Cline Mining Corporation: Time to Buy?

by JDH on March 26, 2010

It’s time to discuss a blast from the past: CMK.TO – Cline Mining Corporation. My last detailed post on Cline was back in January, 2007 where I discussed PNP.TO – Pinetree Capital Ltd. ‘s purchases of shares in Cline. At the end of December, 2009 Pinetree owned 13.5 million shares of Cline, or about 16% of the outstanding shares, based on numbers from Cline’s website. Obviously something is up; here’s the chart:

What’s up, other than the stock price, are two recent developments.

First, on February 11, Cline announced $6.9 million in new financing; $3 million in new debt, and $3.9 million in new equity, priced at 30 cents a unit (one share and one warrant exerciseable at 40 cents).

Then, on March 16, Cline announced a new NI 43-101 report. Here’s the story:

Cline Mining Corporation owns the New Elk Coal Mine, located in Las Animas County, Colorado. First production of steel-making metallurgical coal is scheduled to commence in the fourth quarter of this year. The mine has a 20 year projected life span, with production hitting 3 million tons annually when in full production by 2013. This is not a new mine. According to their website:

The New Elk Mine was opened in 1951 by the CF&I Steel Company to provide metallurgical coking coal for its blast furnace iron and steel production plant at Pueblo, Colorado. The CF&I plant was converted to direct electrolytic reduction of steel in 1981 eliminating its need for coking coal and the mine was sold to Wyoming Fuels who continued operation of the mine through 1989; the coal preparation plant, which was built in 1984 to improve product coal specification, continued operating with coal from other nearby mines until 1996.

In other words, this mine has a long history of production. There is no discovery risk, or production risk, and it’s in a mine friendly jurisdiction.

The problem? The capital cost required to bring the New Elk coal mine into full production by 2013 is $65 million. At their year end on November 30, 2009 they had virtually no cash, so the $6.9 million they just raised won’t be enough to finish the job. Further financing will be necessary.

However, the good news is that the internal rate of return on the project is 98.65%, and the net present value of the investment is US $1.041 billion (assuming a 10% discount rate). The payback period on the $65 million investment is only 1.58 years.

So, let’s do the math. If the mine is worth $1 billion, and there are 93,397,942 shares outstanding (including 8 million in options), each share is conceivably worth over $10 each.

So, at around $1.35 per share, this looks like a great buy. Of course, earlier this month, at 50 cents, it was an even better buy.

I currently don’t own any shares, and I don’t like the idea of buying after a triple, which is what’s happened this year. However, I will place some bids at below current market value, with a view to accumulating a position.

Full disclosure: this is not a current recommendation of Dines or Casey, so you are on your own on this one.

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