Zinc might not be the flashiest metal around but it was one of the top performing commodities in 2021 (+31.53%).
One of the reasons for this is that late last year, Zinc was added to the ‘US Critical Minerals List’ — a list of minerals deemed essential to economic and national security.
Why was it added?
Mainly because the country's refined zinc import dependency is too high — about 83%. The more supply that is concentrated in one country, the higher the potential risk factor, particularly if that country is a mineral competitor, as is the case with China.
Global supply trends — exacerbated by the global pandemic — make this situation even more problematic.
Another reason is the growing deficit between Zinc production and consumption in the US.
The bottom line is that the US needs to produce more Zinc locally, rather than importing it.
In 2021, Zinc was mined in five States at 14 mines operated by just five companies — all of these are major mining companies except for one — TITAN MINING — which just announced production and cost guidance for 2022.
TITAN MINING - ANALYSIS OF RESULTS AND 2022 GUIDANCE
Earlier this morning, Titan Mining announced production and cost guidance for 2022.
I have summarized my key takeaways below and have also done a scenario analysis to show different outcomes within the production and cost guidance range.
The “worst” case scenario assumes production at the low end of the guidance range and costs at the upper end, while the “best” case scenario assumes production at the upper end of the range and costs at the lower end. Base case is right in the middle.
Production guidance for 2022 is estimated between 64-68 million pounds of payable zinc representing a 35-43% increase from 2021.
Cash Cost for 2022 is estimated between $0.94 and $0.98 per payable pound and AISC is estimated between $0.98 and $1.03 per payable pound.
Zinc production at ESM is expected to increase moderately in the second half of the year as mining activity is expected to ramp up at the #2 mine open pits.
Now let’s take a closer look at the base-case scenario…
Production is 66,000,000 pounds of zinc, AISC is $1.00, and the average price per pound sold is $1.57.
In this scenario, Titan Mining would be left with USD $37M gross profit. Keep in mind that this does not include any of the debt or loan agreements on the company's books (about $30.5M in debt -- 2/3 of which is held by R.W.). The $37M in expected profit is enough to pay off all debts + interest and still have enough for a sizeable annual dividend (~0.05 per share).
For the purposes of relative valuation, I like to convert this number into Canadian dollars — as the ticker TSX:TI trades in Canadian currency. In any case, relative valuation on Titan Mining is a bit difficult to do accurately because — as the only public, pure-play Zinc producer with an asset in the US — it is such a unique company.
So, I took a reasonable range of P/E multiples (2.5-15x) based on other similar companies as well as the industry average. The relative valuation table is shown below.
In the base-case scenario, with a forward P/E multiple of 5x, Titan Mining should be trading around $1.70. Even in the worst case scenario, at the lowest part of the P/E range (2.5x), Titan Mining would still be valued close to $1.
My conclusion is that Titan Mining is significantly undervalued based on the 2022 production and cost guidance as well as the favourable macro conditions for Zinc and, as a result of these factors, the stock will likely see a rerate to the $1.00-$1.50 range in the near future.
At the time of writing this article, Titan Mining was trading for $0.58.