Vimy Resources. Mulga Rock Australia s next uranium mine? ADD (no change)

Transcription

1 Vol th Mining Australia Equity research April 18, 2016 ADD (no change) Current price: Target price: Previous target: A$0.31 A$0.47 A$0.51 Up/downside: 54.2% Reuters: Bloomberg: Market cap: Average daily turnover: VMY.AX VMY AU US$53.61m A$69.68m US$0.00m A$0.00m Current shares o/s 227.7m Free float: 35.0% Price Close Relative to S&P/ASX 200 (RHS) Apr-15 Jul-15 Oct-15 Jan-16 Source: Bloomberg Price performance 1M 3M 12M Absolute (%) Relative (%) Chris BROWN T (61) E chris.brown@morgans.com.au Vimy Resources Mulga Rock Australia s next uranium mine? The Mulga Rock uranium project, WA (VMY 100%) hosts uranium resources of 75Mlbs U A Preliminary Feasibility Study was released November 2015 and the recently released reserve of 22.1Mlbs U supports an initial 6-year mine life. Current work is focused on improving the understanding of the geology, optimising mining and rehabilitation, and refining the projected process plant design and operation. The downturn in demand for mining services and increased competition for new contracts is expected to deliver cuts to projected Capex and Opex. Resource and reserve definition drill programs are ongoing and should see strong newsflow over the next 12 months. A Definitive Feasibility Study and final investment decision is anticipated by the end of We update coverage after the release of the Reserve statement, maintaining our Add recommendation and adjusting our sum-of-the-parts based valuation to $0.47ps (from $0.51), which equates to our price target. Vimy reported $7.1m cash at 31 December The top 5 shareholders account for over 85% of VMY shares, led by the Forrest Family and Acorn Capital. A robust PFS and a 17-year mine life The PFS released November 2015 outlined a low-cost financially robust project based on the total resource of 520ppm U expected to support a 17-year mine life. VMY expects initial reserve of 660ppm U (reported March 2016) to support an initial 6-year mine life. The capital cost is projected at close to US$290m, and C1 Opex is projected at US$34/lb before by-product credits. Positive newsflow through 2016 Although VMY had received environmental approvals, the longer mine life projected from the PFS obligated VMY to re-submit the Public Environmental Review in December 2015, with comments to be lodged by 7 March We don t anticipate any issues not previously addressed. We do anticipate strong newsflow through 2016 as VMY aims to complete the DFS with a final investment decision on the project by the end of the year. VMY expects to reduce the cost of overburden removal, budgeted at US$33.6m in the PFS, with labour rates weakened, and mining services companies highly competitive. Metallurgical studies are also underway to fully quantify the potential for an uplift in the resource grade, as well as optimising metallurgical performance, and improving the potential for achieving by-product credits. Market supply dynamics are weak but expected to tighten Weak pricing has stalled new uranium developments. Peninsula Energy (ASX: PEN, not rated), has completed (March 2016) a supply agreement at a weighted average price of US$56/lb over a 10-year period. The industry consensus forecast is for global demand to increase to ~240Mlbs U308 by 2024, with current output of ~150Mlbs. The incentive price to bring on new supply is commonly estimated to be around US$65/lb. We have used US$60/lb in our modelling. Financial Summary Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) (0.020) (0.047) (0.050) (0.024) (0.022) Normalised EPS Growth 140% 6% (51%) (9%) FD Normalised P/E (x) NA NA NA NA NA DPS (A$) Dividend Yield 0% 0% 0% 0% 0% EV/EBITDA (x) NA NA NA NA NA P/FCFE (x) NA NA NA NA NA Net Gearing 2% (112%) (152%) (113%) (19%) P/BV (x) NA ROE 114% (322%) (187%) (131%) % Change In Normalised EPS Estimates 0.9% 46.8% 46.8% Normalised EPS/consensus EPS (x) SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN ) AFSL A PARTICIPANT OF ASX GROUP Powered by EFA

