METRO MINING LIMITED Current Price Target Price
$0.07
$0.20
Friday, 6 November 2015
Metro Mining Positive BFS: Investigating higher productionAnalysts | Matthew Keane | Patrick Chang
Ticker: MMI
Sector: Materials
Shares on Issue (m): 358.5
Market Cap ($m): 25.5
Net Cash ($m): 5.0
Enterprise Value ($m): 20.5
52 wk High/Low: $0.13 $0.02
Quick ReadMetro Mining (MMI) released a positive BFS for the Bauxite Hills project. The study delivered standout IRR of 148% owning to low upfront capex and high margins. Production of 1.95Mtpa direct shipping bauxite ore (DSO) generated a NPV15 of A$235m, largely in line with the February 2015 PSF. The Company is now evaluating an optimised production case of 4-5Mtpa in the wake of the State Governments request for a full
12m Av Daily Vol (m):
Mineral Inventory (100% basis)
0.22
Environmental Impact Statement (EIS), requiring a longer dated permitting process than
the original Environmental Assessment (EA). While this clearly sets back first production,
Mt Available Reactive
Al2O3 Silica
Ore Reserves 48.2 38.4% 6.4%
Mineral Resource 53.6 38.6% 6.3%
Project Metrics
Argonaut est. NPV A$m 99
Argonaut est. IRR % 72%
Directors
Stephen Everett Non-Executive Chairman
Simon Finnis CEO
Philip Hennessey Ind. Non-Executive Director
Lindsay Ward Ind. Non-Executive Director Jijun Liu Non-Executive Director
Dongping Wang Non-Executive Director
Xiaoming Yuan Alt. Non-Executive Director
George Lloyd Ind. Non-Executive Director
Substantial Shareholders
Balanced Property Ltd 19%
DADI Engineering Development Group 16%
China Xinfa Group Corp Ltd 6%
Gregory Willims 6%
Netwealth Investments 5%
$0.14 | 3.5 | the less onerous EA permitting process generally applied to bulk mining projects in QLD. The impediment of a full EIS has set the project back 10 months, but this affords |
$0.12 | 3.0 | the Company time to evaluation higher production options (4-5Mtpa) and time to |
$0.10 | 2.5 | negotiate a potential partnership with neighbour Gulf Alumina. Gulf's Mining Lease (ML) bisects MMI's project area and has comparable bauxite Resources. Importantly, the ML |
$0.08 | 2.0 | |
contains key infrastructure including a wharf on the Skardon River, an established haul | ||
$0.06 | 1.5 |
Share Price Graph
Argonaut believes MMI now has the opportunity to right-scale the project and explore
partnership options with neighbour Gulf Alumina to maximise project value.
Event & Impact | PositivePositive BFS: MMI delivered a positive BFS for the Bauxite Hill project, delivering 1.95Mtpa over a ~25 year mine life. The project benefits from low upfront capex of
~$34m and high operating margins of ~$29/t. The study delivered a project NPV of
$235m with an IRR of 148%. Key variations to the PFS include an additional four years mine life, first production delayed by ~10 months, 24% increase to development capex and 11% increase to operating costs (full summary over).
Project simplicity: Planned operations consist of low strip (>0.1:1) free dig mining, crushing and screening, 5-10km haulage to a barge loadout facility, then transport down the Skardon River for tranship loading to bulk carriers in the Gulf of Carpentaria. The project requires little infrastructure with only crushing and screening prior to export. Bathymetric studies and a detailed assessment of the river show no requirement to dredge or bed level the river.
Time to right-size the project: MMI originally planned to fast track Bauxite Hills under
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road to the wharf, a camp and airstrip. A partnership could significantly reduce capex under a joint development scenario.
RecommendationNov-14 Feb-15 May-15 Aug-15 Nov-15
Argonaut maintains a SPEC BUY recommendation with a revised valuation of $0.29
(previously $0.32/sh). This revision follows minor increases to both capex and opex (in line with the BFS) and accounts for the delay to first production. Our valuation does not account for expanded production options at this stage. We apply a 30% discount to NAV to account for permitting and offtake risk to achieve a target price of $0.20.
Bauxite Hills is located in the Cape York Peninsula…
…with access to the shipping routes via the Skardon River
MMI delivered a positive BFS for
~2Mtpa bauxite production…
…with low capex and opex
Price estimates for the study are US$42-45/t based on market expert studies
OverviewLocation
The project is located on the Cape York Peninsula in far north Queensland (QLD), Australia. It is 5-10km south of the Skardon River and 95km north of the town of Weipa, the centre for Rio Tinto's (RIO) Weipa Bauxite operations which produce ~23Mtpa bauxite. The project is bisected by a wedge containing Gulf Alumina's land holding. Gulf's mining leases contain 78.8Mt bauxite (applying a higher silica cut-off) with existing infrastructure including a camp, airstrip and haul road to an established barge docking facility. Infrastructure was established for a historic Kaolin mining operation.
Figure 1: Bauxite Hills project location
Source: MMI
MMI delivered a positive BFS for the Bauxite Hill project, producing 1.95Mtpa over a ~25 year mine life. The project benefits from low upfront capex of ~$34m and high operating margins of ~$29/t. The study delivered a project NPV of $235m with an IRR of 148%. Key variations to the PFS include an additional four years mine life, first production delayed by ~10 months, 24% increase to development capex and 11% increase to opex.
