BHP - Filo Mining Insiders Dumping Shares: Should You Join The Exodus?

Summary

• Filo Mining Corp.'s Filo del Sol mining project carries significant permitting and financing risk as it is not yet permitted.
• The upfront capital expenditure requirement of $1.27 billion, based on 2019 data, may increase when updated in the feasibility study.
• Insiders have been net sellers of Filo Mining shares, with approximately C$1.8 million worth of shares sold over the past year.
• Should you join insiders and sell or avoid Filo Mining Corp. stock? I break down my analysis below.

Filo Mining Overview

Filo Mining Corp.'s ( FLMMF ) Filo del Sol is a massive mining project that boasts an impressive indicated resource of 4.4 million oz gold, 147 million oz silver, and 3.1 billion lbs. of copper. With eight rigs currently drilling and plans to ramp up to 11 rigs later in the season, the Filo del Sol project is definitely worth keeping an eye on because the resource may get even bigger.

However, I don't believe Filo Mining's current valuation is very attractive for new investors, and I view the stock as a sell here.

Key points of this article include:

• The project is not yet permitted and carries significant permitting and financing risk.
• The upfront capex requirement of $1.27 billion seems reasonable for the project's size, but it's based on 2019 data and is likely to get more expensive when updated in the feasibility study.
• Finally, insiders have been net sellers of Filo Mining shares with approximately C$1.8 million worth of shares sold over the past year.

I break down these key points below in my analysis of Filo Mining, including an overview of its project, a look at the stock's current valuation, its various resource and permitting risks, and my concluding thoughts.

Filo del Sol Project

Filo Mining is the owner of Filo del Sol, a huge copper and precious metals project that's home to massive drill holes, which have included several results of over 1,000 meters intersecting grades of 1%+ copper equivalent.

Results like this have certainly gained the attention of the investing community, especially on social media and investing forums. Copper is a much-needed metal for the economy, especially for the future development of electric vehicles (EVs). And its drill results are impressive: Filo Mining regularly tops the charts of MinerDeck's top copper intercepts report.

This project hosts a high-sulphidation epithermal copper-gold-silver deposit associated with a large porphyry copper-gold system; the existing Cu-Au-Ag resource is supported by a robust oxide project.

Founder Lukas Lundin of Lundin Mining ( LUNMF ) has stated that the potential size and scale of the Filo del Sol deposit is unparalleled to any project he has been involved with and that the drill results are truly exceptional and rank among the best intercepts of his career. Lundin has also been quoted as saying that it's growing into one of the bigger copper-gold-silver discoveries ever made.

With 8 rigs currently drilling and plans to ramp up to 11 rigs later in the season, the Filo del Sol project is definitely worth keeping an eye on because the resource may get even bigger than its current size.

Readers should also note that Filo Mining has proposed a name change to "Filo Corp." This change is going to be made to better align with the company's direction, especially if it plans to acquire new exploration and development projects in the future.

Why Filo Doesn't Look Like a Great Buy

While it's a massive project and the pre-feasibility study results were certainly positive, I don't believe Filo Mining's current valuation is very attractive for new investors.

Filo currently has a market cap of approximately $2.3 billion, as of writing on Jan. 24. At spot commodity prices, Filo Del Sol carries a post-tax NPV of $2.61 billion; that's using $4 copper, $1,800/oz gold, and $26/oz silver. The upside commodity price case gives the project a value of $3.26 billion. There's little upside based on those figures alone.

That NPV comes from an estimated annual output of 159,000ozAu, 8.65 million ozAg, and 67,000 tonnes of copper, with recoveries ranging from 70% to 82%. The life of mine cash cost comes in pretty low at $1.23/lb copper equivalent.

However, the upfront capex requirement of $1.27 billion is a concern. Even though the project's value comes in north of $2 billion at spot metals prices, I feel that is a high price tag and it may be hard to finance from equity and debt. For example, Filo would need to issue approximately 50 million shares and dilute shareholders by 40% if it raised that money via equity alone.

More importantly, the capex estimates are also based on 2019 figures, so these cost estimates will certainly be higher when the feasibility study is released as it will factor in the inflation we've experienced since 2019. Higher upfront capex may result in a lower project NPV.

