Company Review. Centaurus Metals. Makings of a Brazilian Export and Domestic Iron Ore Business. CTM $0.635 Recommendation Buy Risk Assessment High

Transcription

1 Ord Minnett Research Centaurus Metals Makings of a Brazilian Export and Domestic Iron Ore Business Centaurus Metals (Centaurus) has recently achieved a number of key milestones in its strategy to become a Brazilian iron ore producer. By the end of 2013 it is targeting iron ore production for sale into the domestic market from its Jambreiro project followed by exporting iron ore from its Serra da Lontra by the end of Infill drilling results announced today from Jambreiro are outstanding and likely to lead to a significant portion of the current 116Mt resource being converted to a Measured Resource next month. A majority of the infill assays announced were of iron grade significantly higher than the current reserve grade of 28.2%. Results including: metres at 30.7% Fe from 27.0 metres (JBR-RC ), and % Fe, 3.5% Al2O3 and 0.02% P from surface in Hole JBR-RC are outstanding and bode well for the project. In addition, recent milestones announced by Centaurus include: Impressive assay results from the first program of drilling at Serra da Lontra announced 11 April, Jambreiro pilot plant testwork, confirming an outstanding iron ore product can be produced, grading >65% Fe with very low impurities of <3% Silica and negligible phosphorus. Significantly higher grade and better quality than almost all ore produced in the Pilbara today. Submission of an Environmental Impact Assessment ( EIA ) for Jambreiro, with the environmental authority SUPRAM in the State of Minas Gerais. This is a major administrative achievement for the Jambreiro project and keeps the project timeline to production intact. Our 12 month price target is $2.20 per share and we maintain our Buy recommendation. We continue to view Centaurus as an outstanding iron ore development story as well as providing direct exposure to the growth of the Brazilian economy in the lead up to the soccer world cup in 2014 and Olympics 2016, both to be held in Brazil. Key Financials Year-end June (A$) FY11A FY12E FY13E FY14E FY15E Brazilian domestic iron ore price Sales Revenue ($M) Mining Op. Profit Before Tax 1 ($M) Reported NPAT ($M) (12.2) (8.1) (7.5) Normalised NPAT ($M) (12.2) (8.1) (7.5) Reported EPS ( ) nm (4.4) (3.1) Normalised EPS ( ) nm (4.4) (3.1) Op. Cash Flow Per Shr ( ) (0.2) (2.4) (1.6) Total Dividends ( ) Net Yield (%) na na na Na Na Franking (%) na na na Na Na EPS Growth (%) nm nm nm Nm 305% Normalised P/E (x) nm nm nm EV/EBITDA nm nm nm Price/Op. Cash Flow (x) nm nm nm Normalised ROE (%) nm -17% -7% 22% 47% Source: Iress, Company, Ord Minnett Estimates Note: all share price data as at 16 April 2012 CTM $0.635 Recommendation Buy Risk Assessment High Mining Iron Ore Luke Smith Senior Mining Analyst lsmith@ords.com.au Centaurus Metals ASX Code CTM 52 week range $0.46- $1.24 Market Cap ($M) 85 Shares Outstanding (M) Av Daily Turnover ($M) 0.1 ASX All Ordinaries 4383 ASX200 Small Resource 4980 Net Cash Dec11 ($M) 20 Relative price performance XSR CTM 0 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Source: Iress Consensus earnings Tuesday 17 April, 2012 FY12E FY13E NPAT (C)* nm nm NPAT (OM) nm nm EPS (C) nm nm EPS (OM) nm nm 12mth Price Target (C) mth Price Target (OM) 220 Source: Iress, 3 estimates Tuesday, 17 April 2012 Page 1