Price
Costs for the BFS were based off market expert CM Group forecasts. CM Group uses a baseline CBIX 'value in use' CFR reference price for standard gibbsitic bauxite which is 50% A.Al2O3, 5% RxSiO2 and 10% moisture. When provided with MMI average expected specifications, CM forecast the prices tabled below for the Bauxite Hills product. These prices are more conservative than those used in the PFS and are based on a revised study by CM Group. The project still maintains solid margins even at the long term downside case (US$25.30/t or A$33.73/t at 0.75 FX). Argonaut conservatively models flat pricing of US$40.00/t with an AUD/USD exchange rate of 0.75.
Even at the low case scenario, MMI generated high margins
Key differences to the PFS include; slightly higher capex and opex…
…with an additional 4 years mine life
Bauxite Hills is delayed by 10 months…
…with first production not expected in September 2017
MMI has a non-binding off-take MOU with Chinese major Xinfa
Table 2: CM Group price estimates for Bauxite Hills product
Source: MMI, CM
Table 3: Comparison of BSF and PFS studies vs Argonaut model inputs
Key Metrics | Unit | PFS | BFS | Argonaut Est. |
NPV15 (Real post-tax)* | A$m | 197 | 235 | 99 |
IRR* | % | 88 | 148 | 72 |
Mine Life | Yrs | 21 | 25 | 15 |
LOM Production | Mt | 42 | 49.1 | 30 |
Development Capex* | A$m | 27.4 | 33.9 | 35 |
LOM Sustaining Capex* | A$m | 18.1 | 4.9 | 10 |
Average Cost (FOB) | A$/t | 26.69 | 29.75 | 29.75 |
Average USD Realised Price (FOB) | US$/t | 44.80 | 38.60 to 45.40 | 40.00 |
Average AUD Realised Price (FOB) | A$/t at FX 0.75 | 61.37 | 51.47 to 60.53 | 53.33 |
Average EBITDA margin** | A$/t | 34.68 | 21.72 to 30.78 | 23.58 |
Average Annual NPAT** | A$m | 43.3 | 37.3 | 25 |
Payback on Capital | Yrs | 1.1 | 1.1 | 1.5 |
*Not Adjusted from original FX of 0.81 | ||||
*Adjusted from original FX of 0.81 to 0.75 | ||||
Source: MMI, Argonaut |
Project timeline
MMI had aimed to take advantage of the QLD Government guidelines which only required an EA for bulk mining projects under 2Mtpa. However, following a ruling that by the Queensland Department of Environment and Heritage Protection (DEHP) that a full EIS was required, the project timeline was extended by ~10 months. Construction is now set to commence in February 2017 with first mining scheduled for September 2017. Construction and mine development is short (seven months) owing to limited infrastructure requirements and limited pre-strip. Native Title and negotiations with traditional owners are well advanced and expected to be completed before year end.
Table 4: Development timeline
Source: MMI
MMI has signed a non-binding Memorandum of Understanding (MoU) with the Xinfa Group for approximately half of its planned annual bauxite production, 1.0-1.2Mtpa, over a five year term, extendable by mutual agreement. Argonaut understands that finalisation of a binding agreement will likely occur once MMI has confirmed its production profile. Xinfa, who hold a 6% stake in MMI and a Board seat, may opt for a larger offtake contract. It is a private unlisted company and the second largest importer
Partner Xinfa imports an estimated 25Mtpa from seaborne suppliers
MMI is now exploring an expanded 4-5Mtpa production scenario…
…which should improve economies of scale and increase appeal to offtakers and investors
Given the deposits geometry, expansion is highly achievable
Argonaut also sees an opportunity to partner with project neighbour Gulf Alumina
Bauxite Hills benefits from operation simplicity
of bauxite into China behind Weiqiao Aluminum and Electricity Co. Xinfa's annual bauxite consumption is estimated at 25Mt, with approximately 15Mt of this is sourced from the seaborne market.
MMI stated that it is exploring an expanded production scenario of 4-5Mtpa. This level of production should be achievable with lower capital intensity. A staged development case, commencing production at 2Mtpa, is also an option. The Company is yet to decide what level of study to initiate, but indicatively believes that a revised PFS could be delivered within several weeks and a revised BFS in ~3 months. Argonaut sees several advantages with higher production including:
Economies of scale with lower capital intensity and unit costs
Greater appeal to off-take partners with ability to contribute a larger proportion of customer refinery blends
Greater appeal to strategic investors and financiers with significant cashflow (expected to be >$100mpa)
Greater presence in the Australasian market
Increasing mine output should be highly achievable due to the shallow, low strip and large lateral extent of the Bauxite Hills Resource. As the projects infrastructure has few moving parts (crushing, screening and conveying), increased product handling would require only minor infrastructure up-scaling (i.e. wider conveyor systems and a larger gearbox).
Gulf Alumina holds a wedge shaped Mining Lease between MMI's three Mining Lease Applications (MLs 20676, 20688 and 20689 in Figure 1). Argonaut believes with a longer lead time to development, the Company now has time to thoroughly explore and negotiate a partnership with Gulf Alumina. Under a partnership scenario, MMI could utilise existing infrastructure (barge loadout, camp, airstrip and haul roads) to reduce development capital. The combined Resource would significantly increase mine life and support higher annual production. Argonaut believes there is potential for a combined operation producing up to 10Mtpa.
Planned operations consist of low strip (>0.1:1), free dig mining, crushing and screening, 5-10km haulage to a barge loadout facility, then transport down the Skardon River for tranship loading to bulk carriers in the Gulf of Carpentaria. The project requires little infrastructure with only crushing and screening prior to export. Bathymetric studies and a detailed assessment of the river show no requirement to dredge or bed level the river.
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