Cash burn high

Filo will need to raise money soon to fund its 2023 exploration program and development work. The last quarterly report as of September 2022 shows a cash balance of $91.6 million.

Filo is a developer that produces no cash flow, and it is burning approximately $20-$25 million per quarter. So it's likely that Filo ended the year with cash of about $70 million, and it'll probably need to tap into the markets soon; shareholder dilution may limit the stock's upside.

Resource and Permitting Risks are Concerning

Investors should note that Filo's resource is currently weighted towards the indicated category. This means there's more uncertainty surrounding their size, quality, and continuity. They're considered less reliable than both measured resources and proven and probable reserves. So they have potential, but they're not yet considered economically or technically feasible to extract. Filo needs to do more infill drilling to prove them up.

Permitting risks a concern, too. The Filo del Sol project is massive, spanning two countries, Argentina and Chile. This means that it's subject to permitting requirements in both locations, making it more difficult to secure the necessary permits. Investors should be aware of the permitting challenges that can arise with cross-border projects, as seen with Barrick's Pascua Lama project , which has faced controversy and public protest in Chile.

To move forward with the project, Filo del Sol will need to pass comprehensive environmental assessments in Argentina and an environmental impact assessment study in Chile. Also note that after receiving environmental approvals, the company will still need to obtain additional permits, licenses, authorizations, and certificates to proceed with construction.

Filo del Sol has highlighted in its annual report that failure to obtain or comply with the necessary permits can result in fines, suspension or revocation of permits, and other penalties, and may also face delays and added costs in obtaining and maintaining compliance with these permits.

There is also a risk of political and economic instability in Argentina, as the Filo del Sol project is located in San Juan Province. The government of Argentina has defaulted on foreign debt repayments and official loans in the past, and may alter or impose additional requirements or policies that could negatively impact its activities or ability to attract partners or financing.

Lastly, investors should consider the various environmental and socio-political risks of this project. Filo Del Sol is a massive project that must meet environmental protection standards that meet or exceed existing requirements in the countries where it conducts activities. It's not a sure thing, as the mine could potentially produce a significant amount of CO2 emissions, which could lead to opposition from nearby residents and environmental advocates, and potentially impact its development.

Insiders at Filo Mining are Offloading Shares

Now getting to the crux of the matter, even though insiders own approximately 5% of Filo Mining's stock, they have been consistently selling their shares over the past year, taking advantage of the rising stock price to secure their profits.

Insider selling can be an important factor to consider for investors. But it should not be the only thing to base your decision on. It can be a sign of a lack of confidence in the company's future by its management team, but it can also be due to personal financial needs or diversifying investments. We simply don't know why the insider is selling shares.

Still, I think the recent insider selling from Filo insiders is a potential red flag and should be taken into consideration along with the other factors mentioned in this article.

Insiders have sold C$1.8 million worth of shares in the past 12 months, according to MarketBeat , compared to just C$76,451 worth of insider purchases.

Here is a table breaking down Filo Mining's insider transactions over the past 2 years. Most of these insider sales occurred at prices of over C$17 per share (Filo Mining trades at C$25 currently).

Many of the company's insiders participated in Filo's 2019 private placement financing , where it issued 7.25 million common shares at a bargain price of C$2.75 per share.

Filo Mining: The Bottom Line

Filo Mining owns an impressive project and has backing from some major investors, including the Lundin family and BHP ( BHP ). The size of this deposit is massive and may even get larger from here. Drill results will likely continue to earn the praise of the retail investing crowd.

But I think the risk vs. reward here is not favorable for new investors. The valuation does not look very compelling given the likelihood of higher upfront capex and the significant permitting risks outlined above. Insiders appear to agree with that sentiment with close to C$2 million worth of stock sold in the past year.

I will also remind investors that while Filo's current resource is massive, it is weighted in indicated resources, which are not proven and probable reserves, and are based on limited data and analysis.

I wouldn't necessarily short Filo Mining Corp. shares here given the potential for a takeover, more excellent drill results, or some other bullish news, but I would strongly recommend avoiding the stock.

What do you think of Filo Mining? Let me know below in the comments.

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