Microcap Speculator submits: Last week, a reader who wishes to remain anonymous -- he is soon starting a position on the buyside -- suggested I take a look at Atlas Mining . He thinks that this microcap clay mining concern holds promise both as an asset play, and as a play on technological advances that will allow the mined materials to be used in high margin advanced ceramics and polymer applications.
Rather than summarize his research, take a look at the impressive report (.pdf) he prepared, and has kindly permitted me to share. I'm not ready to jump in quite yet, for reasons I'll get to in a bit, but this report is as professional and well done as you will find on a microcap company (at any price).
After reading the report, I did a little digging of my own and had several questions. Because this reader's responses were so helpful, I have recast our email correspondence into a quasi-interview. Please read the report first; otherwise the questions and answers will lack context. The questions below are mine, and the answers are his.
Q: Does it concern you that the other public companies in which management is involved have not rewarded investors (Transnational Automotive Group , Trend Mining Co. )?
A: I do not believe ALMI's CEO, Bill Jacobson, had much managerial influence at TRDM and I believe he accepted a board position with TAMG because he felt the Company's acitivties in Africa will generate social benefits. You are correct in stating that TRDM and TAMG has not returned much to investors. I doubt, however, that Jacobson has had much influence in the management of either of these companies.
Q: The company currently has a market cap/sales ratio of over 50. The plan is clearly to ramp operations and revenues, but can this be done quickly enough to provide a revenue stream that would justify comparison to Amcol, which trades at an EV/R of 1.61?
A: The speed at which the Company can ramp up its topline is a critical assumption I've made in my analysis. Ron Price, who heads the NTI subsidiary of Atlas, is targeting a 30,0000 - 35,000 ton run rate by late 2007/early 2008. This won't be easy. Selling the clay to advanced application users takes a bit of work but once you win a customer he is yours to lose due the technical orientation of the sale. Price is currently working with multiple polymer and advanced application customers and I do believe he could meet his goal but if the target run rate turns out to be a mid-2008 event, I think the valuation thesis still holds.
Q: Are the cost estimates too low? The report works off of a base estimate from 2004, but most public mining companies have reported strong increases in costs since then.
A: According to the Company, the cost estimates are in-line with its expectations. I think there has been some slight cost increase but nothing material. What is interesting about the business model is if the Company gets $2,000 - $3,000 per ton for its product, increasing our estimated mining costs from $200 to $300 per ton does not make much difference to the margins realized given that mining costs are such a small percentage of the estimated sales price for the clay.
Q: What will the SG&A costs be when sales/marketing is ramped, and how much will these eat into cash flow?
A: I believe the Company will bring on a salesman who will act as an initial point person with customers but Price will do the heavy selling. I do not believe there is a strong linear relationship between SG&A expense and total tonnage sold. There are some small costs associated with selling the intial clay samples to potential customers and Price will travel throughout 2007 to attend certain technical conferences to market his product line. I do not believe, however, that SG&A would be much more than $2.0MM annually whether the
Company sold 30,000 tons or 50,000 tons annually from its Dragon Mine property.
Q: Are any additional environmental or other permits needed to expand the mining or process the tailings?
A: The Company has filed for a 100 acre mining permit that will enable it to process the tailing piles. Management expects to receive the permit in a few weeks. They see no reason for a denial but there is always a risk of governmental red tape muddling the process.
Q: What do you think the odds are of reaching a 35,000 ton run rate on the production side and sales side by early 2008?
A: I'll put the odds at 60% because the Company has no history executing sales.
Q: How much additional financing will be required to reach this?
A: After my discussions with management, the most recent $2.0MM raise was the last round of financing needed to bring the company to the 35,000 ton run rate. I expect no further dilution.
I'm inclined to wait until Atlas Mining books a few big sales on the higher margin ceramics and polymer products. However, I cannot deny that this reader has done quite well on his investment, proving once again that a well-researched microcap pick can yield returns far above the market. Thanks for the great research, and keep 'em coming!
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