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MDM Engineering Buy at 226.5p Background: We tipped this one at 184.5p just after its IPO. 3 weeks later we are already well ahead. But there is more to come. AIM welcomed MDM Engineering to the market on 12th May. Prior to listing the South African mining services company raised £4.4 million net by placing 3.45 million new shares with institutions at 145p. The shares have performed very well since the first day of dealings and now trade at 226.5p, valuing the business at £84.84 million. Operations: MDM is a minerals process and project management company which provides services mainly to African based mining companies. The company provides services such as preliminary and bankable feasibility studies, plant design, construction and commissioning to junior and mid-tier miners. MDM was founded in November 2006 and in February 2007 acquired certain assets and intellectual property of MDM Ferroman, a liquidated mining services company with a history of providing services to the African mining industry. DMF's key staff were also hired, including founder George Bennett who is now on the board of the company. Following the acquisition MDM changed the business model from a fixed price basis to a cost plus margin based model, which reduces this risks of increased costs for the company from over-run on a project. It was the fixed price model that caused the former business to run into financial problems. As at 7th May 2008 MDM had on its order book four confirmed or active projects along with seven scoping and feasibility studies. These projects range across gold, copper, diamonds, cobalt, nickel and manganese projects with companies including AIM listed ZincOx Resources and Mano River Resources, ASX listed OmegaCorp, and Johannesburg Stock Exchange listed Slimmer and Jack Mines, amongst others. MDM is also in discussions with prospective clients in relation to a further four studies and three execution projects. The total value of the confirmed or active projects is around $400 million with the total value of further projects expected to result from initial studies is estimated to be around $1 billion if the studies result in active projects commencing. Historically, studies which resulted in a project being undertaken saw further project contracts given to the former business in over 90% of cases. MDM has continued to convert a significant amount of bankable feasibility studies into project contracts since the acquisition. The company has estimated that it will secure between two and four further projects in the current year to March 2009. Business Development: With the new funds in the bank from the IPO fundraising MDM is looking to take on more, as well as larger projects. The company will also look to make relevant acquisitions within the engineering sector. In terms of its geographical base the company intends to continue its focus on Africa where its brand is the strongest. However, members of the company technical team have experience of working outside the continent and as such MDM would consider working in other areas. While the company is currently concentrating on minerals including gold, uranium, cobalt, manganese and nickel its team has experience in working in other minerals and the company will be looking to expand its services into these areas. In addition, MDM is looking into supplying maintenance services to plants that it has constructed in order to diversify its income stream. Management: Non-Executive Chairman, Bill Nairn, has over 40 years experience in the mining industry. He is a former technical director of Anglo American and served on the company's board. He has also been a director of Anglo Gold Ashanti, JCI Limited, Avmin and Kumba Resources. CEO, Grant Lowman, has a background in finance and resources having worked for Highveld Steel, Industrial Development Corporation First National Bank of South Africa and Rand Merchant Bank. He joined MDM at the beginning of 2007 after four years as group executive of project finance at Bateman Engineering. Executive Director, George Bennett, has almost two decades of experience in investment banking and was the former Head of Mining Research Sales at HSBC, South Africa. Following that he became CEO of Shanta Gold and was the former CEO of MDM until Lowman took over in February this year.
Conclusion: In the 11 months to 31st December 2007 MDM generated revenues of $8.9 million, with pre-tax profits of $3 million. Cash flow from operations was strong at $2.76 million. At the end of the period the balance sheet showed $4.4 million of cash and a long term loan plus interest bearing liabilities of just under $0.7 million, however the loan, which amounted to $0.66 million has since been repaid. Following the IPO fundraising we estimate net cash to stand at around £6 million. In the first three months of 2008 MDM's four active projects delivered a total average month revenue stream of $1.5 million. Over the next four months as several projects increase in activity monthly revenues are expected to rise to around $3.5 million. In its admission document the company has revealed illustrative financial projections for the year to 31st March 2009. Revenues for the year are expected to be around $56.6 million with pre-tax profits of $22 million based on the projects that the company is currently working on. There are of course risks to these numbers being met, the main problem perhaps being the recruitment of new and relevantly qualified staff to work on the projects. The company is looking to increase its workforce by around 50% to 150 by July this year and this could be tricky considering the current shortage of skilled mining personnel available. In addition to the existing studies the company is working on several other studies, which if converted into full projects, could significantly increase the above forecasts, making the current price look even better value than it does now. Considering the company's previous success in converting studies into further contracts we are highly optimistic about its prospects. Another attraction to investors will be the fact that the company believes it will be able to distribute around half of its post-tax profits in dividend payments subject to financial performance and financial position. In February we claimed that Kentz was the best IPO of the year so far but we now give that title to MDM. Buy. Key Data EPIC: MDM
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