0760 covers spreads - · pdf filema hew keane analyst, ... bc iron – more to mine at ......
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Th e Natural Choice in ResourcesARGONAUT
Licenced in Australia & Hong Kong for Stockbroking & Corporate FinanceCorporate Advisers | Stockbroking & Research | Special Situations Financing
Metals & Mining Research“Return of the Stock Picker”
February 2013
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Argonaut Securities Research Return of the stock picker
Contents
OVERVIEW
Introduction .......................................................................................................................... 1
Commodity price assumptions .................................................................................................. 2
Summary of recommendations ................................................................................................. 3
Earnings & Metrics summary .................................................................................................... 5
Peer Comps ........................................................................................................................... 7
STOCKS
Producers
BC Iron – More to mine at Nullagine ........................................................................................ 11
Endeavour – Setting sail ........................................................................................................ 15
Independence Group – Diversified mid cap miner ..................................................................... 19
Northern Star – 100koz in CY13 ............................................................................................. 23
Paladin – Emerging from the Nuclear Winter ............................................................................ 27
Western Areas – Ten in a row ................................................................................................. 31
Pre-producers
Azumah – Cheap cheap ......................................................................................................... 35
Dacian Gold – Flying start ...................................................................................................... 39
Papillon – Bigger, higher, faster .............................................................................................. 43
Renaissance – Moving into a golden age .................................................................................. 47
OTHER
Summary of recommendations (Resource Services) .................................................................. 51
Summary of recommendations (Oil and gas) ............................................................................ 52
DISCLOSURE AND DISCLAIMER
Argonaut Securities Research 1 Return of the stock picker
31 January 2013
Return of the stock picker Volatility has been the one constant since mid-2011, which has been underpinned by a sea of macroeconomic uncertainty. The outcome of key events in 2012 (US election, Chinese leadership transition and the European sovereign crisis) has improved sentiment leading into the New Year, and markets are less likely to be driven by the next news headline.
China’s forecast 8-8.5% growth rate looks robust under the Country’s new leadership who have unveiled their ambitions to continue economic development. This will underpin demand for commodities particularly with exposure to late cycle construction completions.
The broader resource sector continues to face supply pressure despite this outlook. Many producers are not delivering acceptable financial results and the continued escalating cost environment has placed pressure on margins. This industry wide theme has forced companies to rethink growth plans, focus on cash flow, and management are being held more accountable for delivering results.
Market participants are increasingly turning to a bottom up approach to equities and rewarding companies that demonstrate prudent capital management, transparency in financial reporting and operational delivery. Increased dividend expectation (corporate recognition that equity capital has a cost) and opportunistic M&A is likely to be a developing theme.
Whilst Argonaut remains bullish gold in the medium term, investor scrutiny of producers will only intensify. Both gold bullion and equities underperformed in 2012 despite continued sovereign risk in Europe and ongoing talk of the US fiscal cliff. Most gold producers continue to underperform and any poor performance v guidance is harshly treated. The >US$1,000/oz cash cost club has become a crowded space, and is no longer the exclusive domain of mature gold assets. Quality gold stocks (management, assets, value) will continue to outperform spot gold and trade at a premium to peers.
Base metals (particularly copper) and uranium are well positioned for a staged recovery. The supply side for both commodities remains structurally tight with a major lag time to new production. Argonaut is forecasting a recovery in the uranium price in 2013 driven by the conclusion of the Russian “Megatonnes for Megawatts” program, the staged restart of idle Japanese reactors and the recommencement of new Chinese reactor approvals.
The iron ore market has staged a bold recovery into a new pricing environment, as the near panic of September 2012 continues to fade. The days of ~US$180/t appear over as the producers continue to ramp up capacity with key expansion projects scheduled for completion during 2013. Companies that have capitalised on the window of opportunity and gained production status will continue to perform well. However in the context of the new pricing environment, pre-production stocks will likely face tougher times.
Investment grade opportunities feature quality assets, robust earnings & cash flow, and tangible growth aspirations. Preferred ASX-listed names are (alphabetical order):
� BC Iron (BCI) - Valuation $3.40, best iron ore
� Endeavour Mining (EVR) - Valuation $4.00, delivering growth
� Independence Group (IGO) – Valuation $5.25, best diversified
� Northern Star (NST) - Valuation $1.55, best precious metals
� Western Areas (WSA) – Valuation $5.95, best base metals
Key speculative picks include Azumah Resources (AZM), Dacian Gold (DCN), Paladin (PDN), Papillon Resources (PIR) and Renaissance Minerals (RNS).
Metals & Mining
Research
Argonaut Securities Research 2 Return of the stock picker
Commodity Price Assumptions
Table 1: Price Assumptions (as at 31 January)
Commodity Unit FY13E FY14E FY15E LT
Base Metals
Copper US$/lb 3.50 3.50 3.50 2.75
Nickel US$/lb 9.50 9.50 9.50 8.50
Zinc US$/lb 1.20 1.20 1.20 0.85
Precious Metals
Gold US$/oz 1650 1650 1650 1300
Silver US$/oz 25 20 20 15
Platinum US$/oz 1,700 1,700 1,700 1,500
Bulks
Iron Ore Lump US$/t 150 127 114 80
Iron Ore Fines US$/t 130 111 99 70
Other
Uranium US$/lb 70 70 70 70
FX
AUD/USD $ 1.00 1.00 1.00 0.80
Pricing Assumptions
Source: Argonaut
Argonaut Securities Research 3 Return of the stock picker
Summary of Recommendations
Table 2: Stock Recommendations – Earnings (Key picks highlighted, prices at 31 January)
Market Share Price
Cap. Price Target
Base
Bidder Cathay Fortune (CF) is questioning reconciliation of grade / tonnes and cash costCF extended the offer period to 15th Feb 2013, DML is attempting to engage with bidder on key issuesSlow ramp up continues, concentrator production for Dec Q impacted by mill failureStrong Dec Q result with production up 7% to 2.6kt and costs down 2% to $5.02/lbMCR story is all about increasing Reserves to extend mine life of the Kambalda operationsNew lode at N10B (Kambalda Sth) shaping up and further potential from N30 and N30A depositsProduction up 21% Y-on-Y to 19.1kt in CY12, cost optimisation working with 4Qs of cost reductionHighest leverage to Ni price recovery, cash costs are now back in the pack of ASX Ni producersExpansion to 7.2Mtpa complete, desliming plant commissioned and impacting +ve on cost and prodnPoor result in Dec Q: production down 9% Q-on-Q to 23.3kt Cu and costs up 28% Q-on-Q to $1.83/lbNegative CY13 guidance outlook with production down to 90-95kt Cu and costs up to US$1.50-1.65/lbStrong cash (Argonaut est. $748m), speculation of an acquisition, but higher costs may inhibit thisDiversified with two separate Ni production centres, gold assets in feasibility and PGM exposureGidgee Gold BFS expected May / June then financing in Q3Rare PGM inventory outside Africa at 700koz TBN project, Canada (potential 65kozpa Pt eq)Argonaut's key pick amongst the ASX Ni producers; high grade, low cost assetsDelivered tenth straight quarter of low cost, near nameplate production in Dec Q (7kt Ni @ $2.89/lb)Opportunistic equity raising in Dec and has strategy to extend debt facility ahead of 2014 CB maturation
Precious
Awaiting outcomes of Australian Business Unit strategy and Çöpler (Turkey) Sulphide project updateAustralian assets getting nil value due to elevated costs, share price value resides in ÇöplerRecent 10Moz upgrade confirms Çöpler as the best quality gold deposit under Argonaut coverageAVR deal takes prod to ~300kozpa from 3 mines (Nzema, Youga and Tabakoto), growth to 450kozpaImproved liquidity and a re-rating is on the cards as consistent prod / exploration results are deliveredWest African risk mitigated by multiple projects in multiple countries, “vanilla” mine and metallurgyRising grades and expanding production from the Paulsens gold mine"Best in class" exploration - Near mine ext plus "game-changers" i.e. potential repetitionsRecent regional consolidation through FMG deal further enhances exploration upsideOngoing mechanical issues disappointing but seems priced inRecent change in management will take some for market to digest (new MD Jeff Quartermaine)Re-rating anticipated as production ramps up at Edikan, and Sissingue moves towards developmentProduction slowly ramping up with less low grade stockpile being milledPotentially cash flow positive H2 when high grade Western Queen comes inA pipeline of modest scale project to be developed, low acquisition risksPeerless production growth to >325koz in FY13, first gold poured at Garden WellRecently acquired McPhillamys Gold Project providing further growthA quality gold exposure, but quality is never cheapContinued strong production performance across sitesBalance sheet in good nick with no hedging in place, Bibiani could replace Golden PrideShort term Malian risks persist with ongoing military operationsPositive December Q reported with 31koz gold production at a cash cost of $951/ozMilling expansions could boost production (current 2.4Mtpa, stage one 3.2Mtpa, stage two 4.0Mtpa)Costs require close monitoring given modest grades, multiple ore sources and leverage to diesel Operationally sound at Mt Monger with productivity gains expected to increase volumesIGR deal makes sense and is earnings accretive - instantly builds production to 250kozpa Further growth to 400kozpa (addition of the Murchison), potential 500kozpa (with Kundip), plus copperSolid Dec Q production despite mill not running at capacityCosts anticipated to increase next year due to increased strip and lower gradesHOLD maintainted - strong relative share price performanceArgentinian inflation expected to keep hurting short term costsAccess to high grade delayed due to import issues with jumbo, guidance downgradedHighest margin gold stock under Argonaut's coverage
Bulks
Increasing production to ~7.5Mt in FY13 with the addition of two new mines - Mt Dove & AbydosCurrent cash balance (~$423m) + debt + cash flow capable of self-funding growth to 12MtpaFocus on cost optimisation to build a leaner and more competitive operating modelAchieved the quickest development of any iron ore project - discovery to dividend in 6 yearsCompleted a successful deal with FMG in December 2012, increasing attributable sales to 4MtpaStrong cash flow with no capital expenditure, minimal debt and competitive cash costsOperationally in great shape with FY13 forecast to be MGX's strongest sales year (>8Mt sales)Midwest production profile is supported by the full access of Geraldton port & rail infrastructureNew executive leadership team in place with a focus on addressing corporate governance issues
Diversified
Tropicana (IGO 30%, Anglo Ashanti 70%) on track for first gold pour in Dec 2013Zn production shifting from the historically problematic Jaguar UG to newly stoped Bentley UGLong Ni continues to deliver with low costs and increasing production profile
Perseus PRU
$1.33RSG
$1.09
847 $1.85
462
EVR
NST
Ramelius
Resolute 852
Northern Star
Endeavour
$2.00
$3.50
140
BUY
$2.80
$0.47
HOLD
HOLD
BUY
$5.25
$0.84916
$0.52
$5.09
$2.58
$0.42
AQG 1,228
Western Areas 856
164
425
OZ Minerals
Mirabela
WSA
MBN
129
BUY
BUY
$0.87
Panoramic
Mincor
2,079
PAN
OZL
$3.50
HOLD
$0.56
$2.35
BUY
HOLD
$1.74
BUY
CommentsRec
$5.95
HOLD
$1.20 BUY
BUY$2.00
$3.40
$4.80
HOLD
$4.00
BUY
BUY
$0.65
$7.50
$0.95
BUY
$0.85
$6.51
BUY
BUY
HOLD
BUY
$4.321,006Independence Group IGO
MGX
Atlas Iron
BCIBC Iron
SAR
Teranga TGZ
Saracen
Silver Lake
Mount Gibson
Troy
Regis RRL
AGO
SLR
Alacer Gold
TRY
MCR
Company Code
DMLDiscovery Metals $1.13550
$4.37
$4.26
$0.49
$7.12
$3.60
511
RMS
855 $2.09
$1.55
$0.38
437
1,383
978
$2.08
329
$3.52
2,413
226
$1.52
Argonaut Securities Research 4 Return of the stock picker
Summary of Recommendations - Speculatives
Table 3: Stock Recommendations – Speculative (Key picks highlighted, prices at 31 January)
Market Share Price
Cap. Price Target
Base
Released BFS for the Sulphur Springs copper-zinc mine capex $279m, $1.57/lb CuEq opexCheap on absolute and relative basis, but will require financing over next 12 monthsLarge under-explored exploration footprint offers significant upside to current ResourceProjects funded through Glencore's $158m package, LOM offtake for base metals signedDevelopment works commenced at HeraIntentions of Chinese shareholders on the register a question post Glencore deal
Precious
Recently appointed Russel Clark as CEOAnticipating short term news on Resource update / enhanced management teamHigh quality asset, recent sp deterioration provides buying opportunityResource upgrade to 2.2Moz @ 1.7g/t, increase in both grade and ozsStand-alone operation at Wa East more tangible, 1.5Mtpa scenario more plausibleExploration remains key drive, results due on regional targetsStock trading below cash backing (~21c ps) post $25m capital returnEarly technical success at Mogoraib River prospect could deliver further upsideStrong cash position enables company to pursue other opportunitiesMerger completed, PEA study established a strong base caseCompany focused onexploration to further enhancement of project economicsExpecting near term news flow on highly anticipated drilling at Rainy RiverCommenced site works at Posse, first revenue anticipated in MarchLicensed for 300ktpa, Company pursuing full 1.5Mtpa license in parallelBorborema BFS, maiden Reserve due this QOne of the best resource IPO's of 2012; people, asset, timing and value$18.5m cash will support exploration over a two year period before PFS will be considered520km2 within the highly prospective Laverton Greenstone Belt with multiple walk-up targetsRecently completed dilutive capital raising at 75c, mining has commencedOn track for plant commissioning in August 2013Offers value but lacking short term catalysts, due to a lacklustre~$4m exploration budgetProduction scenario at Central Bore lacks scale, is unenticing economically, and a distractionRegional exploration could deliver most upsideSignificant work completed on regional geology, looking for elephant deposits4.5Moz Resource at Banfora in Burkina Faso, further growth likely with <10% project drill testedBFS due in Q1 CY2013 for a 2Mtpa operation, expandable to 4Mtpa, targeting production in late 2014~$60m cash post recent raise ($31m @ 60cps), plus ~$35m in liquid investmentsUnrivalled gold asset in the ASX junior space in terms of grade, width, metallurgy and production profileRecent Resource upgrade to 4.2Moz should support enhanced production profile to ~300koz pa100,000m drilling campaign started, testing extensions of Fekola, continuous newsflow anticipatedProposed merger is logical given asset locations and potential synergyRemoves funding uncertainties if voted through, although dilutive to PVM in terms of asset qualityProject has scale and is a value proposition, final EPA approval could be a catalystAcquired advanced gold projects in the Philippines from Mindoro (MDO)Company's focus is to grow high grade ResourceHigh grade epithermal mineralisation offers significant exploration upside$15m debt facility with Taurus provide short term flexibilityMining proposal submitted to commence miningIndependent review highlights gold and base metal prospectivityFirst mover advantage in Cambodia, most advanced gold project in countryResource anticipated to grow >1Moz in the near termRegional exploration work identified numerous high tenor anomalies, drilling underwayTargeting production at the Tembang project in Sumatra, Indonesia from 2013Stage 1 potential 45kozpa Au eq, 5 year mine life, ~US$500/oz, followed by larger / lower grade Stage 2Risks include timely permitting in a jurisdiction with a mixed track record
Bulks
Emerging Mongolian hard coking coal project with positive PFS attracting corporate attention Risks are significant - Rail and port infrastructure required, funding, evolving mining lawsBut so is the prize - A 12Mtpa quality hard coking coal asset in proximity to Asian export markets
Uranium
Focus on the development of the Salamanca project in Spain, Resource of 59.2M lbs at 427ppm U3O8Recently resolved long-standing overhang with ENUSA (Spanish Government entity) which unlocks valueBacked by Ian Middlemas and Rob Behets, ex- Mantra with a positive track record, $35m cashOperations have turned the corner and now producing at 8.5Mlbpa rate at a group levelLow capex until Langer Heinrich expansion (Argonaut F CY15), leveraged to an increase in U3O8 spot priceUS$200m prepayment secured in Sept 12, awaiting outcome of a 2nd strategic initiative in March / April 13
Diversified
Recently appointed Julian Hanna as non-executive directorLooking to divest Botswana Copper Project to focus on Sams CreekRecent drilling results at Sams Creek highlight Resource growth potential
Company Code Rec Comments
N/A SPEC BUY
Red Mountain RMX 30 $0.13 N/A SPEC BUY
Chalice Gold Mines CHN 48 $0.19
N/A SPEC BUYMOD Resources MOD 27 $0.06
N/A SPEC BUYBerkeley BKY 78 $0.44
Aspire Mining AKM 74 $0.12 $0.33 SPEC BUY
$0.50 SPEC BUY
Sumatra C&G SUM 47 $0.18 N/A SPEC BUY
Resource & Investment RNI 50 $0.17
Renaissance RNS
$2.50 SPEC BUY
PMI Gold PVM 316 $0.77 $1.35 SPEC BUY
Papillon PIR 475 $1.60
N/A SPEC BUY
Gryphon Minerals GRY 198 $0.50 $1.20 SPEC BUY
Gold Road GOR 43 $0.11
N/A SPEC BUY
Doray Minerals DRM 98 $0.70 $1.20 SPEC BUY
Dacian Gold DCN 52 $0.55
$0.90 SPEC BUY
Crusader CAS 44 $0.35 $1.65 SPEC BUY
Coventry CYY 23 $0.32
$0.35 SPEC BUY
$0.35
Azumah AZM 32 $0.10
Azimuth AZH
YTC Resources YTC 73 $0.29
52 $0.04
$0.57 SPEC BUY
$0.50 SPEC BUY
149
$0.14 SPEC BUYVenturex VXR
39 $0.19 N/A SPEC BUY
$1.15Paladin PDN $1.75 SPEC BUY958
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Ret
urn
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mar
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Tabl
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Met
rics
(as
at
31 J
anua
ry)
Yea
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arke
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har
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rice
End
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20
12
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20
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12
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very
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als
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EV
/Rev
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e (x
)E
V/E
BIT
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(x)
P/E
NP
VR
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ode
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pan
yEV
Arg
onau
t S
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riti
es R
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7
Ret
urn
of
the
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ck p
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r P
eer
Com
ps
Tabl
e 6:
Nic
kel C
omps
(as
at
31 J
anua
ry)
Gra
de
(% N
i)C
ash
Co
sts
(US
$/
lb)
EV
/P
rod
uct
ion
($
/t)
EV
per
t
Ni
($/
t)
0
10,0
00
20,0
00
30,0
00
40,0
00
WSA
MBN
MCR
PAN
2013
E20
14E
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
PAN
MCR
MBN
WSA
2013
E20
14E
0%1%2%3%4%
MCR
WSA
PAN
MBN
Res
erve
Res
ourc
e
0
1,00
0
2,00
0
3,00
0
4,00
0
5,00
0
WSA
MCR
PAN
MBN
Res
erve
Res
ourc
e
Arg
onau
t S
ecu
riti
es R
esea
rch
8
Ret
urn
of
the
sto
ck p
icke
r P
eer
Com
ps
Tabl
e 7:
Cop
per
Com
ps (
as a
t 31
Jan
uary
)
Gra
de
(% C
u)
Cash
Co
sts
(US
$/
lb)
EV
/P
rod
uct
ion
($
/t)
EV
per
t C
u (
$/t)
0
10,0
00
20,0
00
30,0
00
40,0
00
50,0
00
60,0
00
DM
LSFR
PNA
OZL
2013
E20
14E
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
DM
LO
ZL
SFR
PNA
2013
E20
14E
0.00
%
1.00
%
2.00
%
3.00
%
4.00
%
5.00
%
6.00
%
SFR
DM
LO
ZL
PNA
Res
erve
Res
ourc
e
0
500
1,00
0
1,50
0
2,00
0
2,50
0
3,00
0
3,50
0
SFR
DM
LPN
AO
ZL
Res
erve
Res
ourc
e
Arg
onau
t S
ecu
riti
es R
esea
rch
9
Ret
urn
of
the
sto
ck p
icke
r P
eer
Com
ps
Tabl
e 8:
Gol
d Com
ps (
as a
t 31
Jan
uary
)
Cas
h C
osts
(U
S$
/oz)
EV p
er o
zEV
/EB
ITD
A (
x)
Gra
de
(g/t
)
02468
RRL
EVR
PRU
TGZ
NST
SLR
SAR
TRY
AQ
GEV
NRSG
RM
S
2013
E20
14E
0
200
400
600
800
1,00
0
1,20
0
RM
SSAR
RSG
EVN
SLR
PRU
AQ
GTG
ZEV
RN
ST
TRY
RRL
2013
E20
14E
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
TRY
NST
SLR
EVR
RSG
RM
SAQ
GRRL
SAR
TGZ
EVN
PRU
Res
erve
Res
ourc
e
0
200
400
600
800
1,00
0
1,20
0
NST
RRL
EVN
TGZ
TRY
EVR
SLR
PRU
AQ
GSAR
RSG
RM
S
Res
erve
sRes
ourc
es
Arg
onau
t S
ecu
riti
es R
esea
rch
10
R
etu
rn o
f th
e st
ock
pic
ker
Pee
r C
omp
s
Tabl
e 9:
Iro
n O
re C
omps
(as
at
31 J
anua
ry)
Gra
de (
% F
e)
Cash
Co
sts
(A$
/t)
EV
/P
rod
uct
ion
($
/t)
EV
per
t
0
100
200
FMG
AG
OBCI
MG
XSFZ
2013
2014
0153045607590
AG
OFM
GM
GX
BCI
SFZ
2013
E20
14E
25%
35%
45%
55%
65%
MG
XBCI
AG
OFM
GSFZ
Res
erve
Res
ourc
e
05
10
FMG
MG
XBCI
AG
OSFZ
Res
erve
Res
ourc
e
Argonaut Securities Research 11 Return of the stock picker
31 January 2013
More to mine at Nullagine
December Q:
The Nullagine Iron Ore JV (NIOJV, BCI – 75%) reported a weaker December Q, whereby lower shipped tonnes were a result of crusher upgrades and unplanned low grade ore that was encountered. Q on Q variances included:
� Ore mined - Down 1% to 1.09Mt (was 1.10Mt)
� Ore crushed - Down 7% to 0.99Mt (was 1.07Mt)
� Product shipments - Down 15% to 1.05Mt (was 1.24Mt)
� Ore stockpile balance - Up 21% to 425kt (was 351kt)
Operating costs increased marginally to $51/t and BCI forecasts that full year costs will reconcile within the $45-50/t range (YTD average $47/t). The average realised sales price was US$105/dmt (CFR) against the Platts average CFR62 price of US$122/dmt.
