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One of the things we admire about Asia Broadband, Inc. (OTC – AABB) is the simplicity of its successful, unique model and that in our view, there is virtually no ambiguity in assessing a valuation. It’s quite simple, really. Through its wholly owned subsidiary Asia Metals Inc., the Company is generating revenue, along with operating and net profit, and yet has major upside to all of these key operating metrics. At current levels, the stock trades at a ridiculous discount to its peer group on a price/sales basis and could be valued on a P/E basis next year which might even expand the valuation for the stock.
The View from 30,000 Feet
In 2015, the Company entered the mining business with operations focused on the production, supply and sale of precious and base metals, primarily to Asian markets. By the end of the fiscal year of 2016, the Company began small scale mining production in Mexico and completed its first mineral sales. The Company has steadily expanded its mining production and property development over the last several years with increasing mineral sales and the securing of a significant funding source in 2018. The Company’s Phase I Exploration and Development Program concluded near the end of 2018 and the drill results were released near the end of January 2019.
The highlights of the drill results revealed high grade gold mineralization that attested the mine's historical production to date. The most significant gold value intersections were 3.1 meters (m) graded at 10.9 grams per ton (g/t), 4.8 meters (m) graded at 8.7 grams per ton (g/t) and 14.2 meters (m) graded at 5.7 grams per ton (g/t).
The Company's Phase II Exploration and Development Program has now completed over 4,400 meters (m) of the planned 20,000 (m) drilling campaign targeting areas in extended proximity to the Company's mine in Guerrero, Mexico, to further delineate the known historical and new gold vein structures. All required procedural protocols to professionally catalog, secure and prepare core samples for shipment have been completed and the drill core samples have been delivered for assay testing. The Company is expecting the initial drill results of the Phase II Program to be available and announced in September. Once the sample assay results are in hand, it is possible that the size of this opportunity that is four times larger than the original Phase 1 benchmark. As a result, AABB can dramatically scale its operations and increase production.
The Company's new gold mine acquisition campaign is targeting properties that have historic gold production in South America, Central America and Mexico. The focus of the campaign is to duplicate the successful acquisition model of the Company's existing high-density, shallow gold mine property in Guerrero, Mexico, that had known historical gold vein structures prior to AABB's full-scale development and production expansion. AABB has scheduled its acquisition team travel to multiple locations in South America, Central America and Mexico. Representing the Company during the site visits will be a mineral lands agent specializing in the Americas region, a geological consultant to assess production profit potential and representatives from a Joint Venture Partner to analyze the expansion potential of each site location. The expectations of the acquisition initiative are to secure one or more new gold properties with high development potential in the coming weeks.
The Business Model
What should be appealing to investors is AABB’s unusual vertical integration---true soup to nuts, which is a key driver and component of its overall success. The Company seeks shallow mines that may have high grade known vein structures. While production volume may not be large, mineralization is high, thus making production scalable and profitable. AABB’s business process (in simple terms) is exploration, resource production/processing, and direct distribution supply sales to its Asian partners, one of whom is a major investor in the Company and will be making additional investments in AABB, ostensibly to secure physical supply and for use as a hedge against industrial operations. Thus, revenue is divided by brokered mineral sales and resource production.
For the first six months of 2019, AABB has already recorded gross profit (in this case revenue) of $2.75M, with operating and net profit of $2.3M and $2.26M, respectively. Given the strong results thus far in 2019, management is forecasting $6M in gross profit (revenue) for this year and once the Phase II program migrates to production, this figure could be 4-5x higher next year. To be conservative, we have assumed an increase of just over 3x. Some of the operating funds, along with an expected 4Q19 $9M investment with its joint venture partner (Asian sales and investing partner) related to prospective acquisitions will be used for new deals, infrastructure, and expanded operations. Thus, we are not forecasting profit until the transactions are closed and we have a better sense of the future operational cost picture.
Given that this vertically integrated junior miner is generating meaningful revenue with substantially higher sales growth and production on the horizon via its current production site and future acquisitions, the current valuation is absurdly low. At present, the stock trades less than 1x current gross profit (revenue). As evidenced by Table I, found later in this report, the median price/trailing twelve-month sales valuation for AABB’s peer group is 6.7x. If current valuations hold, and it very likely that they move higher, given global economic concerns, the stock should trade to the $0.09 level in the next 4-6 months, which would be 6.7x its 2019, or 12-month trailing revenue. Looking out a year from today, we believe the stock could trade to $0.24 which would represent 5.4x current year (2020) revenue, the median valuation afforded the peer group.
