Wednesday, March 14, 2007

Blue Note (BN on Venture)

Blue Note is a little known near term producer. It is building a new mill to commence operations in June and will start mining the ore for the mill in April. The metals are zinc, lead, copper and silver.

Blue Note will be a commodity winner due to their choice to develop their mine and cash in on the commodity prices rather than to drill, and drill, and drill their property. An educated look at the property told them they have these metals at depth. An existing mine in the area has been mining for over 20 years and has mined to incredible depth. The geology of the area is similar.

A difference between Canadian and Australian philosophy in mining is that Canadian companies and investors have become more concerned with showing the resource is there rather than making money. Australian companies look at this policy of premature drilling when you have good reason to believed the resource is there as wasteful of capital. Spend $10 million today to establish a resource you won't use for another 20 years means you have spent $10 million that will gain no return for 20 years. Their mines work on a philosophy of having about 5 years of reserves always established. It maximizes the use of capital.

Blue Note has followed this type of philosophy in choosing to put the resource to work by building a mine and earning money sooner rather than later and also tying up capital to establish a reserve that won't be used for 20 years.

Their forecasted 2007 cash flow numbers look very good. At prices of $1.44 for zinc, $0.52 for lead, $2.80 for copper, and $12.50 for silver they expect $15.3 million cash flow. They also expect costs net of byproduct credits to be $0.76. Currently the price on lead means this cash flow estimate is low by about $10-$12 million. They are most price sensitive to zinc, then lead, then silver. Copper has little influence on their cash flow as it will only contribute perhaps 2% of the total.

The number get impressive for 2008. They have adjusted their prices way down, $1.17 for Zinc, $0.44 for lead, $2.29 for copper, and $11.65 for silver. The costs also decline, to $0.55 net of by product credit, and it gives them about $58 million in pre-tax cash flow. After taxes I calculate 2008 eps of about $0.14, exceptionally impressive for stock currently trading at $0.47-$0.48, and those earnings strongly take into consideration the price of commodities coming down. The IRR on the mine is 126.3%.

As a near term producer, Blue Note is one that will win big time for its investors.

No comments :