BCI also completed a landmark transaction on the 10th December 2012, lifting their stake in the NIOJV to 75% or 4Mtpa (was 2.5Mtpa) for a total consideration of $190m.
Impact: Neutral
Whilst sales were down for the Q, they were within 5% of Argonaut’s forecast (1.1Mt). The installation of plant equipment led to lower crushed tonnes and this upgrade (commissioned in January) can support increased throughput on the revised 6Mtpa rate.
An unplanned zone of low grade material was also incurred at Outcamp 1 pit which offset ore tonnes during the Q. This led in a spike in product and low grade stockpiles which Argonaut expects will flow through sales and provide a buffer over the west season.
View: Positive
Despite the Q looking disappointing, the development work undertaken positions the Nullagine operation well to achieve the revised production rate of 6Mtpa. The mining operation lacks complexity and Argonaut considers execution risk as minimal. Post the FMG transaction, Argonaut F 1,250t sales for the March Q ramping up to 1,500t from July 2013 based on 4.5Mtpa attributable annual capacity.
This transaction underpins a strong sales platform moving forward and BCI’s 75% share of the JV revenue translates into ~$130m EBITDA in FY13 and ~$157m EBITDA in FY14. At 31 December 2012, BCI held $58.3m cash with $8m remaining capex in FY13.
Argonaut’s $3.40 valuation is based on medium term pricing of $110/t (to FY15), however, adjusting this for spot pricing derives a valuation of $3.90.
Recommendation: Hold
Argonaut’s valuation is $3.40, HOLD rating retained as a function of the stocks strong performance relative to the price target.
BC Iron HOLD
Research
Analysts: Adam Miethke Patrick Chang Troy Irvin Matthew Keane
0.0
2.0
4.0
6.0
8.0
10.0
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
Current Price:Valuation: $3.40
Ticker: BCISector: Materials
Shares on Issue (m):Market Cap (A$m): 432.0Net Cash (A$m): -60.0Enterprise Value (A$m): 492.0
52 wk High/Low: $3.80 $2.2412m Av Daily Vol (m):
Key Metrics12A 13E 14E
P/E (x) 9.3 6.5 6.5EV/EBITDA (x) 7.2 3.8 3.1
Financials:
Revenue ($m) 202.9 291.4 427.8EBITDA ($m) 68.8 130.6 157.3NPAT ($m) 48.7 66.9 66.6
Net Assets ($m) 145.0 101.2 211.7
Op CF ($m) 88.9 136.3 153.0
Per Share Data:
EPS (cps) 38.0 54.5 54.3DPS (cps) 15.0 15.0 15.0Div Yield (%) 4% 4% 4%CFPS (cps) 56.3 83.4 93.6
Share Price Graph
0.25
$3.52
122.7
Argonaut Securities Research 12 Return of the stock picker
Recommendation HOLD Sector MaterialsCurrent Price $3.52 Issued Capital (m) 122.7Valuation $3.40 Market Cap (m) $432.0All Ords (XAO) 4,919 Updated
Profit & Loss (A$m) 30 June 2012A 2013E 2014E 2015E Financial Summary 2012A 2013E 2014E 2015ERevenue 202.9 291.4 427.8 436.4 Reported EarningsOther Income 1.5 3.0 5.1 6.9 Net Profit ($m) 48.7 66.9 66.6 66.9Profit/(Loss) on Hedging 0.0 0.0 0.0 0.0 EPS (A$) 0.38 0.55 0.54 0.55Operating Costs 132.1 155.7 268.3 283.8 PER (x) 9.3 6.5 6.5 6.5Exploration Exp 1.0 2.0 1.0 1.1 Normalised EarningsCorporate/Admin/Other 6.0 6.1 6.3 6.4 Net Profit ($m) 48.7 66.9 66.6 66.9EBITDA 68.8 130.6 157.3 152.0 EPS (A$) 0.38 0.55 0.54 0.55Depn & Amort 9.8 25.9 45.4 46.4 EPS Growth (%) 3361.7 43.3 -0.4 0.4EBIT 59.0 104.7 111.9 105.7 PER (x) 9.3 6.5 6.5 6.5MRRT 0.0 0.0 3.9 2.7 CashflowNet Interest Paid 0.0 9.1 14.1 8.8 Operating Cashflow ($m) 88.9 136.3 153.0 151.7Operating Profit 59.0 95.6 93.9 94.2 GCFPS ($) 0.56 0.83 0.94 0.94Tax expense 10.3 28.7 27.2 27.3 PCF (x) 6.3 4.2 3.8 3.7Minorities 0.0 0.0 0.0 0.0 DividendNPAT 48.7 66.9 66.6 66.9 Dividend ($) 0.15 0.15 0.15 0.15Normalised NPAT 48.7 66.9 66.6 66.9 Yield (%) 4% 4% 4% 4%
Franking % 100% 100% 100% 100%
Cash Flow (A$m) 2012A 2013E 2014E 2015EOperating Cashflow 88.9 136.3 153.0 151.7 Financial Ratios 2012A 2013E 2014E 2015E- Capex (+asset sales) -19.1 -15.1 -3.8 -3.8 Balance Sheet Ratios -Exploration Expenditure -1.9 -4.0 -2.0 -2.0 Total Debt/Equity (%) 14% 143% 60% 42% -Other 1.4 0.0 0.0 0.0 Interest Coverage (x) - - - -Free Cashflow 69.2 119.1 148.2 146.8 Profitability Ratios- Dividends 0.0 18.4 18.4 18.4 Net Profit Margin (%) 24% 23% 16% 15%+ Equity raised 0.0 47.4 47.4 0.0 Return on Assets (%) -18% -25% -41% -54%+ Debt drawdown (- repaid) -15.1 -122.0 -104.0 -86.0 Return on Equity (%) 34% 66% 31% 22%Net Change in Cash 77.9 77.7 88.8 90.4Cash at End Period 92.8 170.5 259.4 349.8Net Cash (Debt) 72.8 25.5 132.4 222.8
Valuation Summary A$m $/shNullagine JV (BCI - 75%) 460 3.75
Balance Sheet (A$m) 2012A 2013E 2014E 2015E Bungaroo Creek 2 0.02Total Assets 183.0 265.3 358.8 454.2 Exploration 18 0.15Total Debt 20.0 145.0 127.0 127.0 Investments 4 0.03Total Liabilities 38.0 164.0 147.1 148.2 Unpaid Capital 1 0.01Shareholders Funds 145.0 101.2 211.7 306.0 Corporate -21 -0.17
MRRT 0 0.00Net Cash -60 -0.49
Production & Cash Costs 2012A 2013E 2014E 2015ESalesNullagine (Mt) - BCI share 1.78 3.13 4.50 4.50 Total @ 10% Discount Rate 405 3.40
Cash Costs - inc royalties (A$/t) 69.1 47.3 55.8 59.5
DirectorsTony Kiernan Chairman
Reserves & Resources Mike Young Managing DirectorMorgan Ball Executive DirectorAndy Haslam Non-Executive Director
Reserves Mt % Fe %CaFe %P Malcolm McComas Non-Executive DirectorProven Jamie Gibson Non-Executive DirectorProbable 42.4 57.0 64.8 0.011 Terry Ransted Non-Executive DirectorTotal 42.4 57.0 64.8 0.016
Resources Mt % Fe %CaFe %P Substantial Shareholders* %Measured 1.4 56.9 64.7 0.019 Consolidated Minerals 23.9%Indicated 46.9 57.0 64.8 0.016 Henghou Industries 8.4%Inferred 6.9 57.0 64.1 0.020 Ausbil Dexia 5.4%Total 55.1 57.0 64.7 0.016 Tribeca Investments 5.0%
Nullagine - DSO only
31-January-2013
0.00
1.00
2.00
3.00
4.00
5.00
2012A 2013E 2014E 2015E
Kt
SALES PROFILE
Nullagine (Mt) - BCI share
0
50
100
150
200
FY11 FY12 FY13 FY14
A$
/t
REALISED PRICE & COST PROFILE
Price Received Cash Costs
Argonaut Securities Research 13 Return of the stock picker
Weaker Q, but operationally sound moving forward
Q on Q performance
Full year operating costs targeting $47/t v guidance $45 - $50/t
EBITDA margin for BCI averaged ~$40/t for the Q
More to mine at Nullagine
The Nullagine Iron Ore JV (NIOJV, BCI – 75%) has reported a weaker December Q. Lower shipped tonnes were a result of crusher upgrade and unplanned lower grade ore. Key results included:
� Ore mined: down 1% to 1.09Mt (was 1.10Mt)
� Ore crushed: down 7% to 0.99Mt (was 1.07Mt)
� Product shipments: down 15% to 1.05Mt (was 1.24Mt)
� Ore stockpile balance: up 21% to 425kt (was 351kt)
Figure 1: Q on Q tonnage of ore mined, crushed and shipped from NIOJV
0
200
400
600
800
1,000
1,200
1,400
1,600
Mar�12 Jun�12 Sep�12 Dec�12
Tonn
age�
(Kt)
�
Ore�Mined Crushed Shipped
Source: Argonaut
Operating costs increased marginally to $51/t and BCI forecasts that full year costs will reconcile within the $45-50/t range (YTD average $47/t). The average realised price was US$105/dmt (CFR) against the Platts average CFR62 price of US$122/dmt. The difference between the average price received and the Platts average represents grade adjustments, marketing and offtake fee’s which accounted for 15% during the Q.
Based on Argonaut’s cost assumptions, this assumes an average EBITDA margin of $40/t for the Q (Figure 2).
Figure 2: Price achievement for NIOJV Bonnie Fines product
$0
$20
$40
$60
$80
$100
$120
$140
Mar�12 June�12 Sep�12 Dec�12
Aver
age�
Sale
s�M
argi
n�(A
$/dm
t)
Average�CFR�Sales�Price�(A$/dmt) Cash�Costs���inc�royalties Average�Sales�Margin�(A$/dmt)
Source: Argonaut
Argonaut Securities Research 14 Return of the stock picker
Development work during the Q positions BCI well moving into H2 FY13
Argonaut F 6.0Mtpa run rate will be achieved during Q4 FY13
Revised mining schedule at 6.0Mtpa run rate
Project inventory study aims to extend mine life at Nullagine…
…aiming to add 3 – 5 years
Argonaut F 1,250kt sales for the March Q
Healthy balance sheet with $58.3m cash and strong cash flow
Setting up for 6Mtpa
The development work undertaken during the Q positions the Nullagine operation to achieve the revised production rate moving forward. The mining operation lacks complexity and Argonaut considers execution risk as minimal.
Argonaut anticipates that the full ramp-up to 6.0Mtpa with be achieved in Q4 FY13 with 4.5Mtpa attributable to BCI from FY14. The revised production profile brings forward the mining schedule and life of mine to ~7 years and Argonaut has modelled the following ore to waste physicals.
Figure 3: Nullagine mining schedule
0
3
6
9
12
15
FY12 FY13 FY14 FY15 FY16 FY17
Mt
Waste Ore Mined
Source: Argonaut
A project inventory study is also underway to increase the revised mine life based on the new production profile. BCI indicate that mine life may be extended through the definition of new Resources and/or the potential beneficiation of low grade material into sales specification quality. A ~2,500m drilling program and metallurgy study is scheduled for completion during the March Q.
The low grade beneficiation study is considering the merits of upgrading material currently classified as mineralised waste (52%-55% Fe) to sales product quality. BCI are targeting a mine life increase 3 - 5 years based on this material.
Outlook and valuation
Following the FMG transaction, Argonaut F 1,250t sales for the March Q ramping up to 1,500t from July 2013 based on 4.5Mtpa attributable annual capacity.
This transaction underpins a strong sales platform moving forward and BCI’s 75% share of the JV revenue translates into ~$130m EBITDA in FY13 and ~$157m EBITDA in FY14.
At 31 December 2012, BCI held $58.3m cash with $8m remaining capex in FY13.
Argonaut’s $3.40 valuation is based on medium term pricing of $110/t (to FY15), however, adjusting this for spot pricing derives a valuation of $3.90.
� PE multiples of 6.5x FY13 and 6.5x FY14
� EV/EBITDA multiples of 3.8x FY13, 3.1x FY14
� ~A$40/t margin at current spot prices is very competitive in peer group
Argonaut Securities Research 15 Return of the stock picker
31 January 2013
Setting sail
December Q:
Endeavour Mining (EVR:ASX, EDV:TSX) is a gold producer delivering growth, having completed the recent acquisition of Avion Gold (Avion) and its third producing mine, Tabakoto. EVR’s production rate is now ~300kozpa with significant operating cash flows from mines in Ghana, Burkina Faso and Mali.
The fourth mine, Agbaou, is under construction with commissioning scheduled for early 2014. Agbaou will contribute ~100kozpa, supporting group production to ~450kozpa. EVR also released a positive Preliminary Economic Assessment (PEA) for the Houndé Project in Burkina Faso which could add a further ~160kozpa production from 2015.
During the December quarter, the Company reported a total of 71.6koz from its three operations for 310koz total production in CY13. Key development during the Q included the integration of Tabakoto operations and mill expansion (expected completion March Q 2013), progress of Agbaou (first gold scheduled for March Q 2014) and a balance sheet clean-up (retired 12koz hedge position and repaid $28.2m credit facility with Bank Atlintique Mali).
Cash on hand at 31 December was $151m (v 30 September $131m). EVR forecast a cash margin of $230m in 2013 across its three operations. When combined with the cash position, should comfortably fund the planned capital and exploration budget of $227m.
Impact: Positive
EVR has quickly built a foothold in the West African gold sector through an opportunistic M&A growth strategy and are delivering production in-line with guidance. The recent December Q confirmed the intergration of Tabakoto is on-track and bolsters CY13 guidance to 310 – 345koz. Argonaut F March Q production of 74.0koz at a cash cost of US$745/oz.
View: Positive
The results demonstrate the delivery of another successful Q for EVR as the Company integrates the Tabakoto Mine and builds a production base >300Kozpa in 2013.
EVR will continue to reinvest cash flow towards growth and Argonaut forecasts 2013 EBITDA of $225m and $101m NPAT. The fourth mine (Agbaou) scheduled for commissioning in 2014. The positive PEA announced on Houndé underpins a strong organic, self-funded growth profile over the coming 3-5 years beyond 500kozpa.
EVR offers deep value on metrics (see P/NAV chart, page 4) relative to the producer peer group with a >80% valuation upside. Going forward, the market is likely to reward EVR as it integrates the new assets and demonstrates operational delivery.
Recommendation: Buy
BUY recommendation maintained with price target of $4.00.
Endeavour Mining BUY
Research
Analysts: Adam Miethke Troy Irvin Patrick Chang Matthew Keane
Current Price:Valuation:
Ticker: EVRSector: Materials
Shares on Issue (m): 410.7Market Cap ($m): 858.4Net Cash ($m): 91.0Enterprise Value ($m): 767.4
52 wk High/Low: $2.65 $1.8312m Av Daily Vol (m):
Key Metrics12F 13F 14F
P/E (x) 14.5 9.4 6.8EV/EBITDA (x) 4.6 3.4 2.7
Financials:
Revenue (US$m) 371.7 481.8 625.5EBITDA (US$m) 170.7 224.7 283.5NPAT (US$m) 66.8 100.8 139.2
Net Assets (US$m) 732.1 802.1 1,058.9
Op CF (US$m) 163.3 247.8 299.0
Per Share Data:
EPS (cps) 16.1 22.1 30.6DPS (cps) 0.0 0.0 0.0Div Yield 0.0% 0.0% 0.0%CFPS (cps) 35.3 54.5 65.7In A$ unless otherwise stated
Share Price Graph
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Argonaut Securities Research 16 Return of the stock picker
Endeavour Mining Equities Research
Analyst: Adam Miethke
Recommendation BUY Sector MaterialsCurrent Price $2.09 Issued Capital (m) 410.7Valuation $4.00 Market Cap (m) $858.4All Ords (XAO) Updated
Profit & Loss (US$m) 31 December 2012E 2013E 2014E 2015E Financial Summary 2012E 2013E 2014E 2015ESales Revenue 371.7 481.8 625.5 626.5 Reported EarningsOther income 6.2 9.5 17.7 30.8 Net Profit (US$m) 66.8 100.8 139.2 114.3Operating costs 161.1 219.8 311.9 344.6 EPS (A$cps) 14.4 22.1 30.6 27.9Exploration expense 16.7 6.1 6.2 6.4 PER (x) 14.5 9.4 6.8 7.5Corporate / administration 29.3 40.7 41.5 42.4 Normalised EarningsEBITDA 170.7 224.7 283.5 263.9 Net Profit (US$m) 74.6 100.8 139.2 114.3D & A 69.3 71.7 75.6 91.6 EPS (A$cps) 16.1 22.1 30.6 27.9EBIT 101.4 153.0 207.9 172.3 EPS Growth (%)Finance expenses 7.0 9.0 9.0 9.0 PER (x) 13.0 9.4 6.8 7.5Impairment of assets 0.0 0.0 0.0 0.0 CashflowLosses on derivatives 5.7 0.0 0.0 0.0 Operating Cashflow (US$m) 163.3 247.8 299.0 267.0Profit Before Tax 94.4 144.0 198.9 163.3 GCFPS (A$cps) 35.3 54.5 65.7 65.2Tax expense 19.8 43.2 59.7 49.0 PCF (x) 5.9 3.8 3.2 3.2One-off deferred income tax 7.8 0.0 0.0 0.0 DividendMinorities 0.0 0.0 0.0 0.0 Dividend (A$cps) 0.0 0.0 0.0 0.0NPAT 66.8 100.8 139.2 114.3 Yield (%) 0.0 0.0 0.0 0.0Normalised NPAT 74.6 100.8 139.2 114.3 Franking % 100.0 100.0 100.0 100.0
Cash Flow (US$m) 2012E 2013E 2014E 2015EOperating Cashflow 163.3 247.8 299.0 267.0- Capex 77.6 157.4 21.4 21.9 Financial Ratios 2012E 2013E 2014E 2015E- Exploration & evaluation 47.5 20.4 20.8 21.2 Balance Sheet Ratios- Asset purchases (+ asset sales) -20.0 0.0 0.0 0.0 Total Debt / Equity (%) 13.7 12.5 9.4 7.8Free Cashflow 58.2 70.0 256.8 224.0 Interest Cover (x) - - - -- Dividends 0.0 0.0 0.0 0.0 Acid test ratio (x) 1.3 2.5 2.6 3.4+ Equity raised 0.0 0.0 0.0 0.0+ Debt drawdown (- repaid) 0.0 0.0 0.0 0.0 Profitability RatiosNet Change in Cash 58.2 70.0 256.8 224.0 Net Profit Margin (%) 20.1 20.9 22.3 18.2Cash at end period 136.1 261.0 517.8 741.8 Return on Assets (%) 10.3 14.5 19.9 17.4
Return on Equity (%) 9.1 12.6 13.1 8.9
Balance Sheet (US$m) 2012E 2013E 2014E 2015ETotal Assets 1123.2 1315.5 1561.7 1730.1Total Debt 100.0 100.0 100.0 100.0Total Liabilities 391.2 513.5 502.8 447.3 Valuation Summary US$m A$/shShareholders Funds 732.1 802.1 1058.9 1282.9 Nzema 331 0.81
Youga 216 0.53Tabakoto 299 0.73Development Assets 433 1.05
Gold Production (Attributable) 2012E 2013E 2014E 2015E Exploration Assets 312 0.76Nzema (koz) 98 100 103 103 2015E Hedging -25 -0.06Youga (koz) 82 76 70 70 103 Corporate -108 -0.26Agbaou (koz) 0 0 88 101 70 Unpaid Capital 99 0.24Tabakoto (koz) 88 120 129 148 101 Listed Investments 5 0.01
Cash Estimate 191 0.47Total Gold 268 295.6 390.5 421.8 274 Debt -100 -0.24
Gold Cash Cost (US$/oz) 714 714 746 804 Total @ 11% discount rate 1653 4.00Gold Total Cost (US$/oz) 1001Gold Price Realised (US$/oz) 1628 1628 1630 1602
Board and ManagementReserves & Resources (Attributable) Michael Beckett Chairman, Non-Executive DirectorReserves Mt g/t Au (koz) Neil Woodyer Chief Executive Officer & PresidentNzema 14.6 2.0 867 Adriaan "Attie" Roux Chief Operating OfficerYouga 7.3 1.9 403 Christian Milau Chief Financial OfficerAgbaou 11.1 2.5 769 Antony Harwood Non-Executive DirectorTabakoto 5.6 4.3 627 Jorge Gamarci Non-Executive DirectorFinkolo 2.4 3.0 95 Wayne McManus Non-Executive DirectorTotal 41.0 2.5 2,761 John Begeman Non-Executive Director
James Coleman Non-Executive DirectorResourcesNzema 66.0 1.2 2,445Youga 23.1 1.5 1,010Agbaou 16.5 2.3 1,045Tabakoto 14.4 4.8 1,785Ouare 4.7 2.1 291 Substantial Shareholders %Hounde 24.1 2.1 1,445 Fidelity 5.0%Kofi 19.3 2.0 902 Macquarie Bank Ltd 5.0%Finkolo 16.8 1.8 395Total 184.9 1.9 9,318
EV / Reserve (US$/oz) $278EV / Resource (US$/oz) $82
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Argonaut Securities Research 17 Return of the stock picker
71.6koz produced during the December Q and 301Koz for full year 2012 Three operations contributed to the group production
Grade & tonnes increased via the integration of the high-grade Tabakoto deposit
EVR are targeting a group operating cost of $790-$830/oz in 2013
$151 cash on hand ($51m net cash) and EVR forecasts $230m cash margin in 2013
Setting sail
Endeavour Mining (EVR:ASX, EDV:TSX) reported a positive Q of gold production at 71.6koz across its three West African operations. This result completes 310koz gold production in CY13 against the Company’s guidance of 282-304koz.