As described in the next section, the metrics could rise if the likelihood of a recession rises next year, or if current gold price forecast rises come to fruition during 2020. Clearly, AABB partner must believe in these projections, given its relationship with the Company. Separately, given that AABB is more profitable than most revenue-generating junior miners, its valuation could rise if the Street elects to value the stock based on P/E rather than P/S, as it does with select, larger players.
Even casual followers of gold are aware of the ride the yellow metal has taken these past several high. years. Since its 2011 peak, the price of gold has dropped significantly after completing an extended bull market and the 10-year and 1-year charts below illustrate these events. Interestingly, even with the decline in prices since 2011, gold, at around $1550, is much higher than it was 10 years ago. In fact, it recently reached a six-month high, due to concerns over a global recession among other monetary factors such as negative bond yields, debt levels, etc. In our view, the confluence of 3 themes makes gold stocks and junior miners in particular, an unusually compelling opportunity that could yield substantial rewards.
An investment in gold mining stocks serves a number of purposes. Geopolitical and economic uncertainty such as the current tenuous trade situation between the US and China have prompted global investors to invest in gold as a hard currency and in key equities as well. The unnerving negative bond yields clearly played a role, as noted above. To that end, gold is arguably the most popular alternative to stock and fixed income portfolios as it remains a key tool in hedging stock portfolios, combating inflation, and protecting downside risk for fixed income. Today, a tug-of-war persists as it pertains to gold and public/monetary policy. The number of rate decreases (if any) in the U.S. is a bit uncertain at present—despite the current economic situation. While we could see a healthy modest correction in the near term, many prognostications suggest higher levels by year-end 2019. Moreover, if we do enter into a recession next year, Citigroup believes gold could reach the vaunted $2000 figure. It should be noted that the all-time high for the yellow metal was north of $1900. At present, the belief is that there is a 50/50 chance a recession could occur. Thus, we expect continuing gains in gold and gold-related equities next year.
Figure 1: Junior Miner Cycles
An interesting piece penned by Sprott reinforces the widely held belief regarding the mining sector’s cyclicality. During the gold market decline, funding and subsequent drilling programs didn’t exactly set the world on fire. Still, the appetite for new “discoveries” by investors did not wane—just the real opportunities. Although the recent bottom for gold prices occurred some time ago, there is a lag between gold prices and subsequent (and much greater moves) in mining stocks. This is due to the time factor; mapping, feasibility studies, permitting, exploration, etc. which must be borne. However, not only are we in the favorable part of the ebb/flow junior miner cycle for a number of companies such as AABB, but with new finds occurring of late, investor and Major Miner appetites are just beginning to be sated. Since we are in the early innings of this discovery-to-development cycle of gold by the juniors—often in new locales, resurgence is now underway as many firms exit the pre-discovery phase and enter the profitable discovery, production and sale stage, which drive valuations.
Mining company developments tend to largely occur in bunches so it is no surprise that the same goes for their stocks. Junior mining stocks in particular reflect this pattern, with big moves higher occurring in conjunction with news/progress. Now that the spigot of available funding is nigh it is not uncommon to see stocks enjoy substantial price movement and volume spikes. The key is to identify the junior miners who offer a sustainable, profitable and replicable business model that offer major growth with the most favorable risk/reward. Enter Asia Broadband, Inc.
A RECIPE FOR SUCCESS
The novel vertically integrated approach, top-line organic growth and the prospect of growth through acquisition of two targets in South America and/or Mexico that boast historical, and scalable production means that the AABB model is replicable in multiple markets. Moreover, with a direct sales partner of physical product, AABB is unusually well-positioned for success. A large part of this standing is its Asian joint venture partner. This partner has invested $5M in the Company and will invest an additional $9M later this year as part of a planned multi-year, $34M equity financing for (ultimately) 40% of the Company in the next three years. Per the JV per the agreement, $5M was received in
Looking ahead, two key milestones include the conclusion and initial results release of its Phase II drill program, later this year. This event should coincide with the $9M financing and facility expansion to ensure the infrastructure is set for substantial increase in production, beginning in early 2020. The other major milestone involves the closing of the prospective acquisitions later this year as well. If the model is indeed replicable, it is possible that following evaluation, drilling and other programs, the deal could become profitable in 12-18 months, especially if the mines are shallow.
For the first six months of 2019, AABB has already recorded gross profit (in this case revenue) of $2.75M, with operating and net profit of $2.3M and $2.26M, respectively. Brokered mineral sales were $2.25M of the total and the Company boasts very high operating and net profit margins. (The P&L from the most recent quarterly filing can be found below.) The Company’s balance sheet is very strong for Company of its size and position. As of June 30, 2019, AABB had $7.7M in cash and $12.5M in assets. With over $10.6M in shareholder’s equity, the debt on the books of $1.9M is minimal and the stock currently trades at a mere 0.5x book value, much lower than typical junior miners.
