xinfa with one million tonnes in the first year followed by 2 million tonnes per annum for each of the next 3 years.
Pricing under the agreement is linked to a well-established alumina price index.
On target to meet 2018 guidance
Since the first shipment, bauxite was loaded from site to ship at an average rate of more than 7,000 tonnes per day.
Management expects to reach its 2018 target average of 10,000 tonnes per day by the end of June.
Could share price weakness be linked to commodity price
Given everything went to plan with the first shipment and Metro is set to meet its 2018 guidance, it is difficult to understand the retracement in the company’s share price.
The most likely reason appears to be a decline in the bauxite price as indicated by the CBIX chart below.
This points to a price of about US$47 per dry metric tonne as at mid-April.
Still above BFS assumptions
If this is responsible for the share price retracement, it needs to be put in perspective.
The bankable feasibility study (BFS) was worked on a mid-range cost, insurance and freight (CIF) bauxite price of about US$45 per tonne.
The current price is still broadly in line with that range.
Attractive fundamentals remain in place
This indicates that the compelling fundamentals which underpinned the project at the BFS stage are still in place.
It is worth reflecting on Metro’s share price performance from the time the BFS was released on March 15, 2017.
At that stage, Metro was trading at 13 cents but as investors crunched the numbers, offtake agreements were negotiated and financing was arranged, the company’s shares surged.
By October, Metro’s share price had roughly doubled and despite the fact that the number of shares on issue increased substantially, the share price momentum remained.
Revisiting the numbers
Given little has changed except for the fact that the project has been de-risked by virtue of the fact that it is now in production and shipping ore, perhaps it’s time to run the numbers.
The other factor to bear in mind is that the company has a number of offtake agreements in place which provides additional comfort in terms of product sales.
On the sales front, the BFS assumes a steady-state production rate of 6 million tonnes per annum over a mine life of 17 years.
$2.5 billion in underlying earnings
The project is forecast to generate earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.5 billion.
Based on the BFS, the payback period of initial capital is less than two years.
These metrics indicate that there is scope for the company to maintain profitability in a lower price environment.
Tightening of supply in China
However, it would appear that the bauxite price may find support fairly soon.
The continuing environmental pressure on mines in China has led to a tightening of bauxite supply in the inland provinces.
These areas have begun to take trial shipments of imported bauxite, mainly from Australia, as part of the bauxite supply mix.