Metro Mining Ramping up Bauxite Production, Leveraging Scale to Boost Margins

• Metro Mining is ramping up bauxite production to 6-7 million tons in 2023, leveraging scale to boost margins.
• Bauxite demand is growing 8%+ annually due to aluminium's role in decarbonisation and EVs. Supply constraints boost prices.
• Metro has derisked operations by securing multi-year contracts and locking in freight rates and fuel costs.
• The company has steadily increased productivity and optimised operations, targeting $14/ton margins at 6 million tons.
• The expansion project has 80% IRR and could boost NPV to $600M. Currently trading around $80M market cap.

About Metro Mining

Australian miner Metro Mining is in the midst of a major growth phase, scaling up bauxite production just as demand for the mineral is surging. Bauxite is seeing over 8% annual growth driven by decarbonisation and aluminium's key role in electric vehicles (EVs), presenting a compelling opportunity for scaled producers like Metro.

As the only pure-play bauxite producer on the ASX, Metro is leveraging its proprietary mine and favourable geography to crank production. After overcoming COVID-related setbacks, CEO Simon Wensley has led a turnaround centred on building scale, de-risking operations, and boosting productivity. With the expansion project on track for 2023 completion, Metro is ramping up to 6-7 million tons while locking in contracts and costs, driving significantly higher margins.

Interview with CEO & Managing Director, Simon Wensley

Bauxite and Aluminium Crucial for Decarbonization

For those unfamiliar, bauxite is the only ore used to produce primary aluminium. Aluminium's conductivity and strength compared to alternatives like copper and steel make it a key metal enabling decarbonisation across transportation, renewable energy infrastructure, batteries and beyond. Aluminium is seeing surging global demand that will require bauxite supply to grow 8%+ annually this decade.

"Bauxite is the only way that you can make primary aluminium so bauxite has a content of alumina or aluminium oxide that is refined to make a white powder, which is pure alumina, and that is smelted to make aluminium metal."

While headlines suggest slowing Chinese growth, the aluminium and EV markets there are accelerating. Data shows China's bauxite imports are already up 15% in 2023, sucking in global supply. China is expected to drive bauxite imports 18-20 million tons higher in the near term - 3x Metro's expanded capacity. Other regions like India will take over in the longer term, but China will dominate the next 2-3 years.

Turnaround Centered on Scale, Derisking and Productivity

Metro's turnaround under new leadership focused on building production scale, derisking the business, and boosting productivity and margins. In 2021, COVID impacts had halted production and sales fell to just 2 million tons.

The first priority was securing multi-year contracts with customers to support the expansion. Sales rebuilt rapidly to 2.8 million tons in 2021 and 3.5 million tons in 2022, providing cash flow and confidence to proceed. Long-term contracts now underpin production through 2023 and beyond.

"The economy of scale here will deliver those margins and I think the expansion elements we put in place will deliver the resilience from a performance or a productivity point of view that that says, well look we we can now withstand a little more weather interruptions."

Next was addressing Metro's cost base starting with its largest cost: freight. By investing in a floating crane, the company has been able to load larger 180,000-ton "cape-size" vessels, nearly halving freight costs. This also enabled Metro to lock in multi-year freight contracts, hedging volatility. Fuel costs were also secured at fixed rates through 2023.

On the operational side, upgraded mining equipment and processing delivered steady productivity gains towards the 6-7 million ton target. New screening and loading processes boosted throughput, while optimised rosters retained Metro's loyal workforce despite tight Australian labour markets. The company is already achieving an annualized production of 5 million tons for 2023.

Financial Turnaround Becoming Visible

As the operational turnaround takes hold, the financial benefits are becoming tangible. At 2 million tons production, Metro was unprofitable with negative EBITDA. But with production scaled up and costs optimised, Metro is now achieving close to $14 per ton margins at the 6 million ton run rate.

In the most recent quarter, the company generated record production and became EBITDA positive for the second consecutive quarter. Management targets $90M EBITDA in 2023 on 6-7 million tons of production. And with bauxite prices up 20%+ in 2023, margins appear headed higher.

The $32M expansion project is fully funded, slightly below budget, and utilizes infrastructure from Metro's existing operation. It offers exceptionally strong returns, with an IRR of 80%+ at conservative bauxite pricing. NPV could reach $400-600M compared to the current ~$80M market cap. The expansion sets Metro up for decades of low-cost production close to key Asian markets.

Overall, Metro Mining has managed an impressive turnaround under its new leadership team. It has built scale, derisked the business, and become consistently profitable. As the market recognizes Metro's cash generation potential, the undervalued shares appear primed for substantial upside. Management expects to reach 8 million tons of production in the coming years, supporting further growth. For investors, Metro Mining offers leveraged exposure to the burgeoning global aluminium and EV revolution.

The Investment Thesis for Metro Mining

• Leveraged play on surging bauxite demand driven by aluminium and EVs. Forecast 8%+ CAGR.
• Proprietary, low-cost bauxite mine in Queensland with expansion fully funded.
• Turnaround and optimization already delivering $14/ton margins at a 6M ton rate.
• Management focused on derisking operations and costs.
• 80%+ IRR on the expansion project, could boost NPV to $400-600M.
• Trading at a steep discount to NPV with profitable growth funding.