Wednesday, May 30, 2007

FNX Mining - Cashing in on Nickel

"FNX quadruples resource base" boasted the press release, and adding up the
measured, indicated and inferred resources gives 1,087 million pounds of
copper, 1,105 million pounds of nickel and 1,016,000 oz of precious metals.

In US prices at $23.23/lb for nickel, $3.34/lb for copper, and $981 per
ounce precious metal for about $30 billion in today's dollars in the ground,
with stellar grades. At today's prices the average metal value per ton of
these new resources is $389, with the measured and indicated portion
averaging about $460/ton. At today's commodity prices the grades are highly

So, how much money is FNX making?

FNX had a remarkable growth in earnings for Q1 2007, an increase of 845%
over Q1 2006, or $30.2 million versus $3.2 million. And shareholder have
done remarkably well, from a 52 week low of $9.05 to a high in the past week
of $35.25, or a 289% increase if perfectly timed.

But, for investors earnings need to evaluated relative to their investment.
FNX has 84 million shares and 2.5 million options give a dilute market cap
of about $3 billion. $30 million of earnings on $3 billion of market cap is
about 1% and extrapolated for a full year is about 4%, or a P/E of about 25.
Commodity prices are strong. A P/E above 12 simply is not a good idea when commodity prices are this strong unless there is a very compelling production growth story.

Taking a closer look at the Q1 earning and commodities prices in US they
realized were:

  • Ni $21.65
  • Cu $2.67
  • Pd $395
  • Pt $1530
  • Au $771
  • Co $31.34
The prices FNX realized for their production resulted in $12.3 million in
revenue above the LME average prices for Q1. They also realized even better
revenue because of the strength of the US dollar in Q1, an exchange rate of

Price sensitivity is $1/lb change on nickel will change earnings by $9
million or $0.11/share, a $0.25/lb change in copper will change earnings by
$1.9 million or $0.02/share and a 10% movement in exchange rate will change
earnings by $12.7 million or $0.15/share. Currently commodity gains in
price are being canceled by currency losses.

The Q1 earnings included a 40% increase in production from the Levack
property. Overall production was 2.6 million pounds of nickel, 2.3 million
pounds of copper and 5,961 ounces of precious metals. At this rate they
would produce 10.4 million pounds of nickel, 9.2 million pounds of copper
and 24,000 oz of precious metals.

The year's production is forecast to be 12.7 million pounds of nickel,
10.9 million pounds of copper and 29,500 ounces of precious metal. The full
growth of 2007 has not yet been realized. Looking to 2008, production if
forecast to be about 17.5 million pounds of nickel, 40 million pounds of
copper and 64,000 oz of precious metals.

Further growth is planned through to 2010, for 24 million pounds of nickel,
100 million pounds of copper, and 135,000 ounces of precious metals.
From my way of evaluating an investment, FNX needs to double its earnings
to get to that P/E of 12 for production earning, and it looks doable for
2008 as long as commodity prices remain as strong as they are today. The
growth profile does give protection from downside risk from softening
commodity prices.

In the financial reports is a "comprehensive income" of $11.6 million that
should not be considered towards production earnings, and may result in a
one time only boost to earnings. This is from increases in equity
valuations that they own. To put into perspective of what including it on
earnings is equivalent to, consider a mutual fund. It buys equities that
the managers think will increase in price. The value of a share of the
mutual fund is the value of all the equities divided by the number of

So, consider the simplest mutual fund, with a single share. It buys an
equity worth $100 and that equity increases to $125, the value of that
mutual fund share is now $125. If that $25 dollars of equity gain was
instead consider earnings and the mutual fund was traded on earnings at that
P/E of 25 and the mutual fund share would be $25x25 = $625.

The value of equity increases to share holders needs to be evaluated the
same way a mutual fund is evaluated for its equity holdings. To evaluate as
earning is to make perilous errors in evaluating the value of your
investment. That $11.6 million dollar equity gain is worth
$11.6/86.4 million shares, or 13c per share, hardly a deciding factor one
way or another on a $34 stock.

The last thing, it never hurts to see what the insiders are doing. Part of
their income is from options so there usually is some selling. The question
is, how much?

Robert Cudney has a relationship to Northfield Capital which has sold
373,000 shares this year and he has personally sold 94,700.

Duncan Gibson shows 50,000 shares sold, Daniel Innes shows 37,987 shares
sold, Paul Makuch shows 33,333 shares sold, Daniel Owen 10,000 shares sold,
Donald Ross 23,500 shares sold.

Overall the insider selling is large and so is the cashing in.


Joe_5000 said...

More excellent analysis, Deborah, congratulations. I'd like to ask though, where did you get the insider trading data?

Deborah said...

This was such a good question, I answered it in a post.