EVR are currently integrating the Tabakoto Mine (acquired from Avion Gold in 2012) into their operations portfolio. The mine contributed 23.2koz to group production during the December Q, despite undergoing a mill expansion from 2,000tpd to 4,000tpd which is expected to be completed during the March Q. Tabakoto will support group production beyond 300Kozpa in 2013.
The operations performed as follows:
• Nzema: 26.7koz (Argonaut F 26.0koz) v previous Q 26.8koz
• Youga: 21.7koz (Argonaut F 22.5koz) v previous Q 22.5koz
• Tabakoto: 23.2koz (Argonaut F 25.0koz) v previous Q 32.3koz
Key developments during the Q included progress of the Tabakoto mill expansion, development progress at Agbaou (first gold scheduled for March Q CY14) and a clean-up for the balance sheet (retired 12koz hedge position and repaid the $28.2m credit facility with Bank Atlintique Mali).
Figure 1: EVR – Group production and head grade
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Figure 2: EVR – Total gold produced and cash costs
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Cash on hand at 31 December was US$151m (v 30 September $131m). EVR forecast a cash margin of US$230m in 2013 across its three operations which will be largely reinvested into ongoing growth. When combined with the cash position, the planned capital and exploration budget of $227m will be internally funded.
Argonaut Securities Research 18 Return of the stock picker
Agbaou is well advanced and scheduled for first gold in March Q 2014
And a positive PEA was announced for Houndé, which could be a game changer in its own right Geopolitical diversification within West Africa
Houndé could be a ‘game changer’ in its own right with further exploration
Recent PEA supports robust project economics
Kofi offers strong synergies with Tabakoto, given its proximity to the mine
Development pipeline
Abaou (85% EVR)
The Agbaou Gold Project in Côte d'Ivoire is EVR’s most advanced development project. Construction began in June 2012 and gold production is expected during March Q 2014. EVR has been granted the Mining Permit and there are no further permits required for construction and production.
A 103kozpa open pit operation is planned over an 8 year mine life. Argonaut forecasts US$160m capex and US$750/oz cash costs (including royalties). Open pit mining will commence within the oxide portion of the deposit which is free digging and offers lower-cost mining during start-up.
Figure 3: EVR – project locations (mines – yellow, development – orange)
Source: EVR
Houndé (90% EVR)
EVR announced on 23rd January a positive PEA, demonstrating that the project could add a further ~160kozpa production over a 10 year mine life from 2015. Houndé could further support EVR’s strong organic growth profile over the coming 3-5 years beyond 500kozpa. Ongoing exploration will support ongoing news flow with the BFS due in late 2013. The highlights from the study included:
� An average 91% recovery at a milling rate of 8ktpd supplying a conventional gravity/CIL circuit (free milling gold)
� Owner operated open pit mining and a potentially economic portion of the Resource of 28mt @ 2.0 g/t (at 0.91 g/t cut-off)
� Total initial funding requirement is estimated at US$345m including start-up capital, VAT, import duties and certain first year equipment purchases
� Forecast life of mine direct cash cost of US$563 per ounce (ex royalties)
Kofi (75% EVR)
Kofi is located ~25km north of the Tabakoto mine and Randgold's Loulo Mine and hosts a current Resource of ~900koz (attributable). Kofi is likely to be an upcoming focus of a Resource update and PEA given its stage and proximity to the Tabakoto mill.
Additional studies are required to evaluate the potential for either a standalone mine or a trucking operation to the Tabakoto mine. Deposits at Kofi range from 10 to 40km by road from the Tabakoto plant.
Argonaut Securities Research 19 Return of the stock picker
31 January 2013
Diversified mid cap miner
Tropicana on track:
Argonaut recently visited Tropicana (IGO:ASX 30%, AngloGold Ashanti 70% - Manager), confirming the 6.4Moz project is on track for first gold pour in December Q 2013. A meeting between Argonaut and Anglo Ashanti in December also confirmed that construction is 65% complete.
Argonaut also visited the Long Ni Mine in January and remain content that the operation is performing well with no apparent risks current production.
Impact: Positive
Tropicana is the key share price driver with the deposit growing into arguably the best undeveloped gold project in a low sovereign risk location globally. Forecast operating metrics include a C3 cash cost of $720/oz ($580-$600/oz for the first 3 years), ~480kozpa production for first three years, and 300-350kozpa for the 10 year life of mine at 5.5:1 strip ratio. The operation will focus on conventional open pit mining from the Havana, Tropicana and Boston Shaker Pits prior to underground options. The capital cost is ~$740m (Argonaut F $770m).
A $13m brownfields exploration budget (100% project basis) is set for 2013. Drilling will focus upon extensions to the planned pits and regional targets with a 50km radius of the plant. In December the Company released a Mineral Resource upgrade for Tropicana with an increase of 1.5Moz or 23% to 7.9Moz Au.
Argonaut notes the Tropicana tenements cover the north eastern extension of the Fraser Range Complex, host to Sirius Resources’ (SIR:ASX) recently discovered high grade Nova Ni-Cu deposit. Given the success of SIR, this belt / mineralisation style is likely to attract increased attention from the JV partners.
View: Positive
IGO presents as a diversified mid cap miner with no peers.
The gold is the value driver, but the Company also offers exposure to diversified base metal production with a record of delivering sustained improvement in copper / zinc results. First stoping at Bentley is encouraging as is the slated completion of underground mining at the perturbed Jaguar mine in the December Q.
On the nickel front, the high grade Moran deposit (Reserve 31.7kt @ 4.1% Ni) will underpin at least the next 3 years output at the Long mine. Extensional drilling continues with Moran South presenting as a >50kt Ni target.
Recommendation: Buy
BUY recommendation with a $5.25 valuation.
Independence Group BUY
Research
Analysts: Matthew Keane Troy Irvin Patrick Chang Adam Miethke
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Current Price:Valuation:
Ticker: IGOSector: Materials
Shares on Issue (m):Market Cap ($m): 1,006.1Net Cash ($m): 122.7Enterprise Value ($m): 883.3
52 wk High/Low: $5.05 $2.9112m Av Daily Vol (m):
Key Metrics12A 13F 14F
P/E (x) -40.9 21.5 10.2EV/EBITDA (x) 20.0 10.0 5.8
Financials:
Revenue ($m) 216.6 250.8 346.8EBIT ($m) 5.0 48.7 100.6NPAT ($m) -285.3 46.7 98.5
Net Assets ($m) 642.1 506.7 663.9
Op CF ($m) 32.0 85.7 153.8
Per Share Data:
EPS (cps) -10.1 19.3 40.6DPS (cps) 5.0 5.0 5.0Div Yield 1.2% 1.2% 1.2%CFPS (cps) 13.2 35.4 63.5
Share Price Graph
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Argonaut Securities Research 20 Return of the stock picker
Independence Group Equities ResearchAnalyst: Matthew Keane
Recommendation BUY Sector MaterialsCurrent Price $4.32 Issued Capital (m) 232.9Valuation $5.25 Market Cap (m)All Ords (XAO) 4,919 Updated
Profit & Loss ($m) 30 June 2012A 2013E 2014E 2015E Financial Summary 2012A 2013E 2014E 2015ESales Revenue 216.6 250.8 346.8 550.1 Reported EarningsOther income 0.0 7.2 4.4 4.4 Net Profit ($m) (285.3) 46.7 98.5 203.2Operating costs 159.5 149.3 175.6 265.4 EPS (cents) (117.7) 19.3 40.6 83.8Exploration exp / written off 2.8 6.8 7.7 7.8 PER (x) (3.5) 21.5 10.2 5.0Corporate / administration 10.0 13.8 15.3 15.6 Normalised EarningsHedging / foreign exchange 0.0 0.0 0.0 0.0 Net Profit ($m) (24.6) 46.7 98.5 203.2Other -2.1 0.0 0.0 0.0 EPS (cents) 30.7 88.9 (10.1) 19.3 40.6 83.8EBITDA 44.2 88.1 152.6 265.5 EPS Growth (%) (174.0) (290.1) 110.9 106.3D & A 39.2 39.4 51.9 60.3 PER (x) (40.9) 21.5 10.2 5.0EBIT 5.0 48.7 100.6 205.3 CashflowInterest paid 1.4 2.0 2.1 1.1 Operating Cashflow ($m) 32.0 85.7 153.8 267.5Impairment of assets 372.4 0.0 0.0 1.0 GCFPS (cents) 13.2 35.4 63.5 110.3Profit Before Tax -368.8 46.7 98.5 203.2 PCF (x) 32.7 12.2 6.8 3.9Other 0.0 0.0 0.0 0.0 DividendTax expense -83.5 0.0 0.0 0.0 Dividend (cents) 5.0 5.0 5.0 5.0Minorities 0.0 0.0 0.0 0.0 Yield (%) 1.2 1.2 1.2 1.2NPAT -285.3 46.7 98.5 203.2 Franking % 100% 100% 100% 100%Normalised NPAT -24.6 46.7 98.5 203.2
Cash Flow ($m) 2012A 2013E 2014E 2015E Financial Ratios 2012A 2013E 2014E 2015EOperating Cashflow 32.0 85.7 153.8 267.5 Balance Sheet Ratios- Capex 108.9 141.9 138.4 106.5 Total Debt / Equity (%) 2.9 4.8 1.0 0.7- Exploration & Evaluation 57.2 22.6 25.6 26.1 Interest Cover (x) 4 25 48 195- Asset purchases (+ asset sales) -11.8 0.0 0.0 0.0 Acid test ratio (x) 3.5 2.0 1.5 1.9Free Cashflow -122.3 -78.7 -10.1 134.9- Dividends 10.7 16.3 14.0 14.0 Profitability Ratios+ Equity Raised 115.5 0.0 0.0 0.0 Net Profit Margin (%) -11.3 18.6 28.4 36.9+ Debt Drawdown (Repaid) -17.8 2.8 0.0 0.0 Return on Assets (%) 0.8 7.0 12.6 23.0- Other 0.0 0.0 0.0 0.0 Return on Equity (%) -44.4 9.2 14.8 21.7Net Change in Cash -35.4 -92.3 -24.1 120.9Cash at End Period 192.6 100.4 76.3 197.3
Valuation Summary A$m A$/shBalance Sheet ($m) 2012A 2013E 2014E 2015E Long 194 0.83Total Assets 812.9 795.0 877.9 1088.5 Tropicana JV (7.7% Discount Rate) 660 2.83Total Debt 18.6 24.2 6.7 6.7 Jaguar / Bentley 41 0.18Total Liabilities 170.8 288.3 214.0 154.0 Stockman 30 0.13Shareholders Funds 642.1 506.7 663.9 934.5 Duketon JV 21 0.09
Teutonic Bore 24 0.10Forward Sales 5 0.02
Production Summary 2012A 2013E 2014E 2015E Corporate -68 -0.29Nickel Production (kt) 10.0 11.0 10.5 10.5 Exploration 176 0.76
Unpaid Capital 4 0.02Nickel Cash Cost (US$/lb) 4.74 4.00 4.45 4.82 Investments 4 0.02Ni Price Realised (US$/lb) 8.94 9.64 9.36 9.50 Tax Losses 8 0.03
Cash at 30 September 147 0.63Zinc Production (kt) 16.6 26.8 35.8 45.7 Debt -24 -0.10Copper Production (kt) 7.3 5.8 6.3 11.4Silver Production (Moz) 0.7 0.8 1.1 1.3 Total @ 11% discount rate 1222 5.25
Zinc Cash Cost (US$/lb) 0.58 0.60 0.74 0.68Zn Price Realised (US$/lb) 0.95 1.11 1.20 1.20
DirectorsGold Production (koz) - - 52 142 Peter Bilbe Non-Executive Chairman
Chris Bonwick Managing DirectorGold Cash Cost (US$/oz) - - 552 554 Kelly Ross Executive DirectorGold Price Realised (US$/oz) - - 1238 1650 Rod Marston Non-Executive Director
Geoff Clifford Non-Executive Director
Reserves & Resources
Nickel Mt % Ni Ni (kt)Reserves 1.6 3.6 58.1Resources 2.8 5.3 103.9
Substantial Shareholders %Copper / Zinc / Silver Mt % Cu % Zn g/t Ag Cu (kt) JCP Investment Partners 12.2%Reserves 3.3 1.7 7.4 93 557 NAB 6.6%Resources 18.1 2.1 5.2 58 3756 Fidelity 6.3%
Colonial First State 5.1%Gold Mt g/t Au Au (Moz) BT Investment Management 5.1%Reserves 16.9 2.2 1.2Resources 35.4 2.1 2.4
$1,006.131-January-2012
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Argonaut Securities Research 21 Return of the stock picker
Tropicana key price driver
Tropicana is the key share price driver with the deposit growing into arguably the best undeveloped gold project in a low sovereign risk location globally.
Recent drill results (18m @ 5.4g/t and 24m @ 2.4g/t) reinforce the exploration potential further north and beneath proposed open pits at Tropicana and Boston Shaker.
Figure 1: Proposed open pit positions and new intercepts down plunge of Havana North
Source: IGO
A $13m brownfields exploration budget (100% project basis) is set for 2013. Drilling will focus upon extensions to the planned pits and regional targets with a 50km radius of the plant. Prospective target withing this radius include Rusty Nail, Beachcomber and Voodoo Child. All have returned significant gold interceps to date (see figure 2 below).
Figure 2: Plethora of exploration targets
Source: IGO Long Nickel Mine
Argonaut visited the Long nickel mine in January. The asset is performing at a steady state and there was no evidence of operational risk. Long is arguably Kambalda’s best nickel mine with Reserves of 41.9kt @ 3.7% and <$5/lb costs.
Tropicana is the key share price driver… …growing into the best undeveloped gold project…
…in a low sovereign risk location globally…
…with multiple exploration targets…
…within trucking distance of the plant…
Low cost, high grade Ni producer
Argonaut Securities Research 22 Return of the stock picker
Long nickel mine is on track to beat its FY13 production guidance of 9.2-9.6kt (Argonaut forecast 11kt Ni in conc.). The Company has agressively reduced costs over CY12 as a result of increased production and higher grades. Long is a low cost nickel producer and has been consistantly cash flow positive throughout the low in the nickel cycle.
Moran – Underpinning Long for >3 years
The Moran deposit (Reserve 31.7kt @ 4.1% Ni) will underpin at least the next 3 years output at the Long mine. Significant drill hole intercepts and TEM conductor plates outside current Resources and Reserves are shown below.
Bentley copper and zinc
Operations should improve as mining shifts from the Jaguar underground to the Bentley underground. Bentley is a new development (first stoping September Q 2012) and the operation issues incurred at Jaguar are now behind the operation.
VMS upside
The exploration upside at the Jaguar VMS belt is significant given its size (consolidated >50km strike under one ownership) and track record of success despite modest historic budgets.
Figure 3: Jaguar / Bentley – Tenure, regional geology, mines and significant prospects
Source: IGO
Western Australia’s VMS prospective belts have been inadequately tested with large budgets employing modern exploration techniques. This provides IGO with the opportunity to deliver “company changing” success, with Argonaut rating IGO’s exploration upside at Jaguar / Bentley to be the best amongst ASX listed peers.
The Jaguar Project currently contains ~6Mt in only 3 (Jaguar, Bentley and Teutonic Bore). IGO is likely to find more along its >50km of strike.
Long on track to meet guidance Moran deposit underpinning medium term life at Long Exploration upside from large land holding
IGO hold key tenements over the prospective mineralised belt
VMS potential in an underexplored region
Argonaut Securities Research 23 Return of the stock picker
31 January 2013
100koz in CY13
Production update:
Northern Star (NST) reported gold recovered of 20.5koz in the December Q at Paulsens. Q-on-Q variances:
� Gold output up 9.6% (1.5% less ore milled, at a 10% higher grade of 7.7g/t)
� Cash costs 12.4% lower at $600/oz (including royalties)
Argonaut’s F was 19koz @ $660/oz. Total cost was $924/oz.
NST has completed a mill expansion to 450kt pa, capable of producing ~100koz pa. A gravity circuit was installed as part of the mill upgrade.
Cash and cash equivalents at 31 December were $62m (v 30 September $67m). Cash outflow included an $7m expenditure associated with the plant expansion, and $4m in exploration.
Impact: Neutral
The production numbers are in-line with Argonaut’s expectations.
Argoanut has made conservative adjustments in sustaining capex (to $6m pq) going forward and exploration spending (to $5m pq) to reflect NST’s $20m exploration budget. The resulting valuation is $1.55 (was $1.80).
View: Positive
Operationally, the Paulsens mine is substantially de-risked with capital development >12 months in front of mining, >4 ore sources, mining rates >expanded milling rate (at ~500ktpa), 102kt ore on the ROM pad, new drills / loaders / trucks, and new ventilation.
Increased grades from the V1EZ are set to enhance the production and costs in 2013. In addition, the Company is set to benefit from mining the LZ in the upper levels (previously left behind) as no expansionary capex is required.
