Medallion Resources: A Potential High Flyer in Rare Earths
Tuesday, September 24, 2013 in Blog
Back in June of 2013 we added Medallion Resources (MDL.V/MLLOF in US) as our second addition to our proprietary “20 cents to $2 within 2 years” list. On the heels of our first aggressive call on the list, a hydrothermal graphite company called Zenyatta Ventures (20 cents to $5 in less than 12 months now just under $4), adding a very unique rare earth company like Medallion was a no brainer. With an over 2 year bear market in most resource stocks, some absolute gems are sitting in the dust bin waiting to shine. Critical metals like rare earth elements (REE’s) and are just implied, both rare and critical. Whenever you have a supply of something that’s rare and critical, particularly to applications and technologies that are essential in 21st century technologies and beyond, the natural conclusion is that your existence will prove: Valuable.
I don’t want to spend too much time pointing out the basic investment premise for rare earth metals. The fact is that the applications are endless and many of our daily devices such as smartphones, laptops, tablets, and virtually all clean energy technologies utilize various rare earth metals to operate. In fact, US national defense has a vital interest in REE supply. In this new report for congress, there is much information on the status of the supply constraints most countries outside of China are facing:
China, being the dominant global force in both REE production and consumption, has a significant impact on various REE market dynamics and pricing. Very recently, we’ve finally seen the Chinese reign in unlicensed production and put a short term cap on production:
This development alone should allow for REE pricing to rise into 2014 and potentially bring enthusiasm back into the sector. In 2010-2011 rare earth stocks went bonkers and many stocks were up 5-25 fold after the 2008-2009 financial crisis lows. Now, after years of declines in share value, the sector has been basing and looks like it is ready to garner investor attention once again. Besides some speculative trading around the last rally in REE stocks, I didn’t get stuck in riding the hype back into the dirt and this has been important for fresh perspective on the sector. As usual, I have kept my eye open for a future king or prince in the sector that is relatively undiscovered and could command huge gains even if the sector continues to languish.
In swoops Medallion which is planning to produce rare earths by processing monazite, a widely available by-product of heavy-mineral-sands mining. This allows the Company to forego costly resource-exploration and mineral-concentration work. Medallion has a geographical focus on the Middle East and Indian Ocean Basin, where it has recently signed two significant Memorandums of Understanding (“MOU”) with regional strategic investors, which moves Medallion closer to establishing a production facility. Medallion has also made major progress in the procurement of monazite feedstock.
Just last week Medallion busted to fresh 52 week highs. The stock has more than doubled since our 20 cent initial addition to the 20-2-2 list earlier in the summer. But, we’re not in MDL to double our money as we think the upside is much higher over time. Traditional rare earth companies exploring for the metals in the ground face significant metallurgical risks that Medallion will bypass. Also, traditional companies are looking at a cycle of 14-20 plus years to get into production while Medallion is approximately 2 years into a 5 year process to start shipping REE to customers. Just as Zenyatta is/was a different animal to the other couple hundred public graphite companies, Medallion is the only public company we know of approaching production through the proven method of producing REE’s by processing monazite.
As with most of the stocks we make a huge wager on the ultimate driver of Medallion will be future cash flow numbers, and they are potentially very significant. 2 of 3 critical milestones by the company have been secured, location for the first production plant (Oman) and financing partners (Sovereign Wealth Funds in Middle East). The 3rd component could transpire any day now, which is securing their first monazite feedstock supply agreement. The next development will bring in new investors off the sidelines as they see that Medallion undeniably is securing their stronghold in the global REE market.
Because we are merely scratching the surface on the Medallion story, this will be part 1 of several ongoing reports. In this initial introductory report, I will be general in my cash flow assumptions but in future writings will provide more detailed analysis. I believe a low case scenario in year one of production will equate to $50 Million in CASH FLOW for MDL based on average long term pricing of REE’s. Since stock valuations mainly and simply reflect a stream of future cash flows, this will be helpful to dissect as we move forward in valuing Medallion. In a generalist fashion, if we assume the $50MM in cash flow is reasonable 3 years out, at that time, a 10 multiple on earnings is $500 Million. Currently, at a $20MM market capitalization at 40 cents that would reflect a possible share price of $10. Certainly there will be some dilution between now and then but it may not be that much, at least in the next 12 months.
Just as warrant holders at 25 cents in the summer exercised due to the premium in value during the summer, I think there is a good chance now that the current 40 cent warrants are in the money, the company will be funded through warrant conversions. If the stock sees a new trading range as I estimate it will, between 40-60 cents, MDL should be nicely cash up with a new nearly $2 Million infusion from existing share/warrant holders. That would add about 5MM shares to the number outstanding which would then bring our $500MM market value analogy above to $8 per share. I would assume some further dilution in 2015 but that may be very small, especially if MDL is already trading at $1 or above. So, let’s hatchet the $8 number to $5 in anticipation of new financing and option allowances. Cut that number by 60% and you get our $2 price target by summer of 2015.
Now, there is much that needs to happen between here and production but Medallion is certainly down the path nicely and believers may decide to pile in at any juncture to capitalize on the potentially huge profitability of this company once in production. In fact, looking at a recent research report by a Canadian boutique firm, the risk adjusted enterprise value for Medallion, once at the construction/production stage, are absolutely through the roof(well beyond my examples above).
Also, Euro Pacific has put out a new desk note that is a good summary and update to the current story:
I believe more firms will release new coverage on the stock as Medallion’s story progresses. In addition, new investor awareness initiatives by the company now that they have a concrete story to tell via recent Middle East developments (and hopefully a monazite supplier MOU soon as well) should bring in new buyers of the stock. Because of the very tight capital structure and seemingly loyal shareholder base, MDL has the ability to surpass our expectations. However, my targets are based on taking this one step at a time and NOT assuming that REE stocks catch any new momentum in general. If we see the likes of Molycorp (NYSE:MCP) break back into double digits and enthusiasm returns to the sector, all bets are off. In the meantime, I believe it’s reasonable to assume that Medallion Resources challenges it’s high of 80 cents by January, which should align with environmental study results alongside the Omanis.
Medallion has recently updated their investor presentation in anticipation of upcoming conferences in Europe and new investor road shows this fall:
In summary, we encourage investors to accumulate shares of MDL.V/MLLOF on pullbacks and any weakness. I believe we’re still early in the game and gains here but my guess is that new investors will warm quickly to the story just as we have.
Legal Disclaimer: Eric owns shares in Medallion Resources. I am offering ideas for your consideration and education. I am not offering financial advice. I am not a financial or investment advisor and am acting in the sole capacity of a newsletter writer. I am a fellow investor and trader sharing his thoughts for educational and informational purposes only. This publication is a 100% subscriber supported. No compensation is received by the author from any of the companies mentioned for the recommendation of a stock in this service (if this changes or there is exception-it will be clearly disclosed to our readers). **Medallion Resources is a sponsor of GIL. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided on the Website is based on careful research and sources that are believed to be accurate, Mr. Muschinski does not guarantee the accuracy or thoroughness of the data or information reported. The opinions published on the Website belong to Mr. Muschinski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Muschinski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published on the Website have been prepared for your private use and their sole purpose is to educate readers about various investments. By reading Mr. Muschinski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Muschinski, Gold Investment Letter’s employees and affiliates, as well as members of their families, may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.