The Smell of “MTAL” is in the Air
Do you remember those slotted racing cars when you were a kid? They had the trigger controls that when you first started using them you’d ALWAYS give the car too much juice and it would go to the next turn, about 2 seconds away, and fly off the track.
The trigger controls, with the spring and metal rod that brushed against it, would even have a very particular electricity smell. Especially if you’d let it sit for a few weeks, and it got a little dust on it. Not a pungent odor…just the smell of a little dust being incinerated by an electric current.
I can’t help but think that’s kind of how Powell is attacking inflation. Pull the trigger a little too hard and throw the economy off the track…and into a recession. Don’t squeeze hard enough, with rate increases, and watch the economy just sit there, to be devoured by higher prices.
It’s definitely a tough spot, and I’m not sure he’s using a trigger controller that is as fine tuned as mine eventually became, guiding the car around the track, accelerating at just the right time, slowing for the curves…
My take is that eventually he runs the economy off the track, into a recession. But, a lot of factors, such as full employment, bode well for a relatively mild recession once we get there.
In the meantime, I think there are some inflation/commodity plays that can be taken advantage of to bank some profits.
One of those is a SPAC that recently announced a deal, Metals Acquisition Corp. (MTAL/W). Metals Acquisition Corp., or MAC as they refer to themselves, purchasing the CSA copper mine Glencore in Australia. As it stands right now, MAC is purchasing the CSA copper mine for $1.1 billion plus $50M in working capital and closing costs. Metals acquisition is using a combination of debt and cash from the trust value to pull off the acquisition.
The idea being that the free cash flow from the copper mine will be able to handle the debt load. The main lender is Citibank, with additional convertible debt being offered by Sprott Resource Lending. The cash portion of the deal is for $418.25 million, which is a combination of $265 million in the trust with additional equity and alternative sources for the added funding.
Last week, I sent an email (to Warrant Observer members) about Spring Valley Acquisition (SV, SVSVW). When we talked about that one, one of the key features was that the common stock is trading above trust value. So, you’re not going to see redemptions.
That’s not the case with Metals Acquisition. It’s actually one of the majority of SPACs with announced deals that’s trading below trust value in the common stock. So I think you’ll see redemptions in the deal. But I also think Metals Acquisition is going to figure out a way to pull off the deal.
So the risk up front is that the deal doesn’t get done. And the warrant, which is what I want to focus on, drops back into the $.50 range, which is where it was before the CSA deal was announced.
Right now, the warrant is trading at $1, which I think is being undervalued for this acquisition…assuming it goes through.
Let’s talk about three reasons I think the deal is a good value with a warrant here at $1.
First is the price of copper. Inflation is clearly a lot more sticky than we thought it would be. And while the Fed is doing everything It can to battle inflation through raising rates, it looks like commodity inflation is here to stay.
We talked about one of the reasons inflation is here to stay when we discussed Occidental Petroleum (OXY/WS) at the beginning of the year. That is the limited capex being put into commodities at this point, due to a combination of government policy preference for green energy, ESG and social pressure on the companies in the commodities sector, and investors’ preference for green energy.
You’re getting a lot of undercapitalized investment in things like oil copper and basic dirty commodities. And, you can lay on top of the inflation and under investment in capex, an increasing demand for copper. If you look through Metal Acquisitions investor presentation you’ll see some of the numbers for copper being used in electric vehicles, or hybrid vehicles, versus conventional combustion vehicles.
Basically, battery electric vehicles are around four and a half times more copper intensive than conventional combustion engine vehicles. Then you need additional copper to build out of the energy grid, both here in the US and internationally to support a move from combustion to EV, which is as we know, is mandated in Europe, and essentially mandated through policy here in the US.
We should see the demand for copper just continue to rise over the next 5 to 10 years. So that covers the demand side.
The management team at Metals Acquisition has a really great track record of both building out metals and mining companies, as well as taking underutilized mining and commodity assets and making them more efficient. Mick McMullen, CEO of Metals Acquisition was at Detour Gold and Stillwater. Bill Beament is the former CEO at Northern Star, and built the company into Australia’s second largest gold producer. And the rest of the team has experience at various mining operations, including Barrick and Oceana Gold.
This all-star lineup has already identified a number of initiatives the company can take at the CSA mine to improve operations. They’re basically looking at taking the cost of a cubic ton from $2.62 all in in 2022 to $2.08 in 2024. Or an almost 21% reduction in their overall mining cost.
Interestingly one of the ways they’re looking at enhancing production is through using battery electric loaders on site at the mine. The mine is currently ventilation and cooling constrained, which they’re looking to rectify. And, they plan to gain additional call cost structure benefit by reducing electricity use in the cooling and ventilation of the mine.
And last but not least, valuation. Currently the enterprise value of the company over EBITDA is 4.5x using estimated 2022 earnings. For reference, Freeport-McMoran (FCX) trades at an EV/EBITDA of close to 8. That gives a pretty decent cushion on a valuation basis. (You can check out the investor presentation here, which has some additional info on the mine, quality of the copper, and the expected life of the mining operation.)
So, you’ve got a free cash flow positive mining operation already. It’s in a commodity that should maintain price at a meaningfully high level due to the factors that we just went over, which includes increasing demand from EVs and electric grid build out. And, there is an experienced management team in place and room for improvement on the operations side.
I think this is one similar to what we saw in the early days of SPACs, where the company is presently being held back due to the SPAC structure. I’m currently assuming the deal closes, and that’s the big risk, right, that the deal falls through.
I don’t see anything that might throw a wrench into the deal, apart from the redemption structure, which the way the common is currently trading, you’re going to see a large number of redemptions. Again, I think the management at Metals Acquisition is going to figure out a way to finance this and get it through even without a majority of the trust being used.
Now, the warrant trades at $1, but as my old boss would say, it trades by invitation only. That means there are not a lot of shares that trade on a daily basis. I wouldn’t chase this much over $1, especially with it trading thinly. It still has several months most likely before the deal closes.
No date has been set and the deal was just announced on March 17, so this is a position I will try to work into over time between now and the deal closing, getting in as close to $1 as possible.