With the completion of mill expansion, the “easy growth” at Paulsens appears extracted. Further growth opportunities include more early stage exploration targets at Paulsens (e.g. gold in gabboro and gabboro offsets), as well as regional targets (e.g. Ashburton oxide and Electric Dingo). With Paulsens set to generate significant free cash flow in CY13, NST is also well positioned to make prudent acquisitions.
Recommendation: Buy
The recent management sell-down (was 19.7%, now 10.8%) at $1.35 appears to have sapped demand and put the brakes on the stock's impressive upward trajectory. However, Argonaut also notes NST is a quality offering in an ASX gold list largely devoid of high grade names with earnings and cash flow. BUY recommendation maintained.
Northern Star BUY
Research
Analysts: Patrick Chang Troy Irvin Adam Miethke Matthew Keane
Current Price:Valuation:
Ticker: NSTSector: Materials
Shares on Issue (m): 424.2Market Cap ($m): 462.4Net Cash ($m): 52.6Enterprise Value ($m): 409.8
52 wk High/Low: $1.59 $0.6112m Av Daily Vol (m):
Key Metrics12A 13F 14F
P/E (x) 21.1 12.8 8.3EV/EBITDA (x) 8.3 5.1 3.5
Financials:
Revenue ($m) 99.5 161.6 199.8EBIT ($m) 32.0 52.3 80.8NPAT ($m) 21.9 36.0 55.9
Net Assets ($m) 94.5 104.8 162.4
Op CF ($m) 51.1 78.3 113.2
Per Share Data:
EPS (cps) 5.1 8.4 13.1DPS (cps) 0.0 2.5 2.5Div Yield 0.0% 2.3% 2.3%CFPS (cps) 12.0 18.3 26.4
Share Price Graph
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Argonaut Securities Research 24 Return of the stock picker
Northern Star Resources Equities ResearchAnalyst: Patrick Chang
Recommendation BUY Sector MaterialsCurrent Price $1.09 Issued Capital (m) 424.2Valuation $1.55 Market Cap (m) $462.4All Ords (XAO) Updated
Profit & Loss ($m) 30 June 2012A 2013E 2014E 2015E Financial Summary 2012A 2013E 2014E 2015ESales Revenue 99.5 161.6 199.8 199.8 Reported EarningsOther income 2.6 2.9 4.2 7.1 Net Profit ($m) 21.9 36.0 55.9 66.2Operating costs 45.2 70.7 73.0 73.0 EPS (cents) 5.1 8.4 13.1 15.5Exploration expense / written off 2.1 6.3 6.8 7.0 PER (x) 21.1 12.8 8.3 7.0Corporate / administration 5.5 7.0 7.2 7.3 Normalised EarningsAcquisition related royalties 0.0 0.0 0.0 0.0 Net Profit ($m) 21.9 36.0 55.9 66.2EBITDA 49.4 80.5 117.1 119.7 EPS (cents) 5.1 8.4 13.1 15.5D & A 17.4 28.2 36.3 24.2 EPS Growth (%) 19.0 63.3 55.4 18.4EBIT 32.0 52.3 80.8 95.4 PER (x) 21.1 12.8 8.3 7.0Finance expenses 0.5 0.9 0.9 0.9 CashflowOperating Profit 31.4 51.4 79.9 94.6 Operating Cashflow ($m) 51.1 78.3 113.2 112.9Tax expense 9.5 15.4 24.0 28.4 GCFPS (cents) 12.0 18.3 26.4 26.4Impairment of assets 0.0 0.0 0.0 0.0 PCF (x) 9.1 6.0 4.1 4.1Minorities 0.0 0.0 0.0 0.0 DividendNPAT 21.9 36.0 55.9 66.2 Dividend (cents) 0.0 2.5 2.5 2.5Normalised NPAT 21.9 36.0 55.9 66.2 Yield (%) 0.0 2.3 2.3 2.3
Franking % 100 100 100 100
Cash Flow ($m) 2012A 2013E 2014E 2015EOperating Cashflow 51.1 78.3 113.2 112.9- Capex 31.0 38.6 24.5 25.0 Financial Ratios 2012A 2013E 2014E 2015E- Exploration & Evaluation 16.5 18.8 20.5 20.9 Balance Sheet Ratios- Asset purchases (+ asset sales) 6.5 0.0 0.0 0.0 Total Debt / Equity (%) 10.0 9.0 5.8 4.3Free Cashflow -3.0 20.9 68.2 67.0 Interest Cover (x) - - - -- Dividends 0.0 10.6 10.6 10.6 Acid test ratio (x) 2.8 1.8 2.5 2.8+ Equity raised 46.0 0.0 0.0 0.0+ Debt drawdown (- repaid) 5.3 0.0 0.0 0.0 Profitability RatiosNet Change in Cash 48.3 10.3 57.6 56.4 Net Profit Margin (%) 22.0 22.3 28.0 33.1Cash at End Period 64.9 75.2 132.8 189.2 Return on Assets (%) 46.3 66.8 108.6 94.7
Return on Equity (%) 23.2 34.3 34.4 30.3
Balance Sheet ($m) 2012A 2013E 2014E 2015ETotal Assets 134.0 153.6 207.2 290.0Total Debt 9.4 9.4 9.4 9.4 Valuation Summary A$m A$/shTotal Liabilities 39.5 48.7 44.8 71.2 Paulsens 373.4 0.88Shareholders Funds 94.5 104.8 162.4 218.8 Ashburton 80.0 0.19
Exploration 150.0 0.35Forwards 0.0 0.00Corporate -7.3 -0.02Unpaid Capital 2.5 0.01
Gold Production Summary 2012A 2013E 2014E 2015E 0 Cash and equivalents at 30 December 62.0 0.15Paulsens (koz) 67 95 121 121 121 Debt -9.4 -0.02
Listed Investments - VXR 5.3 0.01Total Gold 67 95 121 121 121Brazil Iron Ore (kt)Gold Cash Cost (A$/oz) 713 642 603 603 Total @ 7.7% discount rate 656 1.55Gold Total Cost (US$/oz) 1004Gold Price Realised (A$/oz) 1613 1636 1650 1650
Reserves & Resources DirectorsReserves Mt g/t Au (koz) Christopher Rowe Non-Executive ChairmanPaulsens 0.8 4.1 113 Bill Beament Managing DirectorAshburton 0.4 3.7 53 Michael Fotios Non-Executive Director
John Fitzgerald Non-Executive DirectorTotal 1.3 4.1 166 Peter O'Connor Non-Executive Director
Resources Mt g/t Au (koz)Paulsens 2.4 5.0 403Ashburton 11.6 2.7 1007
Total 14.0 3.1 1410Substantial Shareholders %Van Eck 6.7%Investmet 5.2%
EV / Reserve ($/oz) $2,355EV / Resource ($/oz) $277
31-January-2013
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Argonaut Securities Research 25 Return of the stock picker
Paulsens produced 20.5koz in the December Q… …cash cost 11.8% lower… …in line with Argonaut’s expectation Operationally de-risked with multiple ore sources and 102kt stockpile
“Easy growth” appears extracted
December Q
Northern Star (NST) reported gold recovered of 20.5koz in the December Q at Paulsens. Q-on-Q variances:
� Gold output up 9.6% (1.5% less ore milled, at a 10% higher grade of 7.7g/t)
� Cash costs 12.4% lower at $600/oz (including royalties)
Argonaut’s F was 19koz @ $660/oz.
Figure 1: Paulsens ore milled and grade
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Total cost was $924/oz.
Figure 2: Paulsens production and cash costs
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Operationally, the Paulsens mine is substantially de-risked with capital development >12 months in front of mining, >4 ore sources, mining rates >expanded milling rate (at ~500ktpa), 102kt ore on the ROM pad, new drills / loaders / trucks, and new ventilation.
Increased grades from the V1EZ are set to enhance the production and costs in 2013.
In addition, the Company is set to benefit from mining the LZ in the upper levels (previously left behind) as no expansionary capex is required.
With the completion of mill expansion, the “easy growth” at Paulsens appears extracted. Further growth opportunities include more early stage exploration targets at Paulsens (e.g. gold in Gabboro and Gabboro offsets), as well as regional targets (e.g. Ashburton oxide and Electric Dingo). With Paulsens set to generate significant free cash flow in CY13, NST is also well positioned to make prudent acquisitions.
Argonaut Securities Research 26 Return of the stock picker
JV with FMG expanded regional footprint to 7000km2…
…consolidated ground position…. …new geological structure could offer exploration upside…
Near mine results from the gabbro units…
…confirm the presence of gold…
…encouraging widths intercepted Could add ounces and extend the mine life
Expanding the regional footprint
NST recently signed a farm-in deal with FMG to acquired up to 60% interest, thereby expanding its regional footprint to 7000km2. The Company would earn 25% interest by paying $2m, and an additional 35% interest can be acquired through spending of $4m in 2 years.
Figure 3: Footprint expanded to 7000km2
Source: NST
While “early days”, the deal was a cheap entry for NST, and consolidates the Company’s ground position. Importantly the new ground covers a large portion of the Baring Downs Fault, a deep-seated geological structure recently recognised by the Geological Survey of WA. The structure remains under-explored but prospective for new discoveries. Near Mine Exploration upside
NST recently reported high grade gold assays from drilling into the gabbro units surrounding the 900koz Paulsens orebody.
Figure 4: Plan - Significant drill results for gabbro
Source: NST
The best intersection was 4.7m @ 13.9g/t (true width ~1.5m). Also of note is the gabbro result of 1.3m @ 13.8g/t (true width ~0.3m), which is the deepest intersection in Paulsens’ history (916m below surface and 350m below current production).
If proven up, the gabbro targets could add ounces and extend the mine life beyond the six years currently modelled by Argonaut (each additional year adds ~18c to Argonaut’s $1.55 valuation). The attraction is the proximity to existing development, implying relatively quick access and minimal development expenditure.
Argonaut Securities Research 27 Return of the stock picker
31 January 2013
Emerging from the Nuclear Winter
Strong production: Beating expectations
Paladin Energy (ASX:PDN, TSX:PDN) has reported a very strong production result in the December Q, with a record 2.20Mlb U3O8. This equates to 8.75Mlbpa and 3% above group nameplate of 8.50Mlbpa.
Langer Heinrich (LHM) produced 1.42Mlb at 805ppm (up 9.9% on September Q) which is 8.4% above the nameplate rate of 5.2Mlbpa. Kayelekera (KM) production of 0.77Mlb at 1,159ppm was up 20.9% on September Q and 93.6% of the nameplate rate of 3.3Mlbpa.
Record sales of 2.78Mlb at US$48.10/lb for US$133m were reported, up 127% on the previous Q (1.22Mlb at US$50/lb for US$61m). This is above the Company’s forecast of 2.70Mlb and is attributed to “lumpy Q-on-Q sales” and the monetisation of inventory (as forecast November 2012)
On a corporate level, the Company updated its progress on a strategic initiative, forecasting a result in March/April 2013.
Impact: Positive
Operations have stabilised and for the first time PDN has over-delivered on expectations.
PDN has strung together three quarters of near nameplate production and the key metrics of throughput and recovery are heading in the right direction. The excess capacity in LHM Stage 4 offers a production buffer to the historically volatile, higher cost KM mine and reduces the overall operational risk of the Company.
The market will be content with PDN’s production and focus will now shift to operational costs, cash balance and an increase in the uranium price. Although sales and production volumes were high, the realised price remains low and PDN will need to gain traction on its cost saving initiatives to generate sustained free cash flows.
View: Positive
Argonaut is forecasting a recovery in the uranium market in 2013. PDN is in the box seat to benefit from an increase in uranium prices with its strong production profile, leverage to the spot market and low capital requirement.
Maintaining a strong balance sheet prior to a price recovery is the key risk to PDN. Argonaut will be looking at Paladin to secure a second strategic initiative to deliver cash to treasury and safeguard the Company against a slower than anticipated price recovery.
Recommendation: Positive
Argonaut maintains its BUY recommendation, price target $1.75
Paladin Energy SPECULATIVE BUY
Research
Analysts: Troy Irvin Adam Miethke Patrick Chang Matthew Keane
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Current Price:Valuation: $1.75
Ticker: PDNSector: Materials
Shares on Issue (m):Market Cap ($m): 958.2Net Cash ($m): -770.2Enterprise Value ($m): 1,728.4
52 wk High/Low: $2.01 $0.7412m Av Daily Vol (m):
Key Metrics12A 13F 14F
P/E (x) -5.7 -19.2 37.6EV/EBITDA (x) 34.7 44.8 10.4
Financials:
Revenue (US$m) 367.4 400.7 485.1EBIT (US$m) 2.2 -3.1 123.6NPAT (US$m) -172.8 -50.5 25.5
Net Assets (US$m) 1,194.8 1,273.0 1,483.1
Op CF (US$m) -125.8 30.9 111.9
Per Share Data:
EPS (cps) -19.7 -5.9 3.0DPS (cps) 0.0 0.0 0.0Div Yield 0.0% 0.0% 0.0%CFPS (cps) -14.3 3.6 13.2In A$ unless otherwise stated
Share Price Graph
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Argonaut Securities Research 28 Return of the stock picker
Paladin Energy Equities ResearchAnalyst: Troy Irvin
Recommendation SPEC BUY Sector Metals & MiningCurrent Price $1.15 Issued Capital (m) 836.8Valuation $1.75 Market Cap (m)All Ords (XAO) Date
Profit & Loss (US$m) 30 June 2012A 2013E 2014E 2015E Financial Summary 2012A 2013E 2014E 2015ESales revenue 367.4 400.7 485.1 591.8 Reported earningsOther income 2.6 4.4 -3.2 -2.0 Net profit (US$m) (172.8) (50.5) 25.5 95.3Operating costs 266.2 322.4 275.0 289.3 EPS (A$cps) (19.7) (5.9) 3.0 11.3Exploration and evaluation 2.5 4.0 3.5 1.7 PER (x) (5.7) (19.2) 37.6 10.0Corporate & marketing 49.8 39.6 36.8 37.6 Normalised earningsForeign exchange loss 0.0 0.0 0.0 0.0 Net profit (US$m) (15.3) (50.5) 25.5 95.3EBITDA 51.5 39.0 166.5 261.3 EPS (A$cps) 5.9 (1.7) (5.9) 3.0 11.3D&A 49.3 42.1 43.0 44.1 EPS growth (%) (78.5) 239.6 (150.9) 274.6EBIT 2.2 -3.1 123.6 217.2 PER (x) (64.7) (19.2) 37.6 10.0Finance costs 56.7 77.3 81.0 81.0 CashflowOperating profit -54.5 -80.5 42.6 136.2 Operating cashflow ($m) (125.8) 30.9 111.9 180.7Impairments 225.0 0.0 0.0 0.0 GCFPS (A$cps) (14.3) 3.6 13.2 21.4Tax expense -78.7 -30.0 17.2 40.9 PCF (x) (8.0) 31.6 8.6 5.4Non-controlling interests -28.0 0.0 0.0 0.0 DividendNPAT -172.8 -50.5 25.5 95.3 Dividend (A$cps) 0.0 0.0 0.0 0.0Normalised NPAT -15.3 -50.5 25.5 95.3 Yield (%) 0.0 0.0 0.0 0.0
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Cash Flow (US$m) 2012A 2013E 2014E 2015EOperating Cashflow -125.8 30.9 111.9 180.7- Capex 70.1 30.4 27.9 144.8 Financial Ratios 2012A 2013E 2014E 2015E- Exploration & evaluation 12.1 18.0 16.4 16.7 Balance Sheet Ratios- Asset purchases (+ asset sales) 0.0 -200.0 0.0 0.0 Total Debt / Equity (%) 70 50 40 30Free Cashflow -208.0 182.5 67.7 19.2 Interest cover (x) 0.0 0.0 1.5 2.7- Dividends 0.0 0.0 0.0 0.0 Acid test ratio (x) 0.8 0.0 0.3 0.3+ Equity raised 124.4 0.0 0.0 0.0+ Debt drawdown (- repaid) 77.1 -197.5 -52.5 -52.5 Profitability RatiosNet Change in Cash -6.5 -15.0 15.2 -33.3 Net profit margin (%) -4.2 -12.6 5.2 16.1Effects of exchange rate 1.2 0.0 0.0 1.0 Return on assets (%) 0.1 -0.2 6.4 10.5Cash at end 112.1 97.1 112.2 79.9 Return on equity (%) -14.5 -4.0 1.7 5.3
Balance Sheet (US$m) 2012A 2013E 2014E 2015E Valuation Summary US$m A$m A$/shTotal assets 2347.7 2015.4 2049.5 2155.9 Langer Heinrich 969 969.4 1.16Total debt 838.5 641.0 588.5 536.0 Kayelekera 111 111.0 0.13Total liabilities 1152.9 742.4 566.5 370.3 Aurora Energy 333 332.9 0.40Shareholders funds 1194.8 1273.0 1483.1 1785.5 Other resources 939 939.4 1.12
Corporate -139 -139.5 -0.17Uranium Database 5 5.0 0.01Unpaid Capital 0 0.0 0.00Cash at the end of Sept 144 144.3 0.17
Production Summary (Mlb) 2012A 2013E 2014E 2015E Debt estimate -915 -914.5 -1.09Langer Heinrich 4.4 5.5 5.6 6.0 2012E Listed Investments 19 18.7 0.02Kayelekera 2.5 2.9 3.0 2.9 4.4
2.1Total @ 12% discount rate 1467 1467 1.75
Total 6.9 8.4 8.6 8.9
Uranium Cash Cost (US$/lb) 39 36 34 34 2012EUranium Price Realised (US$/lb) 55 50 59 70 30Exchange Rate Assumptions (USD:AUD) 1.03 1.01 1.00 1.00 55
DirectorsRick Crabb Non-Executive ChairmanJohn Borshoff Managing Director
Attributable Reserves & Resources Sean Llewelyn Non-Executive DirectorReserves Mt ppm Mlb Donald Shumka Non-Executive DirectorLanger Heinrich 111.3 530 131 84.7 Peter Donkin Non-Executive DirectorKayelekera 9.5 953 20 Phillip Baily Non-Executive DirectorTotal Reserves 120.8 565 151 34
55Resources Mt ppm MlbLanger Heinrich 145.9 536 172Kayelekera 22.9 758 38Aurora 61.1 900 122Mt Isa 86.8 700 132Other 32.5 931 48 Substantial Shareholders %Total Resources 349.1 665 512 L1 Capital 7.5%
Newmont 6.2%Government of Singapore Investment Corporation 6.0%
EV/resource lb (US$/lb) 3.38 National Australia Bank 5.0%
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Argonaut Securities Research 29 Return of the stock picker
Production Group production was a record 8.75Mlbpa which equates to 3% above group nameplate of 8.50Mlbpa. Figure 1: PDN group quarterly production
Source: Argonaut LHM was the standout with record recoveries (87.4%) from on-specification grade (805ppm) for record production of 1.42Mlb. LHM has now delivered two quarters above the nameplate (5.2Mlbpa) and one quarter at nameplate with lower feed grade ore (September Q at 854ppm).
Figure 2: LHM quarterly milled tonnes and grade
Source: Argonaut KM also delivered record production (0.772Mlb) with higher recoveries (83.8%) Q-on-Q and higher than specification feed grade (1,159ppm vs design 1,100ppm). Given that KM plant has produced at ~90% of nameplate for 9 months, Argonaut concludes this will be the steady production rate going forward. However, below nameplate production at KM is compensated by above nameplate production at LHM and the Company is on track to meet its guidance range of 8Mlb to 8.5Mlb in FY2013.
