#MTR Dowgate share price target is low?

The latest Dowgate brokers note gives a share price target of 10.4p (see here). This is mainly attributable to the Thailand and Botswana assets.

Looking at the buildup of the Botswana asset value of £27.3, Dowgate have made a deduction of US$350m for Capex costs. US$350m being the Capex costs of the adjacent Cubric Canyon mine.

 

The following hasn’t been taken into account.

1. Cubric Canyon is an underground mine while T3 will be open-pit. This will hopefully be confirmed when the consultant completes the open-pit feasibility report towards the end of the year.

The different mining methods mean the T3 mine will have cheaper Capex costs.

 

2. Botswana tax laws indicate the Capex costs are tax deductible. The US$350m deduction made in the calculations is recoverable.

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This has the following implications for the brokers note target of 10.4p made by Dowgate.
US $350m = £263.74m. Apply the 10% discount rate and 20% risk Dowgate have used = £189.9m. Take into account the 70/30 JV split = £56.9m

With 609m shares, gives an additional share value of  9.3p.

The 10.4p share price target would then be 19.7p

3. A deduction for royalties of 3% for copper and 5% for silver has been made.

What hasn’t been factored in is JV will probably be given a three  year grace period before royalties have to be paid.

Brokers note assumes will be producing 50,000 t per year by end of year three.
Let’s assume produce total of 50,000t in first three years. This means jv would not pay royalties on first 50,000t

4. Dowgate note assumes operating costs of between US$1.05 and US$1.10 per pound, based on the Cupric mine. Again the operating costs of an open-pit mine, with higher ore grades would be that much lower.

Based on the above the 10.4p share price target looks to be very conservative and a robust argument exists for the share price target to be a minimum of 19.7p.

 

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