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Mwana Africa Plc

Following on from our article “Should you buy Miners?” we decided to take a look at AIM company Mwana Africa Plc (LSE:MWA). The company is a pan-African, multi-commodity resources company focused on the production, development and exploration of gold, nickel, copper and diamonds. Their assets include Freda Rebecca, in Zimbabwe, a gold mine with a resource of 2.3m oz and Zani-Kodo, a DRC gold exploration project with a gold resource of 2m oz. Bindura Nickel is the only integrated nickel mine, smelter and refinery operation in Africa and has a Nickel resource of some 314kt. The gold and nickel assets are the main revenue streams but MWA is also carrying out an exploration programme on a vast copper prospective land in the Katanga region of the DRC. They hold minority stakes in several diamond projects in the DRC, Angola and Botswana and their Klipspringer diamond mine in South Africa produced 12,383cts during the most recent quarter 31 March 2014.

Drilling down into the detail, Freda Rebecca produced 58,704 oz this FY to 31 March 2014. The average gold price achieved was $1,319/oz with the average total cost during the year at $1,193/oz. Not a huge margin but profitable for the year none-the-less. It is notable that in the most recent quarter results, the total cash cost per ounce stood at $1,324 and the average gold price achieved was $1,302. A similar situation occurred in the 3rd quarter also so the gold mine was marginally loss making in the final two quarters. We would monitor the situation as more information becomes available going forward.

The real interesting aspect of this business though is the nickel mine. Nickel sales rose considerably throughout the year, with 686.3 tonnes in Q1, perked up to 2,650.8 tonnes in Q3 and finished the year with 2,250.2 tonnes in Q4. Total nickel sales were 7,093 tonnes for the year with an average nickel price of $14,071/t. High costs in Q1 distorts the average cost slightly but at $12,582/t was still profitable for the year. The nickel price has risen substantially since the start of 2014 and with costs seemingly now under control, the nickel asset looks to be the key earnings driver going forward.

Now comes the interesting part, as the final accounts have not yet been released, firm figures are not yet available, however forecasts estimate £91m revenues to March 14 with pre-tax profit at £3.55m, EPS is expected to be 0.15p putting it on a PE of 12.9, cheap but quite normal considering RIO for example is on a PE of around 10 or 11. Next year however, ie. FY to March 15, revenues are expected to climb to £125.7m with pre-tax profit of £23.2m, EPS growth of over 500% to 0.96p drops the PE to 2.0!! The conclusion we would make is that if MWA can achieve these numbers, the market cap, currently just £26m, could at least double over the next year.

On the other side of the coin, investors should continue to monitor the situation as, like all investments, there are risks involved. One good point of reference with any company you look at is the Going Concern section of the auditor’s report in the accounts.

“Discussions are on-going with the Zimbabwean Government pertaining to the implementation of the country’s Indigenisation Act in relation to Mwana’s Zimbabwean assets. Mwana’s implementation of the Indigenisation Act may reduce the quantum of cash flow Mwana receives from its Zimbabwean entities. Furthermore, the lack of clarity around indigenisation makes it harder for Mwana to raise funding as required for its Zimbabwean assets.”

“The Directors are aware that various uncertainties might affect the validity of their forecasts. These uncertainties include metal prices, mining and processing risks and resource and reserve risks, in addition to indigenisation risks in Zimbabwe. The Directors, however, believe they have the ability to manage cash flows and implement indigenisation proposals in such a way to minimise the cash flow impact to the Group. However, the Directors acknowledge that there is no certainty of successfully carrying out mitigating steps.”

Despite the risks, we still think the risk/reward is justified. This is a high risk investment but it will also be highly rewarding should things go positively. In light of recent strong buying and a build of expectation of forthcoming news, we see MWA a buy. Due diligence is required here but we would buy at 1.8-2p with an initial target of 4p for 100%+ gain and continue to monitor the progress.

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