Figure 3: KM quarterly milled tonnes and grade
Source: Argonaut
Continued production growth across the group, expected to deliver on 8Mlb to 8.5Mlb guidance range
LHM a standout, delivering on all key metrics
Record LHM recoveries and production
Record KM production
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Argonaut Securities Research 30 Return of the stock picker
Sales Record sales of 2.78Mlb for US$133.9m should result in free cash flow for the quarter, however this volume is attributed to “lumpy sales” and monetising inventory which will not necessarily be replicated in subsequent quarters. Costs There was no mention of cash costs in the report, however the Company reiterated its focus on cost saving initiatives. Mining volumes were down at LHM as was the strip ratio at KM as the company reviewed its mining schedules in an effort to reduce costs. The Company gave an update on two key cost saving measures at KM; the project to reduce acid consumption is scheduled for commissioning in July 2012 and the switch from diesel generated power to grid power is expected in Q3 CY2014. Argonaut is forecasting moderate decreases in cash costs for the December Q of US$31/lb (September US$31.8/lb) at LHM and US$45/lb (September US$49/lb) for KM. Long-term Argonaut forecasts US$29/lb at LHM and US$40/lb at KM. Cash balance and strategic initiatives PDN updated its progress on the strategic initiative, forecasting results in March/April 2013. The Company is yet to clarify the nature of the strategic initiative, however the cessation of comments on an asset sale indicate that the deal will be at a corporate level or linked to off-take. Maintaining a strong balance sheet prior to a price recovery is the key risk to PDN. Argonaut will be looking at Paladin to secure significant cash from the second strategic initiative to safeguard the Company against a slower than anticipated price recovery. PDN had a cash balance of US$144.3m at the end of September and should deliver a modest operating profit of ~A$30m. The second tranche of the EdF prepayment of US$150m is expected at the end of January, however the cash balance will be eroded by the retirement of the $US134m March 2013 convertible bonds, financial repayments of ~A$25m, corporate costs and incidental capital items. Argonaut is still forecasting a healthy balance sheet at the end of the December Q. Market outlook Argonaut is forecasting a recovery in the uranium price within 2013 driven by the conclusion of the Russian “Megatonnes for Megawatts” program at the end of the year (minus ~24Mlbpa from global supply), the staged restart of idle Japanese reactors and the recommencement of new Chinese reactor approvals. Global uranium demand is ~170Mlb of which ~140Mlb is sourced from primary mine supply and the remainder from secondary sources. Mine supply has been severely impacted by post-Fukushima low prices and most new uranium projects have been deferred or cancelled. In contrast, there are currently 67 nuclear plants under construction with many more planned or proposed within the decade. Forecasted demand for 2020 ranges from 220Mlbpa to 280Mlbpa uranium consumption. The recent acquisition by ARMZ for the remaining 48.6% of Uranium One is indicator that end users are taking early action to secure supply. This event also highlights the takeover potential of PDN, which remains the only significant independent uranium producer. Further, this acquisition may act as a catalyst to expatiate the pending strategic initiative. Recent softening in the long-term uranium price from US$60lb to US$54/lb may indicate that the price recovery will be weighted to the second half of 2013, however we expect uranium stocks to increase in the short term in anticipation. Exploration 23 Diamond holes were drilled at the Canadian Michelin project drilling at the core Michelin deposit and nearby Running Rabbit Lake prospect. Initial results from Michelin confirm results from previous owners. The 96 holes were drilled at Manyingee (Western Australia) and also confirmed previously defined mineralisation. PDN is assessing drill results and geophysical data to create an updated resource estimate.
The 12 holes drilled at the KM Mpata deposit failed to return significant uranium mineralisation. Satellite deposits are much needed to extend the mine life of the KM project.
Focus on cost saving initiatives; awaiting results Cash balance is the key concern for the market as uranium prices remain low
Expecting a uranium price recovery in 2013
Michelin and Manyingee focus for exploration
So signs of a satellite deposits at KM
Argonaut Securities Research 31 Return of the stock picker
31 January 2013
Ten in a row
December quarterly report:
Western Areas (WSA) reported steady Ni in concentrate production for the tenth consecutive quarter. December Q production was 6.7kt, in line with Argonaut’s F of 6.7kt. Q-on-Q operating variances included: 6% higher ore milled at 152kt, 8% lower milled grade at 4.9%, 2% lower mill recovery at 90% and 16% higher cash costs at $4.19/lb (assuming 69% payable).
Ni sales were comparable Q-on-Q at 6.8kt v 6.9kt in the September Q.
Cash and trade receivables at 31 December were $108.2mm (v Sept 30 $79m). Treasury was bolstered by the December/January $65m equity raising. The Company also stated that it is renegotiating an increase and time extension to the ANZ debt facility to mitigate financial risk around the 2014 convertible bond (CB).
The Lounge Lizard Ore Reserve was increased by 49% to 1.8Mt at 4.0% for 72.2kt contained Ni.
In January the Company has announced the finalisation of a two year off-take agreement with Jinchuan for up to 26kt with improved payability terms commencing 2013.
Impact: Positive
Overall a steady quarter. Most metrics are less attractive than the September Q, however the Company is still on track to meet FY2013 cost and production guidance of $4.35/lb (assuming 69% payable) and 26kt Ni in concentrate respectively. The Q results represent natural Q-on-Q variation with no indication of negative long-term trends. WSA has now delivered 10 strong quarters in a row.
The Company is keeping Ore Reserve definition ahead of mining, evidenced by the increase to the Lounge Lizard Probable Reserve.
View: Positive
WSA remains the lowest cost producer amongst its ASX listed Ni producer peer group. Low costs and consistent production have enabled this stock to weather the current low in the Ni price cycle.
The opportunistic equity raising and strategy to extend the ANZ debt facility beyond the maturation date of the 2014 CB are evidence of prudent financial management. This should give the market confidence that WSA can meet its financial obligations and maintain a strong balance sheet even if Ni prices remain low for an extended period.
Recommendation: Buy
BUY recommendation maintained, Argonaut has decreased its price target to $5.95 (previously $6.50) based on 5% higher mining costs and higher sustaining capex.
Western Areas BUY
Research
Analysts: Matthew Keane Troy Irvin Adam Miethke Patrick Chang
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Current Price:Valuation:
Ticker: WSASector: Materials
Shares on Issue (m):Market Cap ($m): 856.3Net Cash ($m): -194.7Enterprise Value ($m): 1,051.0
52 wk High/Low: $3.56 $5.7412m Av Daily Vol (m):
Key Metrics12A 13F 14F
P/E (x) 21.4 28.0 12.2EV/EBITDA (x) 5.5 7.5 6.0
Financials:
Revenue ($m) 330.7 315.8 359.5EBIT ($m) 94.9 73.1 121.0NPAT ($m) 40.1 30.6 69.9
Net Assets ($m) 289.9 293.1 352.1
Op CF ($m) 159.3 114.3 133.8
Per Share Data:
EPS (cps) 22.1 15.4 35.2DPS (cps) 11.0 11.0 11.0Div Yield 2.5% 2.5% 2.5%CFPS (cps) 87.7 57.5 67.3
Share Price Graph
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Argonaut Securities Research 32 Return of the stock picker
Western Areas Equities ResearchAnalyst: Matthew Keane
Recommendation BUY Sector MaterialsCurrent Price $4.35 Issued Capital (m) 196.8Valuation $5.95 Market Cap (m)All Ords (XAO) Updated
Profit & Loss ($m) 30 June 2012A 2013E 2014E 2015E Financial Summary 2012A 2013E 2014E 2015ESales Revenue 330.7 315.8 359.5 401.2 Reported EarningsOther Income 8.8 5.4 6.5 6.1 Net Profit ($m) 40.1 30.6 69.9 99.5Operating Costs 150.5 165.1 174.6 179.1 EPS (cents) 22.1 15.4 35.2 50.1Exploration Written Off 0.0 6.0 6.1 6.3 PER (x) 21.4 28.0 12.2 8.6Corporate/Admin 6.3 10.0 10.2 10.4 Normalised EarningsShare Based Payments 0.9 0.0 0.0 0.0 Net Profit ($m) 40.1 30.6 69.9 99.5Foreign Exchange Adjustment -0.7 0.0 0.0 0.0 EPS (cents) 22.1 15.4 35.2 50.1Derivative Adjustment -7.8 0.0 0.0 0.0 EPS Growth (%) (70.3) (30.3) 128.6 42.3EBITDA 190.3 140.1 175.0 211.5 PER (x) 21.4 28.0 12.2 8.6Depn & Amort 95.4 67.0 54.0 54.0 CashflowEBIT 94.9 73.1 121.0 157.5 Gross (Op.) Cashflow ($m) 159.3 114.3 133.8 165.1Finance Costs 37.4 23.4 21.1 13.9 GCFPS (cents) 87.7 57.5 67.3 83.1Operating Profit 57.5 49.7 99.9 143.6 PCF (x) 5.0 7.6 6.5 5.2Tax expense 17.3 13.1 30.0 43.1 DividendImpairment of Assets 0.1 6.0 0.0 1.0 Dividend (cents) 11.0 11.0 11.0 11.0NPAT 40.1 30.6 69.9 99.5 Yield (%) 2.5 2.5 2.5 2.5Normalised NPAT 40.1 30.6 69.9 99.5 Franking (%) 100 100 100 100
Cash Flow ($m) 2012A 2013E 2014E 2015EOperating Cashflow 159.3 114.3 133.8 165.1 Financial Ratios 2012A 2013E 2014E 2015E- Capex 81.1 70.3 32.7 33.4 Balance Sheet Ratios- Exploration & Evaluation 42.7 20.1 20.5 20.9 Total Debt / Equity (%) 120 83 69 30- Asset Purchases (+ Asset Sales) 87.1 0.0 0.0 0.0 Interest Cover (x) 2.5 3.1 5.7 11.3Free Cashflow (51.7) 23.9 80.6 110.9 Acid test ratio (x) 0.8 1.3 1.6 1.5- Dividends 35.9 20.7 21.7 21.7+ Equity Raised 0.0 0.0 0.0 0.0 Profitability Ratios+ Debt Drawdown (Repaid) 44.2 (105.0) 0.0 (110.0) Net Profit Margin (%) 12.1 9.7 19.5 24.8Net Change in Cash (43.4) (101.8) 59.0 (20.7) Return on Assets (%) 15.6 14.8 25.3 33.8Cash at End Period 165.5 63.8 122.7 102.0 Return on Equity (%) 13.8 10.4 19.9 22.5
Balance Sheet ($m) 2012A 2013E 2014E 2015E Valuation Summary A$m A$/shTotal Assets 775.0 556.1 600.5 568.2 Forrestania 1127 6.20Total Debt 346.9 241.9 241.9 131.9 Other Forrestania Resources 132 0.73Total Liabilities 485.1 262.9 248.4 126.9 Forward Sales 0 0.00Shareholders Funds 289.9 293.1 352.1 441.3 Corporate -38 -0.21
Exploration 50 0.28Investments 4 0.02Unpaid Capital 0 0.00
Nickel Production (in conc.) 2012A 2013E 2014E 2015E 2012E Cash estimate at December 31 86 0.47Forrestania (kt) 25.6 27.2 27.0 27.0 Debt at December 31 -280 -1.54
Ni Cash Cost - net of credits (US$/lb) 3.64 3.84 4.06 4.17Ni Total Cost (US$/lb) 0.00 0.00 0.00 0.00 0.0 Total @ 11% discount rate 1,080 5.95Ni Price Realised (US$/lb) 8.96 7.48 8.50 9.50
25.6Directors
3.64 Terry Streeter Chairman0.00 Dan Lougher Managing Director8.96 David Southam Executive Director - Finance
Reserves & Resources Julian Hanna Non-Executive DirectorReserves Mt % Ni Ni (kt) Robin Dunbar Non-Executive DirectorFlying Fox (inc. Lounge Lizard) 1.8 4.0 72.2 25.7 Rick Yeates Non-Executive DirectorSpotted Quoll 3.0 4.2 126.1 Ian Macliver Non-Executive DirectorDiggers 2.1 2.0 30.8 3.20Total 6.9 3.3 229.1
Resources Mt % Ni Ni (kt) Substantial Shareholders %Flying Fox (inc. Lounge Lizard) 6.7 2.1 141.3 Jungle Creek (Terry Streeter) 14.4Spotted Quoll 2.9 5.9 172.4 UBS 10.5Diggers 10.0 1.0 99.6 Colonial First State 8.6New Morning / Daybreak 2.1 1.4 30.7 NAB 7.1Cosmic Boy 0.4 2.4 9.0 Northmead Holdings 5.9Beautiful Sunday 0.5 1.4 6.7 Acuity Investment Management 5.1Total 22.7 2.0 459.7
$856.331-January-2013
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Argonaut Securities Research 33 Return of the stock picker
Production and cash costs on track to meet guidance Reliable low cost production, 10 Qs in a row.
Mining ramping up at Spotted Quoll, but Flying Fox down Q-on-Q
Strong balance sheet and intelligent capital management Awaiting outcome of product tendering process, expecting increase Ni payability
10 strong quarters in a row
WSA has delivered 10 straight quarters of solid mill production. Although production was down marginally Q-on-Q (6.7kt from 6.9kt), the Company remains on track to meet its production guidance of 26kt Ni in FY2013. Cash cost of $4.19/lb were higher than the exceptionally low September Q, but still below guidance of $4.35/lb.
Figure 1: Forrestania nickel production and cash costs
Source: Argonaut
Overall mining volume was down 3% from 146kt to 141kt, however stockpiles tonnage and grade ahead of the Cosmic Boy concentrator remain strong with 169kt or three months inventory at 4.3%.
Flying Fox mined 90kt at 4.9% for 4.4kt Ni contained, down from 102.2kt mined at 5.0% for 5.1kt Ni in the previous Q. Spotted Quoll mined 51kt at 5.1% for 2.6kt Ni contained, up from 44kt at 5.4% for 2.4kt Ni contained in the previous Q.
Sound capital management
WSA raised $50m via an institutional placement in December and a further $15m in January via a Share Purchase Plan, both priced at $3.80 share. The Company has signalled that the proceeds of the equity raising will be used to repay the outstanding $45m of the newly refreshed $65m ANZ loan facility. The raising was strategically timed within a capital intensive quarter that included the final instalment of the US$15m Outokumpu royalty payout.
WSA is also negotiating a larger, longer termed debt facility with ANZ that will expire after the $110.2m July 2014 convertible bond (CB). Although the Company expects to repay the CB out of free cashflow, this facility will mitigate the financial risk. Argonaut’s forecast show sufficient cash available to repay the 2014 CB, however it commends the risk mitigating strategy of the Company as it will safeguard the balance sheet if Ni prices remain low.
Off-take agreement
Despite the recent rise in LME Ni prices, Ni concentrate prices are relative unchanged. The Company reported in January the finalisation of a two year off-take agreement with Jinchuan for up to 26kt Ni in conc. with improved payability terms commencing 2013. (Argonaut currently forecast 69% payable). The higher payability will increase revenue, however the contract may reduce corporate attractiveness as it locks up ~50% of production from 2015-2017.
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Argonaut Securities Research 34 Return of the stock picker
Replacing depleted Reserves Flying Fox Reserve increases Lounge Lizard, T5 and T7 deposits open to south and at depth
Multiple exploration targets at Forrestania
Keeping Reserves ahead of mining depletion
WSA reported a 49% increase in the high grade Lounge Lizard Reserve resulting to a net 7% increase in total Ore Reserves to 229kt contained Ni. Depletion amounted to 6.9kt for the December Q.
Figure 2: Longitudinal section of the Flying Fox deposit including the Lounge Lizard Deposit
Source: WSA
Exploration upside
WSA has a further exploration upside to increase Resources at Forrestania. Targets include southward and deeper extension of the Lounge Lizard, T5 and T7 deposits at Flying Fox, extension at depth of Spotted Quoll below the T3 fault, Sunrise deposit and New Morning deposit (see figure 3 below).
In January the company reported a significant discovery of new high grade mineralisation below the existing New Morning deposit. Drillhole NMD intersected 2.1m @ 6.9% Ni from 1238m down hole. Although this is the only drillhole to intercept the zone to date, the stratigraphic setting and mineralisation are analogous to Flying Fox. Figure 3: Exploration targets at Forrestania
Source: WSA
Argonaut Securities Research 35 Return of the stock picker
31 January 2013
Cheap cheap
32% Resource upgrade, grade increase:
Azumah Resources (AZM:ASX, AZR:TSX) updated the Resource at its flagship Wa project in Ghana. The upgraded estimate is 2.2Moz @ 1.7g/t (was 1.7Moz @ 1.5g/t), mainly resulted from a 478koz increase at Julie, and the addition of Aduane (85koz).
The Resource was independently estimated by CSA Global.
Drilling results are anticipated from regional prospects including Yiziri, Sabala, and Josephine.
Impact: Positive
The upgraded Resource is a vindication of Argonaut’s view that AZM’s ground should host well in excess of 2Moz. Encouragingly, the Resource upgrade is an increase in both grade and overall ounces.
This outcome has resulted in the Company planning to revisit previously envisaged, higher production scenario of 1.5Mtpa.
The significantly boosted inventory at Julie further strengthens the rationale for Wa East to ultimately host a stand-alone mining operation, supporting an upside case of two production centres, West and East, with up to 100kozpa output each.
Argonaut is bullish Josephine given limited RC work by previous explorers returned wide, high grade, shallow results e.g. 37m @ 3.1g/t from 4m, 14m @ 3.0g/t from surface and 5m @ 5.2g/t from 33m. The drilling will evaluate geochemical anomalies proximal to the 6km shear zone and test for mineralisation in the vicinity of shallow artisanal workings.
View: Positive
Following a lackluster Feasibility Study and maiden Reserve in August 2012, AZM has repositioned itself and re-defined its strategy going forward. The Company’s new focus on exploration and growing Resources / Reserves is already paying dividends. The upgraded Resource would almost certainly have a positive impact on the economics of the project, specifically scale and cash costs.
With only 10% of the 3,100km2 tenement effectively explored, regional exploration potential should offer the most upside for the stock.
AZM is arguably one of the cheapest exploration play on the ASX with an EV / Resource oz of just $12 v peer average of $47.
Recommendation: Spec Buy
Spec Buy recommendation and $0.35 valuation maintained.
Azumah Resources SPECULATIVE BUY
Research
Analysts: Patrick Chang Troy Irvin Adam Miethke Matthew Keane
Current Price:Valuation:
Ticker: AZMSector: Materials
Shares on Issue (m):Market Cap ($m):Cash ($m): 5.4Enterprise Value ($m):
52 wk High/Low: $0.42 $0.0712m Av Daily Vol (m):
Directors
Michael Atkins Non-Executive ChairmanStephen Stone Managing DirectorGeoff Jones Non-Executive DirectorBill LeClair Non-Executive Director
Substantial shareholders
Macquarie 9.4%
Share Price Graph
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Argonaut Securities Research 36 Return of the stock picker
AZM has increased Resource at WA… …to 2.2Moz @ 1.7g/t (was 1.7Moz @ 1.5g/t)
Significant increase at Julie strengthen the rationale for a stand-alone operation
Company’s focus on exploration paying dividend
Regional exploration should offer the best upside…
…given large under-explored tenure
Resource update
Azumah Resources (AZM:ASX, AZR:TSX) updated the Resource at its flagship Wa project in Ghana. The upgraded estimate is 2.2Moz @ 1.7g/t (was 1.7Moz @ 1.5g/t), mainly resulted from a 478koz increase at Julie, and the addition of Aduane (85koz).
The Resource was independently estimated by CSA Global.
Table 1: Updated Resource
Resource estimate
Deposit Mt g/t koz
Kunche 15.5 1.5 750
Bepkong 5.1 1.5 244
Adune 1.8 1.5 85
Julie 16.4 2.0 1,045
Collete 1.7 1.5 79
TOTAL 40.4 1.7 2,203
Source: Argonaut
Encouragingly, the Resource upgrade is an increase in both grade and overall ounces. This outcome has resulted in the Company planning to revisit previously envisaged, higher production scenario of 1.5Mtpa.
East side, west side
The significantly boosted inventory at Julie further strengthens the rationale for Wa East to ultimately host a stand-alone mining operation, supporting an upside case of two production centres, West and East, with up to 100kozpa output each.
Figure 1: East side, west side
Source: AZM, modified by Argonaut
Bepkong – Kunche Camp
Potential stand-alone operation at Julie
Argonaut Securities Research 37 Return of the stock picker
Exploration the main game going forward… …10% of the tenement package effectively explored
Josephine could deliver Resource upside…
…given historical, limited drilling results
AZM has a track record of Resource growth
Exploration main game going forward
Wiith only 10% of the 3,100km2 tenement effectively explored, regional exploration potential should offer the most upside for the stock.
Drilling results are anticipated from regional prospects including Yiziri, Sabala, and Josephine.
Argonaut is bullish Josephine given limited RC work by previous explorers returned wide, high grade, shallow results e.g. 37m @ 3.1g/t from 4m, 14m @ 3.0g/t from surface and 5m @ 5.2g/t from 33m. The drilling will evaluate geochemical anomalies proximal to the 6km shear zone and test for mineralisation in the vicinity of shallow artisanal workings.
Figure 2: Josephine area
Source: AZM
AZM is focused on extensional drilling and regional exploration, and ultimately Resource and Reserve growth. Figure 3 demonstrates a strong track-record in this area.
