Tim Treadgold: Jupiter is rising (at last)

The best part of two years ago I posed a question for investors; was it worth participating in the float of manganese producer Jupiter Mines (ASX:JMS) at 40c a share, or would it be a better buy after listing?

‘Wait’ was the correct response, because there have only been a few occasions when Jupiter has traded above its 40c issue price with the stock spending more time close to its all-time low of 24c, reached around this time last year.

What went wrong for Jupiter, which has a 49.9 per cent stake in one of the world’s best manganese mines, Tshipi in South Africa, was a slump in the price of the steel-hardening material caused by over-supply and sluggish demand in China.

Times change and so do opinions, including a positive report on Australian manganese stocks on Stockhead last week.

Until the coronavirus bruised investor confidence, the answer to the stronger-year question was yes, if only because manganese tends to rise and fall with global steel demand, just as iron ore does.

But, assuming the spread of the coronavirus is controlled in a reasonable time there is every reason to feel confident that the overall improvement in commodity market, which started with the China/U.S. trade truce, will resume.

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What makes Jupiter particularly interesting is that it is a stock which has already had its baptism of selling, as was suggested on Stockhead in early 2018, and is now much more than an over-priced new float.

Jupiter’s negative factors have been well aired. There’s the see-saw manganese market. The mine’s location in a difficult country, and a complicated mine-ownership structure caused by South Africa’s black empowerment laws.

The good news is that the positive factors are starting to outweigh the negative, including a low cost of production which means the Tshipi mine can ride out manganese price downturns, a reasonable pile of cash ($93 million), no debt, a generous dividend policy and now a plan to boost production by 50 per cent.

A glimpse of Jupiter’s improving fundamentals could be seen in the company’s last quarterly report filed in mid-December. It showed a business which sold 867,500 tonnes of manganese ore in the quarter at a solid price of $US4.49 per dry metric tonne unit (the strange way manganese is traded).

The average cost of production, and this is an annoying feature of Jupiter, was said to be 31.69 South African rand per dry metric tonne.

Why the company doesn’t convert to a common financial yardstick to make life easier for investors and analysts is an interesting question, but for the curious 31.69 rand is currently around $US3.10, indicating a cash margin of around $US1.39/dmtu on manganese sold.

When the stock floated in 2018 the manganese price was $US7.50/dmtu – and that was a reason for suggesting Jupiter might be a better buy later because the manganese price was overdue for a correction – which it did, taking the company’s share price with it.

Despite the lower price for manganese Jupiter has maintained a strong dividend policy (the latest is A4c a share), and unveiled a “concept study” for the expansion of Tshipi.

It’s the expansion study which has caught to eye of the handful of stock-broking firms and investment banks which follow Jupiter because it promises to increased profitability for the simple reason that it should further lower unit costs as more ore is shifted through modestly expanded facilities at a time of potentially increased demand.

India’s steel industry, for example, is reported to be facing a manganese shortage with planned closure of seven small low-grade mines which could cut national production by 16 per cent — and open the market to increased imports, especially of high-grade ore such as that mined at Tshipi.

The expansion study, which is an early-stage look at how output Tshipi can be lifted (and at what cost) has focussed on an increase from three million tonnes a year to 4.5m/t at an estimated capital cost of around $A100 million – with Jupiter up for roughly half that.

The next stage in the expansion process is a full-blown feasibility study, expected to be finished later this year.

Two recent stockbroker research reports like the expansion plan. Hartleys said the economics of the proposal looked very strong “on paper” with the big Tshipi orebody easily able to handle the extra tonnes.

Foster Stockbroking said the expansion would be a “logical initiative” for the mine with its 30-year life based on current reserves with the extra production cutting mine life to a theoretical 20 years – a simple calculation that make no allowance for discovery or a corporate deal over manganese in other nearby deposits.

Hartleys is the more conservative of the brokers, retaining a buy tip and lifting its target price for the stock from 40c to 47c, well ahead of last sales at 30c.

Foster said the proposed expansion would lift its valuation of Jupiter by 19c to 75c, but made an allowance for the risks involved with an early-stage concept to lift its price tip from 56c to 60c.

There are good reasons to avoid Jupiter, including the location of its mine, difficulties in reading its accounts which use multiple currencies (ore sold in U.S. dollars, costs calculated in South African rand, financial reports and dividends in Australian dollars – what’s that all about!).

Quite simply, nothing needs to be as difficult as Jupiter makes things, but once you cut through the manganese fog (who talks in dry metric tonnes?) and currency complications (why report in rand, U.S. and Australian dollars?) you find a company which has succeeded after its unimpressive float and is now steaming ahead into an expanding manganese market with a world-class low-cost and expandable mine.

Perhaps it’s time for investors to take a fresh look — but keep your currency converter handy.