Given the strong results thus far in 2019, management is forecasting $6M in gross profit (revenue) for this year and once the Phase II program migrates to production, this figure could be 4-5x higher next year. To be conservative, we have assumed an increase of just over 3x to $20M. Some of the operating funds, along with an expected future $9M investment with its joint venture partner (Asian sales and investing partner) related to prospective acquisitions will be used for new deals, infrastructure, and expanded operations, Thus, we are not forecasting profit until the transactions are closed and we have a better sense of the future operational cost picture.
To say the current valuation is too low is probably an understatement, for all of the reasons cited above. At present, the stock trades less than 1x current gross profit (revenue). As evidenced by the table below, the median price/trailing twelve-month sales valuation for AABB’s peer group is 6.7x. It should be noted that this peer group is made up exclusively of revenue-generating gold resource companies with operations in Mexico or South America---therefore these are very relevant comparables.
If current valuations hold, and it very likely that they move higher, given global economic concerns, the stock should trade to the $0.09 level in the next 4-6 months, which would be 6.7x its 2019, or 12-month trailing revenue. Looking out a year from today, we believe the stock could trade to $0.24 which would represent 5.4x current year (2020) revenue, the median valuation afforded the peer group.
These metrics could rise if the likelihood of a recession rises next year, or if current gold forecast rises come to fruition during 2020. Separately, given that AABB is more profitable than most revenue-generating junior miners, its valuation could rise if the Street elects to value the stock based on P/E rather than P/S, as it does with select, larger players.
AABB EXECUTIVE MANAGEMENT TEAM
James Gilbert, President, Chief Executive Officer
For the past 10 years, Mr. Gilbert has been a business consult for companies in Mexico spanning a variety of industries including mining, manufacturing, transportation, safety and security. He has developed a vast network of corporate and government contacts in many of the state jurisdictions and has proven expertise in the deployment, facilitation and coordination of professional services and labor teams in Mexico. Mr. Gilbert also brings an acute business acumen to every facet of the Company, producing the efficient achievement of corporate milestones and the execution of business plans.
Mr. Wong is an industrial supply and shipping logistics expert within Asian markets. Source product validation, supply verification, quality control and delivery of industrial commodities from Central and South America to Asian buyers has been Mr. Wong’s focus for past the 12 years.
Jirong Luo, Advisor, Asian Markets and Business Development
Mr. Luo specializes in business development and relationship management in China and other Asian markets. He is a negotiation and contract expert that has an extensive client book of commercial metal and commodity buyers.
In our view, AABB’s biggest risks relate to exploration and development including results from future drill programs, resource estimates and technical/economic studies related to prospective acquisitions. However, in our view, this risk is largely mitigated by the historical production history, known vein characteristics and other considerations of any potential transaction. Management has a specific set of criteria for any and all acquisitions. Changes in supply/demand/pricing are typical future concerns and are also consistent with firms of AABB’s size and standing. However, if the brokered mineral vertical were to experience a reduction in sales AABB financial results would be negatively impacted. Still, given the close relationship with its Asian partners who are active investors and play a role in operations, we believe that this risk is markedly reduced.
Volatility and liquidity are typical concerns for microcap stocks that trade on the stock market, especially those that are not generating revenue. Finally, the shares outstanding of this stock could increase due to potential capital needs or to execute future property acquisitions, which are events that will likely occur before year-end. as outlined . Since the proceeds of any future funding would be used in large part to advance exploration and development efforts, we believe that any dilutive effect from such a funding would be more than offset by related increases in market value.
Leveraging its unique vertical integration, an active joint venture partner and a targeted approach, AABB is poised to emerge as one of the industry’s fastest growing junior resource companies in the coming months. AABB generates meaningful revenue and will grow both organically and through acquisitions. Management seeks to replicate its current model in its targeted geography and is on pace to close two new acquisitions before year-end. With an emphasis on shallow mines with a history of production and known vein structures, AABB is well-positioned to expand its footprint in Mexico and South America.
RECENT TRADING HISTORY FOR AABB GROUP INC.
Senior Analyst: Robert Goldman
Rob Goldman founded Goldman Small Cap Research in 2009 and has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. In addition to his work leading GSCR, Rob serves as the Director of Research for Marble Arch Research, Inc. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
I, Robert Goldman, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report.
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