2 Serra da Lontra Iron Ore Project Impressive first assay results from drilling Centaurus Metals (Centaurus) has announced the first assay results from drilling at the Serra da Lontra export iron ore project in Brazil. The results are excellent with iron ore grades higher than expected. The key points are: Assay from first 11 holes have been released following 2,900 metres of drilling into the 7,500 metre drill program at Serra Da Lontra. Results include 37% iron from surface. Assays returned to date confirm the dip of the mineralisation is sub parallel to the natural slope of the ridge lending the project to have the potential of very low strip ratios for mining. The Exploration Target established by Centaurus of million tonnes looks very achievable. Furthermore additional amphibolitic itabirite mineralisation has been encountered. Centaurus is now conducting metallurgical testwork on this mineralisation type, should it readily upgrade to >60% Fe then the exploration target would be substantially increased beyond 50 million tonnes. The first assay results from Serra da Lontra are extremely encouraging. Drilling is continuing and we would expect more results in the coming weeks with a maiden JORC resource due in July. Even though drilling has only really just commenced at the project indications are that a robust resource is readily achievable and that the iron ore grades are better than previously anticipated. Drill results have confirmed excellent grade and thickness of iron ore mineralisation at Serra da Lontra. Exploration Target established by Centaurus of million tonnes looks very achievable. Serra da Lontra is within 110km of the port of Ilheus, providing ready access to export markets, a complimentary strategy to the Centaurus flagship Jambreiro iron ore project. Figure 1: Project Locations Source: Centaurus Tuesday, 17 April 2012 Page 2

3 Jambreiro Iron Ore Project Infill Drill Program Completed Centaurus has today announced the completion of in-fill drilling at Jambreiro. The assays announced are outstanding and likely to lead to a significant portion of the current 116Mt resource being converted to a Measured Resource next month. Centaurus has targeted achieving Measured Resources for the scheduled first four years of production. A majority of the infill assays announced were of iron grade significantly higher than the current reserve grade of 28.2%. Many intersections were also wider than anticipated which will further underpin the robustness of the resource and reserve upgrade in due course. Results including: metres at 30.7% Fe from 27.0 metres (JBR-RC ), and % Fe, 3.5% Al2O3 and 0.02% P from surface in Hole JBR-RC are outstanding and bode well for the project. Of particular note was the southern portion of the Tigre deposit where higher grade friable mineralisation continues to be intersected from surface. Centaurus has stated this zone is likely to provide the best start up option for mining, with higher grades of ore at or near surface with favourable strip ratios. Figure 2: Jambreiro Iron Ore Project Source: Ord Minnett Tuesday, 17 April 2012 Page 3

4 Pilot scale beneficiation testwork Recently completed pilot scale beneficiation testwork on a bulk ore sample from Jambreiro has clearly demonstrated that a high grade, low impurity, quality product can be produced simply and cheaply. The pilot plant feed, utilised reverse circulation (RC) drill chips from the extensive drilling conducted over the last one and a half years, ie was a good representative sample of the entire orebody not just a select sample of ore. The grade of the feed was in line with the overall reserve ore grade at Jambreiro. The result highlights that a simply, 2 stage magnetic separation process route, which is not capital intensive, is amenable to producing a very marketable product. The result underpins the recently released PFS (November 2011) and provides the backbone of processing testwork for the Bankable Feasibility Study due by October Table 1: Jambreiro JORC Reserve November 2011 Mass Recovery Fe% SiO 2% Al 2O 3% P % LOI % Testwork confirms a high grade >65% Fe product from Jambreiro. Pilot plant result underpins flowsheet and capital cost estimate. Ore Feed Product Produced 38.3% Source: CTM The outstanding iron ore product achieved from the pilot plant, grading >65% Fe with very low impurities of <3% Silica and negligible phosphorus, significantly higher grade and better quality than almost all ore produced in the Pilbara today. This product will be highly sought after in the Brazilian market to blend with less expensive lower quality ores currently sold domestically. Brazilian Management Team Recently Centaurus appointed a General Manager of operations, Mr Alexandro Avila de Moura. Prior to joining Centaurus Mr Moura was Chief Operating Officer and General Manager of Operations at MMX Mineracao (MMX). At MMX he was responsible for managing two large scale Brazilian iron ore mines with a combined production rate of 9.5Mtpa, including a team of over 700 employees and 1,300 contractors. Of note he also oversaw the study and statutory approvals phase for a number of planned MMX developments. Outlook Importantly, the mass recovery was above Ord Minnett project estimates. Centaurus has confirmed the company is on target for first production by end of Over the next 18 months we envisage the following key announcements: April September: Drill results from Serra da Lontra and Jambreiro May 2012: Upgraded Resource for Jambreiro July 2012: Maiden Resource for Serra da Lontra October 2012: Bankable Feasibility Study completed Q / Q1 2013: Mining and Environmental Approvals and commencement of construction. Q4 2013: Commissioning and production. Tuesday, 17 April 2012 Page 4