Figure 3: Track record of Resource growth
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Argonaut Securities Research 38 Return of the stock picker
AZM and GRY have unfunded projects… …with production planned for 2014 AZM is relatively cheap across all valuation metrics
If AZM delivers… …the stock should be able to command valuation metrics approaching GRY
Cheap cheap
To demonstrate the value proposition, Argonaut runs AZM “head to head” with West African junior pace-setter Gryphon Minerals (GRY:ASX).
Both stocks have unfunded projects, with first production planned for 2014. GRY’s cash position was recently boosted by a $31.3m share placement (52.2m shares @ 60cps).
Table 2: Head to head – AZM v GRY
AZM GRY
Overview
Project - Wa Banfora
Country - Ghana Burkina Faso
Market cap $m 32 198
Cash estimate $m 5 60
Listed Investments* $m 6 27
EV $m 21 111
Project metrics
Capex $m 160 230
Resource** koz 2,203 3,600
Reserve koz 430 1,050
Plant throughput Mtpa 1.0 2.0
Head grade g/t 2.0 2.0
Recovery % 92 92
Production kozpa 75 115
Valuation Metrics
Fully funded EV*** $m 181 341
NAV cps 35 95
P/NAV x 0.3 0.5
FF EV/Resource oz $/oz 82 95
FF EV/Reserve oz $/oz 420
FF EV/Production oz $/oz 2409 2964
Source: Argonaut
AZM is trading at a modest P/NAV of 0.3x (v GRY 0.5x).
On a FF EV/Resource oz basis, AZM is trading at $82 v GRY $95. Although GRY has a larger Resource, AZM has a “starter” Reserve of 430koz.
On a FF EV/Production basis, AZM is cheap at $2,409 (v GRY $2,964) despite having a similar head grade and similar shallow open pit mining plans.
If AZM continues to grow the Resource / Reserves, and deliver ongoing exploration success, the stock should be able to command valuation metrics approaching the levels of GRY.
Table 3: Relative valuation
Relative valuation AZM GRY Implied AZM cps
Metric
P/NAV x 0.3 0.5 0.18
FF EV/Resource oz $/oz 82 95 0.16
FF EV/Reserve oz $/oz 420 - -
FF EV/Production oz $/oz 2409 2964 0.20
Average 0.18
Source: Argonaut
The average of GRY’s P/NAV, FF EV/Resource and FF EV/Production implies an AZM share price of 18c.
Argonaut Securities Research 39 Return of the stock picker
31 January 2013
Flying start
Drilling results:
Dacian Gold (DCN:ASX) has released results from its maiden drill program at the Mt Morgans Project located in in the Laverton district of Western Australia. The program consisted of 4,000m RC drilling at Morgans North and Ramornie, including the assay result of one previously un-sampled drillhole from Craic. This campaign aimed at testing mineralisation continuity around known deposits.
Key intervals of note include:
• 8.0m @ 8.9g/t from 138m at Morgans North
• 4.0m @ 3.6g/t from 92m at Ramornie
• 5.3m @ 8.7g/t from 35.7m at Craic
Regional exploration identified a number of follow-up targets. Auger sampling at Cooper Pools returned grades up to 6g/t, whilst a geophysical survey completed at Cameron Well is targeting syenite-hosted mineralisation similar to the nearby +7Moz Wallaby deposit.
DCN acquired the Mt Morgans in January 2012, giving the Company a starting endowment of 842koz. The Company’s focus is on aggressively exploring and building on this Resource base to support a future mining operation.
Impact: Positive
This result forms part of DCN’s strategy to add lower-risk extensional ounces at the high grade Mt Morgans gold project. As orebody knowledge is acquired, these learnings will be applied to new targets in order to unlock the full value of the project.
View: Positive
Argonaut considers these results to be positive, as they validate the extension of known mineralisation at three deposits and highlight a number of new drilling targets. The $6.3m exploration budget planned for 2013 will support strong ongoing news flow.
Results from Morgans North demonstrate the potential for new zones of mineralisation to the north and south of the existing pit. These zones were not adequately tested through previous drilling and provide excellent potential support a maiden Resource at Morgans North. The high grade intercept from Craic confirms the potential to extend mineralisation down-plunge and is considered a priority target.
Based on current Resource metrics, DCN is under-valued in the peer group with an EV/Resource Oz valuation of $41 against the average at $60. DCN remains a key pick based on its blue chip mining board, asset quality and ‘blue sky’ exploration potential.
Recommendation: Spec Buy
SPECULATIVE BUY recommendation. Argonaut derives an implied valuation between $0.85 and $1.00 based on a peer average EV/Resource adjusted for DCN’s high grade.
Dacian Gold SPECULATIVE BUY
Research
Analysts: Adam Miethke Troy Irvin Patrick Chang Matthew Keane
Current Price: $0.55
Ticker: DCNSector: Materials
Shares on Issue (m): 96.1Market Cap ($m): 52.9Cash ($m): 20.0Debt ($m): 0.0Enterprise Value ($m): 32.9
52 wk High/Low: $0.50 $0.6212m Av Daily Vol (m):
Directors:
Rohan Williams Non-Executive ChairmanPaul Payne Managing DirectorBarry Patterson Non-Executive DirectorRobert Reynolds Non-Executive Director
Substantial Shareholders:Vitesse Pty Ltd 14.7%HSBC Custody Nominees 6.2%
Share Price GraphUse of funds ($m):
Year 1 Year 2Extensional TargetsRC drilling program 1.0 1.5Diamond drilling program 1.6 2.4Evaluation studies 0.2 0.3New TargetsGeology/geophysics 0.3 0.0Soil geochemistry 0.6 0.4RAB and RC programs 1.6 1.6OtherRents, Admin, Overheads 1.1 1.1Total 6.3 7.3
0.35
Argonaut Securities Research 40 Return of the stock picker
Maiden drill program has yielded positive results
Validates DCN’s strategy to add lower-risk extensional oz’s Key intervals include…
…which also confirms the potential for new zones of mineralisation
Located within the Mt Morgans hub of existing Resources
The Phoenix Shoot and Southern Extension are stand-out targets
Positive maiden results
Dacian Gold (DCN:ASX) has released results from its maiden drill program at the Mt Morgans Project located in in the Laverton district of Western Australia. The program consisted of 4,000m RC drilling at Morgans North and Ramornie, including the assay result from one previously un-sampled drillhole at Craic.
This result forms part of DCN’s strategy is to add lower-risk extensional ounces at the high grade Mt Morgans gold project. Argonaut considers the result to be positive as it and validates the extension of known mineralisation at three deposits.
The program also highlighted a number of new drilling targets which will be a focus of ongoing exploration. DCN has a $6.3m exploration budget planned for 2013.
Key intervals of note include:
• 8.0m @ 8.9g/t from 138m at Morgans North
• 11m @ 1.5g/t from 139m at Morgans North
• 4.0m @ 3.6g/t from 92m at Ramornie
• 5.0m @ 3.0g/t from 89m at Ramornie
• 5.3m @ 8.7g/t from 35.7m at Craic
As orebody knowledge is acquired, these learnings will be applied to new targets in order to unlock the full value of the Mt Morgans project.
Figure 1. Location of 2012 drilling, highlighting significant results
Source: DCN
Morgans North
Morgans North represents a banded iron formation (BIF) style deposit which also hosts the Westralia deposit (+1Moz) ~1km to the southeast. Eleven drill holes were completed which tested the mineralised extents directly below the historical pit and also along-strike.
Results demonstrate the potential for new zones of mineralisation to both the north and south of the existing pit. Morgans North is not currently included in the Resource inventory and these results demonstrate future upside for Resource conversion. The Phoenix Shoot and Southern Extension have been confirmed as key targets as historical exploration was limited to only shallow depths (<30m).
Argonaut Securities Research 41 Return of the stock picker
The Phoenix Shoot is hosted within BIF lithology and remains open Targets at Ramornie remain open and will be tested through ongoing exploration DCN remain under-valued among their peer group… …with 33% upside against their peer average
Figure 2. Morgans North Phoenix Shoot and drill hole intercept
Source: DCN
Ramornie
Ramornie is located within the Transvaal – Ramornie shear corridor which hosts four historical open pit mines. Mineralisation is structurally hosted and a number of exploration targets remain including along-strike and depth extensions of existing Resources. The results from nine drillholes confirm the narrow, high grade nature of this shear zone with average grades exceeding 3g/t. DCN are currently completing further drilling at Ramornie.
Craic
Craic also represents a shear hosted deposit and high grade gold mineralisation remains open to the north and below the developed underground mine. This represents an excellent opportunity to define a direct extension to the already defined high grade Mineral Resource and the assay result of 5.3m @ 8.66g/t from 35m validates this as a priority target.
Value proposition
Based on current Resource metrics, DCN is under-valued in the peer group with an EV/Resource Oz valuation of $41 against the average at $60. Upcoming catalysts include further auger and RC drilling results, further field reconnaissance results from regional exploration targets and the maiden Resource upgrade (March 2013E).
Figure 3. Peer group metrics – EV/Resource
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Source: Argonaut
Argonaut Securities Research 42 Return of the stock picker
A gold exploration and development company… …pursuing a lower-risk exploration strategy within a well-endowed mineral province…
…supported by a team with a track record of delivery
Located within the prospective Laverton gold belt DCN is a key speculative stock pick under Argonaut’s research coverage
Company Overview Argonaut initiatiated coverage on Dacian Gold (DCN) following the Company’s IPO on the 14th November. DCN is a gold exploration and development company and acquired the Mt Morgans Project in the Laverton district of Western Australia in January 2012.
Mt Morgans is a historical mining centre, forming part of DCN’s broader ~520km2 tenement package. This district is highly-endowed, and home to numerous major gold deposits that exceed 1Moz, including the AngloGold Ashanti's (AU:NYSE) Sunrise Dam and Barrick Gold's (ABX:NYSE) Wallaby gold mine.
The Company are conducting an intensive exploration and resource definition drilling program over the next two years (budget ~$14m), with a view to developing the Mt Morgans Project into a stand-alone gold production centre.
Lower-risk extensional ounces from known deposits are being pursued and this strategy was validated by the recent quarterly update. As orebody knowledge is acquired, the learning’s will be applied to new targets in order to unlock the full value of the project. Regional exploration underway includes a auger soil geochemistry program which has identified new ‘blue sky’ targets and geophysics.
The management team and Board have an extensive track record in successfully exploring for gold and developing gold mines in both Western Australia and overseas.
Figure 4: Location map and surrounding gold districts
Source: Argonaut
DCN looms as one of the best resources IPOs in recent times:
� People – Led by Rohan Williams, founding MD of Avoca who took a $7m IPO in 2002 to a ~$1b business in 8 years prior to the merger with Anatolia Minerals in 2010
� Asset quality – located in a region renowned for high-grade gold deposits, supported by under-explored brownfields and greenfields targets and exploration “easy wins”
� Timing - The offering is well-timed with gold supported by the macro and “QE infinity”
� “Blue sky” exploration upside - DCN's Cameron Well and Jupiter prospects form a straight line with Barrick’s +7Moz Wallaby deposit (all three are syenite-related)
� Value - The stock offers excellent value compared to peers, trading on an EV/Resource of US$41/oz v a pre-production peer average of US$60/oz.
Argonaut Securities Research 43 Return of the stock picker
31 January 2013
Bigger, higher, faster
Fekola now a 4Moz deposit:
Papillon Resources (PIR) announced a Resource update at its flagship Fekola Project in Mali, West Africa. The update recoverable Resource is 4.2Moz @ 2.4g/t (was 3.1Moz @ 2.4g/t) using a 1.0g/t cut-off. Using a 0.5g/t cut-off, the Resource increases to 5.5Moz @ 1.5g/t. The Resource now comprises 83% in Measured and Indicated categories. The Resource was independently estimated by MPR Geological Consultants, to a maximum vertical depth of ~390m. 59% of the drilling was completed by diamond holes.
Drilling is ongoing with 4 rigs (2 Diamond, 1 multipurpose RC/Diamond, 1 RC) testing the extension of the mineralisation, as well as regional targets within the Fekola Corridor. An additional RC rig has arrived on site.
Impact: Positive
The Resource update is a 34% increase in overall ounces with no material change in grade. The updated classification now potentially enables a larger proportion of the Resource to be converted to Reserve status. An increased plant throughput is now palpable with the upgrade (Argonaut F 5Mtpa v Scoping Study - 4Mtpa), potentially allowing the Company to produce ~300koz pa for >10 years and reduce operating costs in the upcoming PFS (Scoping Study - US$596/oz).
View: Positive
Argonaut anticipate further Resource growth:
� The interim Resource, including the high grade shoot, remains open along strike and at depth
� In-fill drilling will fill gaps in block models (particularly to the north)
� Earlier stage regional targets could add further ounces
Near term catalysts include:
� Ongoing – Drilling results from Fekola and regional targets
� June Q – Completion of PFS
Recommendation: Spec Buy
As an exploration / development project, Fekola is in a class of its own. The project ranks in the top three across a number of metrics (cash cost, scale, mine life) on the 21 developers under Argonaut’s coverage / watch list. The FF EV / Resource oz premium ($225 v peer average of $121) is warranted for the asset quality, anticipated high Resource to Reserve conversion, excellent Resource upside and regional prospectivity.
Key risks include the deteriorating political situation in Mali with a French / Malian coalition commencing military operations against rebels in northern Mali.
Papillon Resources SPECULATIVE BUY
Research
Analysts: Patrick Chang Troy Irvin Adam Miethke Matthew Keane
Current Price:Valuation: $2.50
Ticker: PIRSector: Materials
Shares on Issue (m):Market Cap ($m): 475.2Cash ($m): 14.8Enterprise Value ($m): 460.4
52 wk High/Low: $2.02 $0.7612m Av Daily Vol (m):
Directors:
Ian Middlemas Non-Executive ChairmanMark Connelly Managing DirectorRobert Behets Non-Executive DirectorAlec Pismiris Non-Executive DirectorPeter Woodman Non-Executive Director
Substantial Shareholders:
Directors 12.8%Goodman & Company 8.3%Gryphon Minerals 5.4%Platypus Asset Management 5.1%
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Argonaut Securities Research 44 Return of the stock picker
PIR announced a Resource update at Fekola…
…increasing the Resource to 4.2Moz @ 2.4g/t…
…a 34% increase with no material change in grade
…85% in Measured and Indicated categories
…59% drilling completed by diamond holes
Potential for upgraded plant throughput
Bigger, faster, higher
Papillon Resources (PIR) announced a Resource update at its flagship Fekola Project in Mali, West Africa. The update recoverable Resource is 4.2Moz @ 2.4g/t (was 3.1Moz @ 2.4g/t) using a 1.0g/t cut-off. Using a 0.5g/t cut-off, the Resource increase to 5.5Moz @ 1.5g/t. The Resource was independently estimated by MPR Geological Consultants, and to a maximum vertical depth of ~390m.
Figure 1: Fekola block model
Source: PIR
The Resource update is a 34% increase in overall ounces with no material change in grade., and now comprises 83% in Measured and Indicated categories. The updated classification now enables a larger proportion of the Resource to be converted to Reserve status.
Table 1: Comparison between July 2012 Resource and January 2013 Resource
Source: PIR
The Resource estimate contains data from a total of 428 RC and Diamond holes, for a combined 80,968m. 59% of the drilling was completed by diamond holes.
Table 2: Fekola drilling summary
Source: PIR
An increased plant throughput is now palpable with the upgrade (Argonaut F 5Mtpa v Scoping Study - 4Mtpa), potentially allowing the Company to produce ~300koz pa for >10 years and reduce operating costs in the upcoming PFS (Scoping Study - US$596/oz).
Argonaut Securities Research 45 Return of the stock picker
PIR released additional assays from the current drilling campaign…
…delivering wide, high grade intersections…
…with mineralisation remaining open
Results have extended the mineralisation at depth and to the north…
…A second shoot could emerge with further drilling
Extending the high grade shoot
PIR is continuing its extensional drilling program. Recently released results include (downhole widths):
� 73m @ 2.3g/t from 254m
� 34m @ 3.3g/t from 413m
� 71m @ 4.9g/t from 337m
� 59m @ 2.2g/t from 287m
� 45m @ 2.2g/t from 287m
Drilling is ongoing with 4 rigs (2 Diamond, 1 multipurpose RC/Diamond, 1 RC) testing the extension of the mineralisation, as well as regional targets within the Fekola Corridor. An additional RC rig has arrived on site.
Figure 2: Fekola long section
Source: PIR
The extensional drilling program has delivered strong results, and extended mineralisation at depth (~400m) and to the north of the current Resource. Importantly the mineralisation remains open, particularly to the north down plunge of the high grade shoot, where extensional drilling is underway.
Importantly the shallow plunging high grade shoot remains open and to be fully tested down plunge to the north. Argonaut believes this could deliver the quickest add to the inventory with results anticipated from this drilling campaign.
Although hole FKD_116 (designed to test the high grade shoot) delivered a “below-par” intersection of 18m @ 3.8g/t, Argonaut notes the wide drill spacing of ~100m (v the dimensions of the high grade shoot - ~50x50m) could suggest the bulk of the shoot was not intersected in this hole.
Interestingly, recent drilling could have potentially demonstrated the emergence of a separate, shallower high grade shoot outside the current pit design.
Deep drilling needed to test plunge extent
Argonaut Securities Research 46 Return of the stock picker
Regional geology is prospective for further discoveries…
…5 priority targets to be tested this campaign
PIR’s Bakolobi and Bantako tenements are also highly prospective
Regional upside
The Kedougou-Kenieba greenstone belt remains one of the best exploration address in West Africa, hosting numerous high grade, multi-million ounce deposits.
Figure 3: 5 priority regional targets to be drill tested this campaign
Source: PIR
Importantly, PIR’s Bakolobi (under application) and Bantako tenements, located along strike from and directly adjacent to the existing Medinandi lease are also highly prospective.
As an exploration / development project, Fekola is in a class of its own. The project ranks in the top three across a number of metrics (cash cost, scale, mine life) on the 21 developers under Argonaut’s coverage / watch list. The FF EV / Resource oz premium ($225 v peer average of $121) is warranted for the asset quality, anticipated high Resource to Reserve conversion, excellent Resource upside and regional prospectivity.
Figure 4: Peer comp, ASX developers, attributable Resource and grade
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Source: Argonaut
Argonaut Securities Research 47 Return of the stock picker
31 January 2013
Moving into a golden age
Site visit, initiation:
Argonaut visited Renaissance Minerals’ (RNS) 100% owned Okvau Gold Project, located in Cambodia, South East Asia. The project is the most advanced gold project in country owned by a listed company and is located 265km NE of Phnom Penh.
Okvau is situated in the recently identified Eastern Cambodian Igneous Province, with the virgin discovery of the existing Resource area made in 2006 by a local prospector. Following the initial discovery, ~1,000 artisanal workers reportedly worked on site.
Previous owner OZ Minerals (OZL) focused on the initial discovery area and delineated a Resource of 729koz @ 1.8g/t. This number excluded oxide material worked by artisanals.
Despite the comprehensive regional generative geological work completed by OZL, minimal field work has been completed outside this area. In particular there is limited drilling (total of ~5km outside the Resource area) and soil sampling.
RNS is taking a more holistic approach to exploration and is rapidly delineating priority targets by doing additional soil / stream sediment sampling, mapping and reconnaissance drilling. A 25km, 2 rig drilling campaign has commenced at Okvau, testing numerous high tenor soil anomalies.
Impact: Positive
The Resource at Okvau is set to exceed 1Moz in March / April, following a planned in-fill and extensional program commencing in February.
However, regional targets offer the real upside. Numerous high tenor, large footprint soil anomalies have emerged following soil and stream sediment sampling. Targets planned to be drill tested include Area 6, Area 3, Okvau North and Granite Hill.
View: Positive
There is potential for multi-million oz deposits as the Eastern Cambodia Igneous Province is a new gold province and untested with modern, systematic methods. This is further supported by the presence of large deposits in other known intrusive related gold belts worldwide (e.g. Donlin Creek 38Moz, Fort Knox 10Moz, Livengood 20Moz).
The stock is trading at an EV / Resource oz of $43. Although this is only slightly below the peer average, Argonaut notes the rigorous nature of the Resource, and exploration upside should rapidly improve this metric.
Risks include untested mining laws, early-stage metallurgy and poor infrastructure.
Recommendation: Spec Buy
Spec Buy.
