JES

JES: ($0.196) Is this a miner's dream or mirage in the remote Xinjiang basin? JES shares rallied another 9% today to $0.196, extending its 26% surge yesterday, after management revealed that Mineriver - a Xinjiang mining exploration firm in which JES is acquiring a 30% stake – is estimated to hold 4.2b tonnes of resources (mainly magnesium) valued at over US$500b. Investors appear to have voted with their hearts and given management’s claims the benefit of the doubt; yet the numbers seem too good to be true. As a sanity check, we highlight the following points and leave shareholders to draw their own conclusions: 1) According to an Geoscience Australia, the estimated world resources of magnesite are ~8.6b tonnes. This would imply that Mineriver holds about half of the world’s magnesium deposits. 2) Mineriver has the exploration rights over a total mining area of 21.5 sq km in Xinjiang. It seems incredulous that half the world's magnesium resources could be concentrated within such a tiny plot in resource-rich Xinjiang province, which spans 1.6m sq km. 3) It defies common sense logic that the vendors be willing to sell a 30% stake in a supposedly multi-billion dollar company (based on its in-situ mining valuation) for a mere consideration of $127m. At $0.196, JES trades at 0.8x P/B, and in our view, may not offer as much margin of safety for value-oriented investors, considering that the ailing shipbuilder posted an EPS loss of 2.4¢ (equivalent to 9% of its book value) in 3Q13 alone. Key details of the Mineriver transaction: Mineriver holds the mineral exploration rights for the surface mine located in Tuoli District, Tacheng City, in the Xinjiang Uygur Autonomous Region of China. The company will be applying for the mining rights, over which it holds first right of refusal, and has been in discussions for a possible future listing on a recognized stock exchange. JES agreement to buy up to a 30% stake in Mineriver for an aggregate $127m, will be carried out in three tranches: 1) Initial 5% stake for $7m cash; 2) Next 15% stake for $60m consideration; and 3) A call option for a further 10% stake for $60m. JES is expected to pay for 2) and 3) via a combination of cash and/or issue of new shares.