5 Financial Position Centaurus cash position as at December 31, 2011 was $20 million with no debt. We estimate that the company had approximately $15 million cash on hand as at March 31, 2012 and has more than sufficient cash reserves to complete the bankable feasibility study by October At this point we would envisage Centaurus to complete project financing which would be followed by an equity injection. The equity injection could be via a number of avenues, including as part of an off-take agreement, sell down of a minority interest in the project or equity raising at a corporate level. Our base case valuation includes a typical 50%/50% debt to equity financing scenario and is on a fully diluted basis taking into account a $70million equity raising and an equivalent debt financing facility secured. Shareholders It is important to note in regards to project financing the current supportive shareholders of Centaurus; Atlas Iron Ltd (19.9%). Lujeta Pty Ltd (5.6%) Darren Gordon (Managing Director, 5.1%) Atlas (AGO, Lighten) is an Australian iron ore producer and known consolidator within the small resources industry. Atlas invested $19 million via a private placement in Centaurus in July 2011 at $0.70 cents per share. Recently Atlas mentioned its long term strategic plans which included the slide in Figure 3 below. We envisage that Atlas will be a cornerstone supporter of project development capital during FY13 for Centaurus which substantially reduces project equity risk. Alternatively the completion of the Bankable feasibility study on Jambreiro and the need to secure project financing may provide the catalyst for Atlas to seek a corporate transaction at that stage. Figure 3: Atlas Iron March 2012 presentation slide Source: AGO, March 2012 Tuesday, 17 April 2012 Page 5

6 Share price risks OML identifies the major risks for Centaurus as follows: Downgrades to resources through infill drilling would significantly lower the value of the respective project and put down side pressure on the share price. Timing delays could occur due to delays in the regulatory approvals process which could stall construction and therefore de-value the projects. Operating costs different to OML s forecasts. Capital costs could be significantly underestimated by OML. Brazilian domestic and export iron ore price and exchange rates moving adversely before or after financing has been secured. This would reduce the values of the projects considerably. Further exploration is not successful, therefore limiting upside risk. Regulatory changes adversely impacting the fiscal regime in Brazil such as the introduction of a resource profits tax akin to that being proposed in Australia. Weather related events causing delay and or damage to projects. Tuesday, 17 April 2012 Page 6