Renaissance Minerals SPECULATIVE BUY
Research
Analysts: Patrick Chang Troy Irvin Adam Miethke Matthew Keane
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Current Price:
Ticker: RNSSector: Materials
Shares on Issue (m):Market Cap ($m): 39.4Cash ($m):* 5.6Enterprise Value ($m): 33.8
52 wk High/Low: $0.29 $0.1512m Av Daily Vol (m):
* post OZ Minerals paymentDirectors:
Rick Hart Non-Executive ChairmanJustin Tremain Managing DirectorMel Ashton Non-Executive DirectorDavid Kelly Non-Executive Director
Substantial Shareholders:
OZ Minerals 16.0%JA Advisory 12.0%Gryphon Minerals 10.0%Management 6.0%CQS Asset Management 5.0%
Share Price Graph
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Argonaut Securities Research 48 Return of the stock picker
Argonaut recently visited RNS’ Okvau Project…
…located 265km NE of Phnom Penh, Cambodia
…acquired from OZL in May 2012…
…mostly success based payments
Cambodia has an attractive fiscal regime
Leading Cambodia gold explorer
Argonaut visited Renaissance Minerals’ (RNS) 100% owned Okvau Gold Project, located in Cambodia, South East Asia. The project is the most advanced gold project in the country owned by a listed company and is located 265km NE of Phnom Penh, the Capital of Cambodia.
Figure 1: RNS project locations
Source: RNS
OZ Minerals deal
The Cambodian projects were acquired from OZL which settled in May 2012.
The assets comprise a 1,100km² position, with an Indicated and Inferred Resource of 729koz @ 1.8g/t Au at the Okvau deposit. The main licences (Okvau and O Chhung) are held 100%. The acquisition included an entire in-country team, including 4 expats. OZL is understood to have spent ~$38m on the project, before deciding to focus on copper. The majority of the consideration is linked to success.
Table 1: Acquisition terms
Acquisition terms
Milestone Cash Payment ($m) RNS shares (m)
Upon Execution and Completion 7.8 (Paid) 26.4
12 months 3.5 -
>1.25Moz 10.0 -
6 months after first gold pour 12.5 - Source: RNS
Cambodia
After the Pol Pot / Khmer Rouge induced brutality of the 1970’s and 1980’s Cambodia has achieved political stability. Forecast GDP growth is ~6% after double digit gains were recorded from 2003-2007. Although relatively untested, tenure is arguably better than other countries in the region with Cambodia offering a functioning title system and mining act. The country is a member of WTO (2004) and ASEAN (1999). The fiscal regime is attractive:
� 30% corporate tax
� 2.5% royalty (negotiated by OZL)
� No government free carried interest, 100% foreign ownership allowed
Argonaut Securities Research 49 Return of the stock picker
No conflicting land use at Okvau, mining / exploration takes precedence
Virgin discovery made in 2006…
…~1,000 artisanal reported worked on site
Existing Resource of 729koz @ 1.8g/t…
…conservative in terms of grade and overall ozs… …>1Moz tangible with extensional drilling
Okvau is an intrusive related gold deposit…
Okvau (100%)
Access to the project is through sealed and unsealed road from Phnom Penh (~8hrs), with alternatively helicopter access (~1.5hrs). Okvau is located in well forested areas, and logging of rosewood is the only commercial activity. There is no conflict of land uses (no agricultural concession) within the project areas, and RNS’ licenses enables exploration / mining to take precedence over other land uses.
Okvau was a virgin discovery made in 2006 by a local prospector. Following the initial discovery, ~1,000 artisanal workers had reportedly worked on site. These workers have worked the oxide to ~10-20m using labour intensive manual methods (no explosive used). Most of these workers have moved away from the Okvau Resource area, with ~200 workers remaining.
Infrastructure
Existing surface infrastructure including camps, offices, and a core shed. Other infrastructure include unsealed roads, water, on site power generation and helicopter pads. The closest proposed grid power is ~70km west of the project.
The in-country team comprise predominantly of locals, with 4 senior expat geos on site.
Mineral Resource
An indepedent Mineral Resource was estimated by Hackman & Associates, from ~22km of drilling. All Resource definition drilling completed to date (68 holes) have been diamond holes.
Table 2: Mineral Resource Estimate at Okvau
Okvau Mineral Resource
Category Tonnage Grade (g/t) koz
Indicated 7.8 2.0 508
Inferred 4.8 1.4 221
Total 12.6 1.8 729
0.5g/t lower cut Source: RNS
The Resource was estimated to 350m below surface, with ~90% of the Resource residing within 250m from surface. The oxide portion of the Resource has been excluded.
Given the high grade nature of the narrow, sub-parallel sulphide veins within the diorite, Argonaut considers the existing Resource conservative, due to the stringent restrictions on high grade hits (>10g/t influence reduced, 30g/t top cut).
Extension to the Okvau Resource is tangible given the Resource is open in several directions, particularly to the NW and NE.
New gold camp
Okvau has been classified as a “reduced” Intrusive Related Gold (IRG) deposit. Gold mineralisation at Okvau is predominantly hosted within a Cretaceous diorite, although some mineralisation does extend into the surrounding Trirassic / Jurrasic sanstone / siltstone (metamorphosed to hornfelds). The structural control on the mineralisation is believed to be secondary, en-echelon structures within 2 larger, NW-SE structures.
Regionally, the newly identified Intrusive Related Corridor spans ~220km by 8km, within which 12 major intrusives and 20 minor intrusives have been mapped. Modern exploration on the project is very limited with last mapping done in the 1990s by Russian geologists.
The regional potential awaits to be unlocked, with minimal work outside the existing Resource area.
Argonaut Securities Research 50 Return of the stock picker
…shares similarities with Alaskan giant deposits…
…newly identified intrusive related gold province
60km2 soil sampling program… …to rapidly screen targets
Soil anomalies to be followed up with RC drilling
Targets include Area 6, a 12km2 multi-element anomaly…
Figure 2: Tintina Belt v. Intrusive Related Corridor in Cambodia
Source: RNS
There is potential for multi-million oz deposits as the Eastern Cambodia Igneous Province is a new gold province and untested with modern, systematic methods. This is further supported by the presence of large deposits in other known intrusive related gold belts worldwide (e.g. Donlin Creek 38Moz, Fort Knox 10Moz, Pogo 6Moz, Livengood 20Moz).
60km2 soil sampling program in progress
To rapidly advance prospects the Company is delineating additional drill ready targets by undertaking a major soil sampling program, designed to cover 60km2 of the Okvau and the adjoining O’Chhung tenements, of which only 30km2, or 15%, has been surveyed previously. This program will comprise ~10,000 samples and is expected to conclude in a few months. In addition a stream sediment sampling program is progressing in parallel.
This strategy is likely to prove fruitful as the present day erosion level would have unlikely exposed all prospective mineralisation hosts. Argonaut anticipates additional targets to be generated in due course.
Geochem anomalies being drill tested
Most of the historic and newly defined geochem targets will be drill tested in the current 25km RC drilling campaign. Targets include Area 6, Area 3, Okvau North (currently drilling) and Granite Hill. Some of these targets have comparable pathfinder mineral tenor and footprints far in excess that of Okvau itself. The drilling campaign will be result driven.
Figure 3: Targets within Okvau
Source: RNS
Intrusive Related gold corridor
Argonaut Securities Research 51 Return of the stock picker
Summary of Recommendations - Resource Services
Table 10: Stock Recommendations – Resource Services (Key picks highlighted, prices at 31 January)
Share Target
Price PriceCompany Code
Market Cap
($m)Rec Comments
Ausdrill ASL 950 $3.12 $3.90 BUYInclusive of BTP, ASL is targeting FY13 revenue and underlying NPAT growth of ~20% and ~15%. After one-off costs of ~$15m, reported NPAT is expected to be similar to FY12 ($112m). BTP will be consolidated from November 2012, largely acounting for the weighting to 2H13.
Austin ANG 356 $4.92 $5.10 BUYANG expects 45-55% growth in EBITDA on pcp in 1H13. This will deliver EBITDA in line with 2H12. Normally earnings are weighted to 2H, but the general slowdown (particularly in coal), together with some margin pressure, means that profit split in FY13 is likely to be more even.
Decmil DCG 431 $2.48 $2.80 HOLD
We expect another record year, but assume a weaker 2H as construction projects tail off. Replacement of order book run-off will be a key risk for DCG, although LNG projects offer opportunities. Offsetting a possible decline in construction revenue is new income under the BOO model.
Fleetwood FWD 619 $10.25 $9.05 HOLDSoft conditions in the RV division, subdued manufacturing activity in the MA division and low occupancy at Searipple implies a much weaker 1H13. Building Gladstone and Port Hedland villages will move FWD into a debt position and may constrain dividends during construction.
Forge FGE 517 $5.90 $6.40 BUYGuidance is for revenue of $950-1,000m and PBT of $90-100m, evenly split between halves. This is underpinned by a strong order book (>$900m) and a solid full year contribution from CTEC. The management transition looks to have gone smoothly.
Global Construction GCS 145 $0.86 $1.00 BUYWhile there remains a solid pipeline of potential work in resource, commercial and oil and gas sectors, project delays have been a recurring theme. We assume a stronger 2H as the Midland Hospital contract ramps up. EPS is diluted as a result of the $32.2m capital raise in the 1H.
GR Engineering GNG 126 $0.82 $1.00 BUYGuidance is for FY13 revenue of $140-145m and PBT of $13.0-13.5m, strongly weighted to the 2H. 1H13 revenue is expected to be $50-55m and PBT $1.8-2.1m. Project delays and deferrals, and one-off costs associated with Gold Ridge dispute in 1H13, has impacted this year's results.
Imdex IMD 395 $1.91 $1.75 HOLDChallenging trading conditions in 1Q13 saw lower Minerals revenue and a 14% decline in tools on rental. Overall, our reduced margin forcasts for FY13 reflect ongoing uncertainty, although this is partly mitigated by IMD's continued geographic and product diversification.
Logicamms LCM 93 $1.36 $1.40 HOLDLCM has not provided specific guidance, however we expect continued growth in FY13 with earnings weighted to the 2H. The Company is well placed to capture market opportunities under its multidiscipline service offering, particularly in the areas of asset management and hydrocarbons.
Lycopodium LYL 249 $6.53 $5.40 HOLDFY13 results are expected to be in line with FY12 (revenue $231m and NPAT $22.4m). Looking to FY14, LYL expects that project deferrals, completion of others, and generally more challenging conditions will lead to a fall in revenue.
MACA MLD 390 $2.59 $3.15 BUYWe expect continued growth in revenue and earnings in FY13, underpinned by a large order book and long term contracts. During the 1H, MLD was awarded contracts for civil, gold and iron ore projects and, as such, we expect a stronger 2H as these contracts ramp up.
Macmahon MAH 336 $0.27 $0.20 HOLDInitial FY13 guidance (post Hope Downs) was for NPAT of $20m-40m. After further review a $95-100m writedown on problem contracts is expected, resulting in a group net loss of $50-60m in 1H13. An $80m capital raising has taken place, and the Construction division is to be sold.
Matrix MCE 178 $1.88 $1.90 HOLDTarget production rates have been achieved at the Henderson plant. However, MCE downgraded guidance in October to reflect a reduced order book and declining visibility. FY13 revenue is expected to be in the range $165-175m and NPAT in the range $6.6-10.9m.
Mermaid Marine MRM 869 $4.01 $3.50 HOLDMRM has not provided specific guidance but has confirmed it expects continued earnings growth. We assume flat Vessels EBIT yoy (after an abnormally strong 1H12), but further improvements in the contribution from the Supply Bases.
NRW Holdings NWH 547 $1.95 $2.00 HOLDNWH is targeting revenue growth of 15% and NPAT margins of 5-6% in FY13. 1H13 revenue and NPAT is expected to be ~$800m and $45-50m respectively. Lower margins and a fall in Mining revenue in FY14 leads us to expect a further fall in earnings in FY14.
Pacific Energy PEA 167 $0.46 $0.63 BUYOur forecasts are aligned with the Company's guidance of revenue of $40m and EBITDA in the range $28-29m. We expect a stronger 2H as more recent contracts start to contribute. PEA has a high degree of earnings visibility and potential acquisition opportunities could add to organic growth.
RCR Tomlinson RCR 301 $2.26 $2.10 HOLDRCR guidance for 1H13 is revenue of $388m, EBIT of $18-19m, and NPAT of 15-16m (boosted by lower tax rate). As is typical, we expect 2H13 to be stronger than 1H13 (also due to conservative profit recognition on Solomon). 1H14 will also be positively impacted by the Solomon contract.
Swick SWK 87 $0.38 $0.40 BUYOur FY13 forecasts are in line with guidance for "revenue in the range of $145-155m and EBITDA in the range $30.5-34.5m". Earnings are expected to be fairly evenly split between halves, following the release of 1H unaudited revenue and EBITDA.
Tox Free Solutions TOX 363 $3.22
$0.01
$2.90 HOLD
VMG has indicated it expects to report a loss before tax in 1H13 of between $7m and $9m. Performance has been negatively impacted by a number of factors including poor execution of recent contracts, legacy issues and softer market conditions.
TOX has not provided specific guidance, although we expect growth on the back of acquisition contributions and opportunities across WA, NT and QLD. As is typical, we expect a stronger weighting to the 2H.
VDM Group VMG 13 $0.02 SELL
Southern Cross SXE 195We expect earnings to be strongly weighted to the 2H due to a lag between completing existing projects and starting new contracts. Our 2H forecasts are underpinned by large contract wins in the 1H for the Tropicana project and Rio Tionto iron ore expansion.
$1.35 BUY$1.22
Argonaut Securities Research 52 Return of the stock picker
Summary of Recommendations – Oil and Gas
Table 11: Stock Recommendations – Oil and Gas (Key picks highlighted, prices at 31 January)
Market Share Price
Cap. Price Target
Australia Non Conventional
Diversified production company with core assets in the Cooper Eromanga Basin in South Australia / QueenslandLarge exposure to non conventional potential of these basins through STO operated and self operated permits2P 94mmboe, 2C 466mmboe, conventional exploration upside at Lake Tanganyika - East African RiftCore assets in the Cooper Basin. currently acquiring another regional player: ACNFY2013 production guidance of 1.2mmboe - a 215% increase on FY12 - soruced from oil and wet gas projects2P 12.5mmboe, 2C 10.4mmboe. 3P+3C potential ~70mmboe. Non conventional program funded by BGCore assets in Cooper Basin. Strong oil production from Western Flank, 2013 guidance of >1mmbbl. Encouraging early signs from 4 non conventional wells in Southern Cooper Basin, 10 more planned.2P 31.1mmboe, 500PJ of CSG resources in Surat Basin. Maiden 2C from non conventional in 2013Huge footprint in the Canning Basin. Encouragaing results for large Basin Centred Gas Accumulation.Recent oil discovery at Ungani in new play type currently under long term test. Near field upside possible.Strategic pertnership with Mitsubishi assists with funding appraisal of massive non conventional potential.Diversified production across Australia, NZ and USA (Sugarloaf Eagle Ford Shale)FY13 production guidance 4.5-5mmboe. Results from tight / shale gas wells in Perth Basin above expectation2P 56.1mmboe, 2C 133mmboe. Growth asset in Indonesia - 50% sale process underway.Core assets onshore Canning and Carnarvon Basin. $120m multi well farm-out executed to Conoco PhillipsFirst drilling result on Conoco / NSE Goldwyer project not well received / understood by market Additional potential / farm-outs at Merlinleigh and Laurel ProjectsCore assets in Perth Basin with large footprint. First non conventional well performed above expectationsTight gas with liquids potential as well as oil recovered to surface - 4 zones all tested successfullyLong term testing of zones currently underway with first zone cleaning up. Conventional UK exploration also.Production assets in the USA performing well. Debt funded for acquisitons / development by Macquarie.Huge option 200,000 acres Marcellus, 140,000 acres Utica in NY state (fracking moratorium)2P 11.6mmboe, 3P+3C 265mmboe. Huge option on 14.5m acres in McArthur Basin, NTLarge footprint in the McArthur and Georgina Basins in Northern Territory and Queensland.Initial results from first 4 wells encouraging, including flow rate of >3.5mmcf/d from the Barney Creek Shale.41tcf and 2b barrels of prospective resources estimatedLarge footprint in the Perth Basin. Conventional wet gas discoveries at Red Gully and Gin Gin West.Non conventional potential provides upside option on undervalued development story with significant followup.2P 20bcf and 1mmbbl (est)Conventional wet gas production onshore USA, non conventional Southern Cooper Basin and Eagle Ford ShaleFirst Eagle Ford well result below expectation. Initial drilling in Cooper Basin highlights large gas potential from coal seams as well as shale.
US Non Conventional
19,300 acres in the heart of the Eagle Ford Shale. Partnered with Marathon Oil. 10,400boe/d productionProduction ramping up quickly. Trialling different techniques to increase reserves and production.2P 92mmboe Upside potential from current downspacing trial as well as other horizons.Recently merged with Texon Petroleum. Non conventional assets in Bakken, Niobrara, Eagle Ford, Mississippian.Conventional assets in the Wattenburg. Sold 1/3 of Bakken assets for $175m. 2P 8.8mmboe, 3P 47.8mmboe $250m in total funding capability including $163m cash.Three projects in Permian Basin, Texas. Core project provides production of 2,500boe/d and is adjacent to a similar property purchased by Breitburn this year for US$220m. Recently increased acreage footprint.Undervalued compared to peers with predictable production growth. Upside possible from less mature projects.19,000 acres in emerging Woodbine Play. First well result below expectation. Adjacent propertypurchased by Halcon for $500m. Additional upside possible from stacked pay potential.Could be the next big thing and risk is considered relatively low due to successful wells nearby.
China Non Conventional
Tight gas and coal bed methane onshore China, Ordos Basin. Adjacent to producing field with same geology.Commercial flow rates from all 11 wells tested. Recent farm-out deal provides $100m in funding to development.>1tcf of contingent and prospective resources with 500bcf 2P reserve target in 2013.
Africa Conventional
23% post farmout ownership of 10,700km2 Mazagan Permit in deepwater offshore Morocco. US$235m farmout executed with Plains - multiple well carry. Gabon entry provides additional upside.1.6b barrels of net resource potential over three play types. 7-8 wells likely in Morocco over next 18mths.Working interests in 4 permits offshore Kenya and 1 permit offshore Namibia. Recent discovery at Mbawa has high graded the region. Share price retraction creates opportunity ahead of drilling activity beginning with APCin December. Drilling on PCL permits possible Q3 2013.>15,000km2 of acreage in East African Rift System. Partnered with Tulllow in Kenya to south of recent success.Partnered with Otto Energy in huge permits with rift basins indicated by aeromag / gravity data.IPO in March 2013
Europe Conventional
100% working interest in two permits onshore Ukraine, each with discovered gas from historic wells.First up drilling success provides production, second development well to come onstream imminently.2P 40bcf 1mmbbl. >500bcf of prospective and contingent resource.
