It’s been a pretty active week for LLEN. (I guess Mr. Market’s been a little forgetful with his meds…)
Back on November 29 LLEN announced that it had entered into an agreement with a mine in Colorado (the Bowie Mine) to loan them $3M at 9%, with the option to acquire a 9% stake for a “nominal” price.
If that sounds like a great deal, that’s because it is. I have to guess a little since they only release output figures annually, but LLEN’s total mining output is probably in the 700,000-750,000 ton range. The Bowie Mine’s output is between 4 and 5 million – split the difference and call it 4.5M tons. A 9% share of that comes to 405,000 tons. It’s a bit of an oversimplification to simply add on LLEN’s minority interest to their existing capacity, but from an earnings standpoint it increases their output around 54% for a small price. They haven’t revealed how small that price is, but any amount smaller than the loan itself would be a great deal.
LLEN had to pay several million dollars for each of the mines it currently owns and several million more to renovate them with new equipment. Even if the equity interest in Bowie Mines costs $3M, the full loan amount, it would be far less expensive on a dollars per ton of output basis than any of their present mines. For reference, the Ping Yi Mine (their newest acquisition) cost $3.96M without even including post-acquisition renovation expenses. That price bought an output of 300,000 tons per year once all renovations are complete. LLEN got a pretty good return on that deal: fiscal year 2010 revenues of $22.7M and $8.2M of net profit (the payback period on that one is pretty quick, ain’t it?).
The Bowie Mine deal looks even better. For a lower price – especially once the interest payments are subtracted out of the equity option price – the mine acquires 33% more output. LLEN doesn’t release quality specifications, so it’s impossible to directly compare the output quality of the Bowie Mine with their existing mines. But, since the Bowie Mine produces very high quality coal, it’s probably safe to say that the Bowie coal would sell for at least as much as the coal LLEN is already selling. The deal looks like solid value from every perspective.
I was actually a bit suspicious of how well the deal seems to work out for LLEN until I saw a local newspaper article which mentioned that mine’s property taxes are currently past due. This explains two things: (a) why the terms seemed so favorable and (b) why the press release emphasizes that the loans are co-senior secured. Bowie seems to have fallen on hard times, which presumably allowed LLEN to dictate terms. The seniority is appealing too, since it guarantees LLEN a bigger piece of the pie if Bowie can’t turn things around. Unless Bowie’s debt burden is truly crushing (and unless all of said debt is owed to GE Energy Financial, the other senior creditor), the value of the Bowie Mine’s reserves should fetch enough in a sale to recover the loan’s full value. It looks like LLEN has great downside protection in addition to its clear upside.
On another positive note, the company has released preliminary financial results for the quarter ending 10/31. Revenue hit a new quarterly high at $57.4M and net income likewise increased to $12.7M. Still looking good.
Local News: http://www.deltacountyindependent.com/index.php?option=com_content&view=article&id=18642:bowie-borrows-3-million-to-continue-operations&catid=34:delta&Itemid=347
Financial Results: http://www.thestreet.com/story/10942578/1/ll-energy-announces-preliminary-second-quarter-fiscal-year-2011-financial-results.html