7 Financial Statements Centaurus Metals Limited (CTM) Year ending June Profit & Loss Statement ($M) FY11A FY12E FY13E FY14E FY15E Assumptions FY11A FY12E FY13E FY14E FY15E Operating Revenue Brazilian domestic iron ore price * Operating Expenses (30) (103) Iron Ore Price (65% Fe, FOB Brazil) 118 Mining Operating Profit Before Tax US$/A$ Other Income - Asset Sales & Rent (>65% Fe Sinter US$/t) Other Expenses (13) (9) (10) (6) (6) Iron Ore Production (kt) FY11A FY12E FY13E FY14E FY15E EBITDA (12) (8) (7) Jambreiro ,079 1,968 Depreciation & Amortisation (5) (15) Serra da Lontra EBIT (12) (8) (7) Passabem Net Interest Income (5) (9) Itambe Pre-Tax Profit (12) (8) (7) Total ,079 2,913 Tax Expense (18) (67) Cash Cost incl royalty (US$/t) na na na Reported NPAT (12) (8) (7) Adjustments (after-tax) JORC Resource Estimates Status Normalised NPAT (12) (8) (7) Reserves Proved Probable Total EBITDA Margin (%) na na na 63% 67% Jambreiro Mine Effective tax Rate (%) 0% 0% 0% 36% 34% Resources (Includes Reserves)* Measured Indicated Inferred Total EPS Reported (cps) nm (4.4) (3.1) Jambreiro Explor EPS Normalised (cps) nm (4.4) (3.1) Passabem Explor EPS grow th (%) nm nm nm nm 305% Itambe Explor DPS - Total (cps) Total Payout Ratio - Ordinary Divs (%) na na na na na *As at October 2011 Franking - Total (%) na na na na na Leverage FY11A FY12E FY13E FY14E FY15E Net Debt/Equity nm nm nm 12% 27% Cash Flow Statement ($M) FY11A FY12E FY13E FY14E FY15E Net Debt/Total Assets nm nm nm 8% 14% Pre-Tax Operating Cash Flow (2) (4) (4) Interest Cover (x) nm nm nm Tax Paid On Operating Activities (18) (67) Operating Cash Flow (2) (4) (4) Valuation Ratios (x) FY11A FY12E FY13E FY14E FY15E Exploration & Development (9) (12) (5) (2) (2) Normalised P/E nm nm nm Property, Plant & Equipment (2) (4) (51) (79) (202) Price/Op Cash Flow nm nm nm Tax Paid On Investment Activities EV* nm Other Investing Items EV/EBITDA nm nm nm Investing Cash Flow (10) (14) (53) (80) (204) EV/EBIT nm nm nm Inc/(Dec) in Equity * Enterprise value forecasts for each financial period inclusive of any forecast issued capital increases Dividends Paid Valuation Financing Costs (1) (0) (4) 0 0 Debt Draw dow n/(repayment) Jambreiro Financing Cash Flow Serra da Lontra Inc/(Dec) in Cash (2) (11) Passabem Itambe Balance Sheet ($M) FY11A FY12E FY13E FY14E FY15E Regional Exploration Cash & Deposits Listed Investments Receivables Corporate (7) (0.03) (7) (0.03) Inventories & Other Current Assets Options Property, Plant & Equipment Cash Exploration & Development Future Equity Raised Investments Total Other Non Current Assets Total Assets Valuation Base: $1.87 Upside : $2.45 Payables and other current Liabilitie Discount of share price to valuation 195% 286% Short Term Debt Long Term Debt Per share valuation sensitivity to: Other Non Current Liabilities /- 10% move in iron ore price $0.24 Total Liabilities /- 10% move in the $US/$A rate $0.08 Total Equity Net Debt (Cash) (10) (12) (24) Current price $0.635 Recommendation Buy Major Shareholders Million (%) Date Risk rating High Atlas Iron % Sep month price target $2.20 Directors and Mgt % Sep-11 Notes: 1. Mining operating profit before tax is the direct mining contribution. Source: Centaurus Metals Limited, Ord Minnett estimates. Base Case 2. May not add because of dilution effects. (million tonnes) Upside Case $ M $ per share 2 $ M $ per share 2 Tuesday, 17 April 2012 Page 7