Figures in A$m unless stated otherwise
Review ReviewSwala N/A 31 N/A
$0.15 Review Review
$0.11
Hawkley Oil and Gas
$0.15
HOG
186
42
BUY
$0.30 BUY
Pancontinental Oil
$2.83
Review
Sino Gas Energy
PCL 121
Review
Antares Energy Ltd
Review
SEH
Pura Vida Energy NL PVD 41 $0.69
Sun Resources NL SUR 97 $0.05
Review
AZZ 137 $0.54 BUY
AUT 1,626 Review
Sundance Energy SEA 330 $0.92
$0.79
Review
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STX 74 $0.12
$3.63Aurora Oil & Gas
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Empire Oil & Gas EGO 72 $0.01 Review Review
Strike Energy Ltd
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Armour Energy Ltd AJQ 72 $0.33
Review Review
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Empire Energy Ltd EEG 42 $0.14
Norwest Energy NL NWE 48 $0.05
Review Review
$2.42
New Standard Energy NSE 69 Review Review
AWE Limited AWE 647
$0.23
$1.24
Review Review
Buru Energy BRU 663 Review Review
Senex Energy Limited SXY 810 $0.71
Drillsearch Energy DLS 547
Beach Energy Limited BPT 1,820 $1.44
$1.28 Review Review
Review Review
Company Code Rec Comments
Argonaut Securities Research Return of the stock picker
Contact Details
Research:
Ian Christie Director, Industrial Research +61 8 9224 6872
Troy Irvin Director, Metals & Mining Research +61 8 9224 6871
Adam Miethke Director, Metals & Mining Research +61 8 9224 6806
Dave Wall Director, Energy Research +61 8 9224 6864
Patrick Chang Analyst +61 8 9224 6835
Emily Reilly Analyst +61 8 9224 6809
Chris Jiang Analyst +852 3557 4804 Matthew Keane Analyst +61 8 9224 6869
Institutional Sales - Perth:
Chris Wippl Head of Sales & Research +61 8 9224 6875
John Santul Consultant, Sales & Research +61 8 9224 6859
Damian Rooney Senior Institutional Dealer +61 8 9224 6862
Ben Willoughby Institutional Dealer +61 8 9224 6876
Bryan Johnson Institutional Dealer +61 8 9224 6834
Institutional Sales – Hong Kong:
Travis Smithson Managing Director - Asia +852 9832 0852
Angus McGeoch Institutional Research Sales +852 6623 8935
Corporate and Private Client Sales:
Glen Colgan Executive Director, Desk Manager +61 8 9224 6874
Kevin Johnson Executive Director, Corporate Stockbroking +61 8 9224 6880
James McGlew Executive Director, Corporate Stockbroking +61 8 9224 6866
Simon Lyons Director, Private Clients +61 8 9224 6881
Geoff Barnesby-Johnson Senior Dealer, Corporate Stockbroking +61 8 9224 6854
Andrew Venn Senior Dealer, Corporate Stockbroking +61 8 9224 6865
Cameron Fraser Dealer, Private Clients +61 8 9224 6851
Rob Healy Dealer, Private Clients +61 8 9224 6873
Ben Rattigan Dealer, Private Clients +61 8 9224 6824
Important Disclosure
VXR - In May 2012 Argonaut acted as Sole Manager to the Placement and Entitlements issue to raise $11M and earned fees commensurate with those services. Argonaut has acted as corporate advisor for VXR in the past 12 months. Argonaut holds or controls 61,102,319 VXR shares. AZM - Argonaut acted as co-manager to the capital raising of approximately $19m on the Toronto Stock Exchange in February 2012. Argonaut received fees commensurate with this service. CYY - Argonaut participated in the capital raising in September 2012 and received fees commensurate with this service. In January 2013, Argonaut was appointed as Joint Lead Manager to the placement to raise C$6 million. Argonaut acts as corporate advisor to CYY and will receive fees commensurate with this service. CAS - Argonaut has acted as corporate advisor for CAS in the past 12 months. DCN - Argonaut acted as Lead Manager to the $20M Initial Public Offer in November 2012 and will receive fees commensurate with this service. Argonaut currently holds or controls 94,000 DCN shares. NST - Argonaut participated in a block sell down in NST & earned fees commensurate with that service. RNS - Argonaut acted as joint lead manager to the placement to raise $10 million in October 2012 and received fees commensurate with this service. RNI - In January and February 2012, Argonaut acted as lead Manager and Underwriter to the Placement and Entitlements Issue to raise approximately $36 Million and received fees commensurate with this service. Argonaut currently owns and/or controls 779,714 RNI shares, 95,944 RNI Options and 3,597,621 options exercisable at $0.4375 on or before 27 March 2015. AKM - Argonaut has acted as corporate advisor for AKM in the past 12 months. Argonaut owns/and or controls 1M AKM shares. BCI - Argonaut acted as Broker to the $47M Capital Raising in December 2012. Argonaut acts as Corporate Adviser to BCI and receives fees commensurate with this service. BMN - In December 2011, Argonaut assisted in the placement of approximately 36.5m shares to Institutional Investors raising approximately $8.2m and received fees commensurate with this service. BKY - Argonaut acted as Sole Manager to the $1.5M Share Placement in April 2012 and will receive fees commensurate with this service. Argonaut currently owns and/or controls 500K options exercisable at $0.45 on or before 30 June 2016. MOD - Argonaut acted as Lead Manager to the placement to raise $6m in February 2012 and received fees commensurate with these services. Argonaut has acted as corporate advisor for MOD in the past 12 months. Argonaut has an interest and/or controls 795,000 MOD shares. GOR - Argonaut acts as Corporate Adviser to GOR and receives fees commensurate with this service.
ASL – Argonaut has acted as corporate advisor for ASL in the past. ANG – Argonaut’s September 2012 visit to ANG’s facilities in Chile, Peru and Columbia, and to the MINExpo 2012 in Las Vegas, was hosted by and partly paid for by ANG. GCS – Argonaut was Co-Manager to the Institutional component of the $32.2m capital raising announced by GCS on 3 September 2012 and received fees commensurate with these services. GNG – Argonaut has acted as corporate advisor to GNG in the past 12 months. Argonaut holds and/or controls 200,000 GNG shares. MCE – Argonaut acted as the Lead Manager and Underwriter to the capital raising of $36.7m in May 2012 and received fees commensurate with these services. PEA – Argonaut acts as corporate advisor to PEA and will receive fees commensurate with this service. VMG – One of the analysts has an interest in VMG shares.
SEH - Argonaut was Lead Manager to the Institutional Placement to raise $10.1M announced on 27 December 2012. Argonaut will receive fees for those services. Argonaut was advisor to SEH in relation to the strategic financing of $100M and the partnership undertaken between SEH and MIE Holdings Corporation to develop Sanjiaobei and Linxing CBM Gas Projects announced in June 2012. Argonaut has received fees for those services. Argonaut continues to act as Corporate Adviser to SEH and will receive fees commensurate with these services. Argonaut has an interest in 1.25M SEH shares, 4.375M Options exercisable at $0.079c on or before 25 November 2013 and 30M Options exercisable at $0.075c on or before 15 February 2017. PVD - Argonaut assisted with placement in the recent Capital Raising in November 2012 and received fees commensurate with this service. Swala - Argonaut acts as Corporate Adviser to Swala and will receive fees commensurate with these services.
The Analyst(s) hold shares in AZM, DCN, CYY, PAN, PLD, PDN, SEH, PVD, Swala, NWE, SUR, PCL, HOG, GCS and VMG.
Information Disclosure
Each research analyst of this material certifies that the views expressed in this research material accurately reflect the analyst's personal views about the subject securities and listed corporations. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this material to any of the analyst(s).
General Disclosure and Disclaimer
This research has been prepared by Argonaut Securities Pty Limited (ABN 72 108 330 650) (“ASPL”) or by Argonaut Securities (Asia) Limited (“ASAL”) for the use of the clients of ASPL, ASAL and other related bodies corporate (the “Argonaut Group”) and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this report in any way. ASPL is a holder of an Australian Financial Services License No. 274099 and is a Market Participant of the Australian Stock Exchange Limited. ASAL has a licence (AXO 052) to Deal and Advise in Securities and Advise on Corporate Finance in Hong Kong with its activities regulated by the Securities and Futures Ordinance (“SFO”) administered by the Securities and Futures Commission (“SFC”) of Hong Kong.
Nothing in this report should be construed as personal financial product advice for the purposes of Section 766B of the Corporations Act 2001 (Cth). This report does not consider any of your objectives, financial situation or needs. The report may contain general financial product advice and you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.
This research is based on information obtained from sources believed to be reliable and ASPL and ASAL have made every effort to ensure the information in this report is accurate, but we do not make any representation or warranty that it is accurate, reliable, complete or up to date. The Argonaut Group accepts no obligation to correct or update the information or the opinions in it. Opinions expressed are subject to change without notice and accurately reflect the analyst(s)’ personal views at the time of writing. No member of the Argonaut Group or its respective employees, agents or consultants accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research.
Nothing in this research shall be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction. The Argonaut Group and/or its associates, including ASPL, ASAL, officers or employees may have interests in the financial products or a relationship with the issuer of the financial products referred to in this report by acting in various roles including as investment banker, underwriter or dealer, holder of principal positions, broker, director or adviser. Further, they may buy or sell those securities as principal or agent, and as such may effect transactions which are not consistent with the recommendations (if any) in this research. The Argonaut Group and/or its associates, including ASPL and ASAL, may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case.
There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment.
The analyst(s) principally responsible for the preparation of this research may receive compensation based on ASPL’s and / or ASAL’s overall revenues.
Hong Kong Distribution Disclosure
This material is being distributed in Hong Kong by Argonaut Securities (Asia) Limited which is licensed (AXO 052) and regulated by the Hong Kong Securities and Futures Commission. Further information on any of the securities mentioned in this material may be obtained on request, and for this purpose, persons in the Hong Kong office should be contacted at Argonaut Securities (Asia) Limited of Unit 701, 7/F, Henley Building, 5 Queen’s Road Central, Hong Kong, telephone (852) 3557 48000.
© 2013. All rights reserved. No part of this document may be reproduced or distributed in any manner without the written permission of Argonaut Securities Pty Limited and / or Argonaut Securities (Asia) Limited. Argonaut Securities Pty Limited and Argonaut Securities (Asia) Limited specifically prohibits the re-distribution of this document, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.
Dave WallDirector, Energy Research
Dave has extensive experience in the energy sector and publishes ins� tu� onally rated research on a range of companies. He is rated as the number 1 oil and gas analyst in greater than 50% of the stocks he covers by Bloomberg. Prior to joining Argonaut Dave was the senior equity analyst with a successful � nancial services organisa� on and also spent a number of years with Woodside as their lead analyst in their budge� ng and strategic planning division.
[email protected] | +61 9224 6864
ENERGY RESEARCH
Research Team
METALS & MINING RESEARCH
Adam MiethkeDirector, Metals & Mining Research
Adam is a quali� ed geologist with domes� c & interna� onal experience in bulk commodi� es, precious & base metals projects from explora� on through to mining & consul� ng. He has held senior roles with Rio Tinto and Snowden & completed an MBA in 2008. Prior to joining Argonaut, Adam was based in Hong Kong with a prominent investment group focusing on iden� fying & evalua� ng opportuni� es in the resource sector.
[email protected] | +61 9224 6806
Ma� hew KeaneAnalyst, Metals & Mining Research
Ma� hew began his career as a geologist with Western Mining in 1995. He has worked in a number of roles across various commodi� es with di� erent companies over the past two decades including 10 years with BHP Billiton. His du� es have included Geologist, Scheduling Manager, Planning Engineer and Superintendent Mine Produc� on. Ma� hew holds a BSc (Hons) Geology and a Masters of Business and Technology.
[email protected] | +61 9224 6869
Patrick ChangAnalyst, Metals & Mining Research
Patrick is a quali� ed geologist and spent two years in the � eld before joining Argonaut in 2011. Patrick is focused on covering emerging resources companies. Patrick is uent in Mandarin, holds postgraduate quali� ca� ons in Computer Science and his quali� ca� on as a Chartered Financial Analyst is pending.
[email protected] | +61 9224 6835
Chris JiangAnalyst, Metals & Mining Research
Chris holds a Bachelor of Commerce & Master of Accoun� ng from the University of Melbourne Australia and is a Cer� � ed Prac� cing Accountant. Chris is a na� ve Mandarin speaker & is uent in Cantonese & English. Chris’ previous experience includes equity research roles at BOCOM Interna� onal & Nomura covering the energy & industrial sectors.
[email protected] | + 852 3557 4804
METALS & MINING RESEARCH Hong Kong
INDUSTRIALS RESEARCH
Ian Chris� eDirector, Industrial Research
Ian is the Head of the Argonaut’s Industrial Research team and publishes ins� tu� onally rated research on a range of resource services and industrial companies. Ian is a Chartered Financial Analyst and in addi� on to his equi� es research provides regular commentary on macro issues impac� ng the resource services sector in Australia.
ichris� [email protected] | +61 9224 6872
Emily ReillyAnalyst, Industrial Research
Emily holds a Bachelor of Commerce, majoring in Corporate Finance and Financial Accoun� ng, and a Bachelor of Environmental Design from the University of Western Australia. Emily has commenced studies towards achieving quali� ca� ons as a Chartered Financial Analyst. Prior to joining Argonaut Emily worked for a global contrac� ng and development company in their Commercial Management division.
[email protected] | +61 9224 6809
Troy IrvinDirector, Metals & Mining Research
Troy is a quali� ed mining engineer with over 10 years experience in the mining industry with senior roles at Barrick Gold, AMC Consultants and MIM. Troy joined Argonaut in 2005 and oversees all resources coverage.
� [email protected] | +61 9224 6871
Argonaut is focused on providing clients with high quality integrated services across the full capital spectrum and entire company life cycle
Argonaut is a full service advisory, stockbroking & research and investment houseArgonaut Overview
› Located in Perth, Western Australia a regional centre for metals & mining and energy industries, and Hong Kong, the Asia Pacifi c fi nancial centre.
› Technically driven and focused on natural resource companies and businesses that service natural resource companies, with market capitalisations of A$50 million to A$5 billion.
› Led by an experienced executive team with deep industry knowledge, who have previously held senior executive roles at leading international investment banks and securities houses.
› Recognised, in our target markets, as a trusted advisor with a strong track record of success.
› Provider of high quality integrated services across the full capital spectrum - from senior debt to ordinary equity.
Corporate Finance
Activities
Capital Market Advisory(Equity & Debt) M&A Advisory
› Focused on providing independent advice and customised capital raising services across the full spectrum of equity and debt products
› Signifi cant cross border expertise and proven execution capabilities
› Extensive global relationships with leading equity and debt providers and specialist fi nanciers
› Strong ECM capability with Argonaut leading and/or participating in raisings totalling more than $2.0 billion since 2009
› Advised on or arranged project fi nance & structured debt of approximately $1.0 billion since 2007
› Focused on providing trusted, unbiased advice to private and public companies and boards
› Specialist resources and resources services M&A advisor
› Delivering dedicated senior-level attention relative to larger investment banking fi rms
› Ability to think creatively and successfully execute challenging transactions
› Considerable cross-border experience and expertise
› Advised on M&A transactions of in excess of $2.8 billion since 2007
Market Activities
Stockbroking & Research Special Situations
› Deep knowledge and detailed research coverage in target markets
› Strong emerging company and mid market presence
› Leading expertise in natural resource companies and related service businesses
› Focused on institutional and high net worth investors
› Strong institutional investor access and distribution capability across Australia and Asia. Increasing penetration in UK/Europe
› Active company road shows and site visit programme
› On-going aft er market support for corporate ECM clients
› Provision of non-standard fi nancing solutions across the entire capital spectrum
› Flexible fi nancing solutions ranging from non-standard loans and bridge facilities to ordinary equity
› Funding for exercise of options provided to company executives. Argonaut can advance against options giving corporates early access to the proceeds from exercising of options
› Strong relationships with other special situation investors, providing the capability to complete transactions ranging in size from $1 million to in excess of $100 million
› Leveraging upon Argonaut’s strong advisory and equity market expertise
Selected Capital Raising & Advisory Transactions
www.argonaut.com
Co-Founder & Lead Manager
2012
Enerdrill Oil & Gas Specialists
$8,500,000
Private Placement
OIL & GAS SPECIALISTS
Lead Manager & Underwriter tothe Placement & Entitlements Issue
$36,100,000
Placement andUnderwritten Entitlements
Resource and Investment NL
2012
Co-Manager to the Placement
$40,000,000
Equity Placement
Ramelius Resources
2011
Manager to the $20m Placement andArranger of the $50m bond issue
2009
Pacific Energy
$70,000,000
Placement & ExchangeableBond Issue
Joint Lead Manager to the Placement
2009
Austin Engineering
$26,000,000
Institutional Placement
$15,000,000IPO
Advisor, Broker & Lead Manager
2010
$20,900,000Director Sell Down
$13,500,000PlacementCo Lead Manager to the Australasian
Component of the Placement
2010
Mirabela Nickel
$180,000,000
Institutional Placement
2011
Corporate & Financial Advisor& Manager
Merredin Energy
$93,000,000
Private Equity Placement& Debt Issuance
Manager & Joint Broker to the VendorSelldown. Advisor & Broker to the IPO
2011
$32,400,000Vendor Selldown
$30,000,000IPO
Joint Lead Manager
2011 & 2010
$130,000,000Institutional Placement
$103,000,000Institutional Placement &
Underwritten EntitlementsJoint Lead Manager
2011
Aspire Mining
$32,800,000
Institutional Placement
Manager to the Placements &Underwriter to the Entitlements Issue
2010 & 2009
$22,000,000Institutional Placements &Underwritten Entitlements
$18,400,000Institutional Placement
2012 & 2011
Lead Manager and Underwriter
2012
Matrix Composites & Engineering
$36,700,000
Jumbo Placement andAccelerated Rights Issue
Lead Manager, Manager to the Placement& Underwriter to the Entitlements Issue
$11,000,000
$36,800,000
Strategic Placement & Underwritten Entitlement Issue with Northern Star
Institutional Placement
Global Construction Services
$27,300,000Institutional Placement and
Accelerated Entitlements
Co-Manager to the Placements
$18,000,000Private Equity Placement
2012 & 2011
enaissancem i n e r a l s l i m i t e d
Renaissance Minerals Limited
$10,000,000
Joint Lead Manager
2012
Equity Placement
Dacian Gold Limited
$20,000,000
Advisor, Broker andLead Manager
2012
IPO
SINO Gas & Energy
Advisor and Lead Manager
2013
Sino Gas & Energy Holdings Limited
$10,100,000
Institutional Placement
Argonaut has a successful track record of raising capitalSince 2009, Argonaut has led and / or participated in in excess of A$2.0 billion of equity capital raisings and advised on or arranged project fi nance and structured debt of approximately A$1 billion
Argonaut is a leading M&A Advisor in the Natural Resources and Resource Services sectors
Advisor to the recommend takeover bidby Denison and the unsolicited bid by
CAMEC
2007
OmegaCorp
$200,000,000
Takeover Defence
Advisor to the acquisition of a portfolioof Bowen Basin coal assets
2010
Newland Resources
$30,000,000
Acquisition of Coal Assets
R E S O U R C E S L I M I T E D
Advisor to the merger by scheme ofarrangement with Mavuzi Resources
2007
Mantra Resources
$107,000,000
Merger
Advisor to the acquisition ofKalgoorlie Power Systems
2009
Pacific Energy
$108,000,000
Private Acquisition
Advisor to the recommended takeoverbid by LSE listed Gem Diamonds
2007
Kimberley Diamond
$300,000,000
Takeover Defence
KIMBERLEY DIAMOND COMPANY
Advisor to a proposed debt refinancingand group restructuring
2009
Great Southern(Receivers & Managers Appointed)
$380,000,000
Debt Refinancing &Restructuring Advice
Advisor to the Warro Gas FieldProject farm-out to Alcoa
2008
Latent Petroleum
$100,000,000
Alcoa Farm-in
Advisor to the Company
2009
BC Iron
$22,000,000
JV with FMG & InfrastructureAgreement with TPI
Advisor to the sale toAnglo Pacific Group
2010
DFD Rhodes
$23,000,000
Sale of Australian Iron Ore Royalty
D.F.D Rhodes
Advisor & Broker to the acquisition of19.9% interest in Sandfire Resources NL
2010
OZ Minerals
$100,000,000
Share Raid
Advisor to the recommended takeoverbid from Campbell Brothers and
recapitalisation proposal from Catalyst
2009
Pearlstreet
$108,000,000
Takeover Bid
Advisor to the merger via schemeof arrangement with Brandrill.
Advisor to the successful defence ofMacmahon’s unsolicited takeover bids
2009 & 2008
$287,000,000Merger
$446,000,000Takeover Defence
Advisor to the company
2010
Anglo Pacific
$31,250,000
Acquisition of BrazilianIron Ore Royalty
Advisor to the merger withLatent Petroleum
2011
Transerv Energy
$26,000,000
Merger
Advisor to the acquisition of thePanorama Project from Toho Zinc
2011
Venturex Resources
$26,200,000
Project Acquisition
Advisor to the bid by schemeof arrangement by Regent Pacific
2011
BC Iron
$345,000,000
Takeover Defence
Advisor to the Company
2010
Aspire Mining
$20,100,000
Placement & Strategic Alliancewith South Gobi
SINO Gas & Energy
Advisor to the Company
2012
Sino Gas & Energy Holdings Limited
US$100,000,000
Strategic Investor
Since 2007, Argonaut has advised on M&A transactions with a value of in excess of A$2.8 billion
www.argonaut.com
Th e Natural Choice in ResourcesARGONAUT
Licenced in Australia & Hong Kong for Stockbroking & Corporate Finance
Long Term Relationships | Innovative Solutions | Step-Change Transactions | Cross Border Deals
PerthLevel 30, 77 St Georges Terrace,Perth, Western Australia 6000
telephone +61 8 9224 6888facsimile +61 8 9225 5511email [email protected]
Hong KongSuite 701, Level 7, Henley Building5 Queen’s Road Central, Hong Kong
telephone +852 3557 4888facsimile +852 3557 4889email [email protected]
Corporate Advisers | Stockbroking & Research | Special Situations Financing