tin prospects and more

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    Turnaround situation...???

    MBG is a tin producer that has been hammered recently. I've taken a little gamble on it last week (as per previous posts) buying a truckload shares at 4c. To date, performance from their Ardlethan tin mine has been anything but great, with production cash flow generally negative.

    I have been surprised by 'respected' mining 'gurus', such as Warwick Grigor being perplexed by the poor performance, despite being shareholders themselves.

    Well doesnt it seem obvious....low tin prices, ramping up of capacity, high debt repayment requirements, thrown in with a couple poor production performances due to water restrictions and lower grade than expected.

    So why a possible turnaround situation?

    Well firstly, the tin prices have zoomed up recently...and importantly, not because of speculatin, but huge reduction in LME stockpiles. (Check out this graph if its still available: http://www.thefinancials.com/Samples/i002113p.jpg

    So operational cash flow will greatly improve

    Secondly, the capacity of the plant has been upgraded by approx 25%. So we can expect 25% greater output which of course means a lower per tonne productin cost. Again this will increase operational cash flow. Of course, the CAPEX paid for the upgrade will most likely be reflected in this quarter so could cause a dent in financial results.

    Thirdly, believe it or not, MBG has currency hedging in place for about 50% of the revenues it receives. Of course the AUD is flying against the USD so the hedge is great for MBG, and its operational till Nov 2005. Fluke, or great economic insight, who knows, but its a big bonus...so far worth 1.7 million to MBG.

    Fourthly, it has begun mining higher grade ore. This will reduce the impact of water restrictions. The latest announcement has already reflected that a recent weeks production was the best week for the year.

    Fifthly, MSC (Malaysian tin smelting and mining company) which is the 3rd or 4th biggest tin producer in the world, has just taken a 30% interest in MBG. Negative is that this caused a dilution in shareholders, positive is that it resulted in a 5 million injecting into MBG which will be used to fund a tailings development program that could more than double the tin resource at Ardlethan. Other benefits accrue but nothing to go into.

    So thats 5 reasons this could be a turnaround...and i have had a pretty good record with picking turnarounds, incl Joyce, Austrim, Burns Philp and Futuris.

    Of course a possible turnaround is also cheap for a good reason, and in the case of MBG its their debt, and the fact tht their quarterlies were not transparent enough, ie not providing cash costs per tonne of tin, which was a bad effort. This means many investors are not confident about the situation.

    To put it briefly, this is a potential turnaround, but there is also a high risk that it could go under, and that MSC were building their interest to pick it up for a negligible value. As such, any purchase of shares is a gamble, however in my opinion, the odds are that MBG will surprise the market on the upside, although, it could take a couple of quarters. I have a 6 month target of 12c.

    Cdchi1


 
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