8 Please contact your Ord Minnett Adviser for further information on our document. Research Stephen Scott Head of Research Sydney Peter Arden Senior Research Analyst Melbourne James Lennon Senior Research Analyst Sydney Luke Smith Senior Research Analyst Melbourne Brad Dunn Analyst Sydney Nicholas McGarrigle Assistant Analyst Sydney Ord Minnett Branches Sydney (Head office) Level 8 NAB House 255 George Street Sydney NSW 2000 Tel: (02) Fax: (02) Caloundra, Sunshine Coast Bulcock Street Caloundra QLD 4551 Tel: (07) Fax: (07) Mackay 45 Gordon Street Mackay QLD 4740 Tel: (07) Wollongong 3/55 Kembla Street Cnr Market and Kembla Streets Wollongong NSW 2520 Tel: (02) Fax: (02) Adelaide Level Grenfell Street Adelaide SA 5000 Tel: (08) Fax: (08) Canberra 101 Northbourne Avenue Canberra ACT 2600 Tel: (02) Fax: (02) Melbourne Level Collins Street Melbourne VIC 3000 Tel: (03) Fax: (03) Brisbane Level Eagle St Brisbane QLD 4000 Tel: (07) Fax: (07) Coffs Harbour Suite 4 21 Park Avenue Coffs Harbour NSW 2450 Tel: (02) Fax: (02) Newcastle 426 King Street Newcastle NSW 2300 Tel: (02) Fax: (02) Buderim Sunshine Coast 1/99 Burnett Street Buderim QLD 4556 Tel: (07) Fax: (07) Gold Coast Level 7 50 Appel Street Surfers Paradise QLD 4217 Tel: (07) Fax: (07) Tamworth Suite Peel Street Tamworth NSW 2340 Tel: (02) Fax: (02) Tuesday, 17 April 2012 Page 8

9 Ord Minnett Limited ABN ASX Market Participant AFS Licence Number Guide to Ord Minnett Recommendations SPECULATIVE BUY We expect the stock s total return (nominal yield plus capital appreciation) to exceed 20% over 12 months. The investment may have a strong capital appreciation but also has high degree of risk and there is a significant risk of capital loss. BUY ACCUMULATE HOLD LIGHTEN SELL RISK ASSESSMENT The stock is undervalued and we expect it to exceed the total return by 15% over the next 12 months.. We expect a total return of between 5% and 15%. Investors should consider adding to holdings or taking a position in the stock on share price weakness. We expect the stock to return between 0% and 5%, and believe the stock is fairly priced. We expect the stock to return less than 0% and possibly as much as 15%. Investors should consider decreasing their holdings. We expect the total return to lose 15% or more. Classified as High, Medium or Low, denotes the relative assessment of an individual stock s risk based on an appraisal of its disclosed financial information, volatility, nature of its operations and other relevant quantitative and qualitative criteria. Disclosure: Ord Minnett is the trading brand of Ord Minnett Limited ABN , holder of AFS Licence Number and an ASX Market Participant. Ord Minnett Limited and/or its associated entities, directors and/or its employees may have a material interest in, and may earn brokerage from, any securities referred to in this document. Further, Ord Minnett and/or its affiliated companies may have acted as manager or co-manager of a public offering of any such securities in the past two years. Ord Minnett and/or its affiliated companies may provide or may have provided corporate finance to the companies referred to in the report. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party or person without the prior written consent of Ord Minnett Limited. Additional Disclosure: The analyst discloses that when conducting on-site visits to inspect property, plant and equipment that the analyst may have received assistance from CTM. This assistance may have included on-site transport, incidental expenses, and access to equipment. Where practical, OML policy is to pay for all travel and accommodation expenses. Disclaimer: Ord Minnett Limited believes that the information contained in this document has been obtained from sources that are accurate, but has not checked or verified this information. Except to the extent that liability cannot be excluded, Ord Minnett Limited and its associated entities accept no liability for any loss or damage caused by any error in, or omission from, this document. This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore before acting on advice contained in this document, you should consider its appropriateness having regard to your objectives, financial situation and needs. If any advice in this document relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement for that product before making any decision. Analyst Certification: The analyst certifies that: (1) all of the views expressed in this research accurately reflect their personal views about any and all of the subject securities or issuers; and (2) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein and (3) the analyst presently holds an interest in the securities referred to in this document, including CTM and will benefit from any increase in the price of these securities. Tuesday, 17 April 2012 Page 9