2 Company overview The Mulga Rock Project (MRP) is a large uranium resource located 240km east-northeast of Kalgoorlie, in Western Australia. The MRP is Australia s third largest undeveloped uranium project and consists of four deposits: Ambassador and Princess, which form the Mulga Rock East Deposit, and Emperor and Shogun, which form the Mulga Rock West Deposit. The Reserves defined to date are in Mulga Rock East, with 91% of the reserves in the Ambassador deposit, which holds 50% of the Resource base. The MRP shares road access with the Tropicana Gold Mine in Western Australia. The MRP is 100% owned and operated by VMY. As the project is located in the Great Victoria Desert, there are no competing land uses to the proposed mining operation. Investment thesis share price catalysts Progressing rapidly to Final Investment Decision: The Mulga Rock PFS outlined a financially robust project. VMY intends to complete a DFS by Q4CY16, with an investment decision by the end of the Uranium long-term contract pricing is significantly higher than the current spot market implies: Recently announced deals on long-term uranium contracts show significantly higher prices than spot pricing. Peninsula Energy recently negotiated a supply agreement with a weighted average price of US$56lb. Shorter-term contracts for were also negotiated with weighted average prices of US$73-75/lb. Additional cost savings on multiple fronts: A large proportion of initial costs is the pre-stripping of pits to expose the uranium mineralisation. VMY expects to reduce the projected cost of overburden removal. Mining services companies are readily available and highly competitive. We anticipate further cost reductions in this area. Metallurgical studies are also underway to fully quantify the potential for an uplift in the resource grade. Market supply dynamics are tightening: Current pricing has frozen new developments. Existing uranium mines are mature with few new projects coming on stream. BREE forecasts global demand at ~240Mlbs U by 2024 versus current output of circa 150Mlbs. The incentive price to bring on new supply is estimated around US$65/lb U Valuation breakdown We identify approximately 36% upside to our valuation of 47cps based on the aggregate valuations of VMY s constituent assets. We discount the NPV valuation of VMY s Mulga Rock PFS by 80%, which we view as being appropriate hard-but-fair - at the current stage of evaluation. As further milestones are reached, we would look to unwind this discount to the asset valuation. Equity upside is expected with successful completion of the Public Environmental Review process, news associated with the Definitive Feasibility Study and the Final Investment Decision by end Market sentiment to the uranium market and to resource developers could also add to our valuation. Our valuation of the VMY assets comprises a heavily discounted value on the Mulga Rock asset. As project milestones are reached we would look to unwind our valuation discount. Figure 1: VMY valuation breakdown Project A$m A$ps Mulga Rock Mulga Rock PFS discountedrisked by 80% to its NPV Exploration Upside Additional 20Mlbs at US$1/lb U308 Total operations Net Debt/Cash Corporate Overheads Total valuation SOURCE: MORGANS 2

3 Upside risks to our target price include: 1) Success in further reducing initial capital costs. 2) Further tightening of market supply, which would translate to increased spot and long-term uranium prices. 3) Discovery of additional resources. 4) Further currency weakness translating to improved AUD commodity prices. Downside risks: 1) Prolonged uncertainty and funding issues in the junior exploration space. 2) Delays in the Japanese reactor re-start program and unforeseen delays in the Chinese reactor construction program. Company overview The MRP is a large uranium resource located 240km east-northeast of Kalgoorlie in Western Australia within 757km 2 of tenements. The discoveries to date demonstrate the significant exploration potential for the low-cost discovery of additional uranium resources. The Mulga Rock project is the third largest undeveloped uranium project in Australia. Figure 2: Mulga Rock project location SOURCE: COMPANY The MRP is Australia s third largest undeveloped uranium project and comprises four deposits: Ambassador and Princess, which form Mulga Rock East, and Emperor and Shogun which form Mulga Rock West. The deposits also contain base metals copper, zinc, nickel, cobalt - rare earths and gold, which may be produced as by-products. Our simple analysis ignores both the costs and revenues of by-products. The Mulga Rock project shares access infrastructure with the Tropicana Gold Mine. The extensive landholding has significant exploration potential, not only for uranium but also for other commodities such as copper, nickel, cobalt and other rare earth elements. 3

4 The Mulga Rock project history 1978 mid-2000: The project was mapped by the Geological Survey of Western Australia in Japanese company Power Nuclear Corporation (PNC) commenced on-ground exploration in 1978 and actively explored and held the ground until the mid-2000s. 1980s: The Mulga Rock discoveries made in the 1980s and resulted in PNC releasing a resource of 0.12% eu Other historic resources were subsequently reported, but prior to the implementation of the JORC Code. 2008: VMY acquired the project and listed on the ASX as Energy and Minerals Australia. 2009: Updated resource estimate of 25,520t of U at a cut-off grade of 200ppm U to JORC Code standards at that time. 2010: Scoping study released outlining 12ktpa U production with projected operating costs of US$23/lb. 2013: Experienced executive Mr Mike Young is appointed as Chairman and Mr Julian Tap is appointed as CEO. 2014: Mulga Rock resources (to JORC Code 2012 standards) upgraded to 63.5Mlbs U Mike Young appointed Managing Director, Hon Cheryl Edwardes appointed as Chairman. 2015: Mineral resource estimate upgrade released increasing JORC resources to 520ppm U for 75Mlbs U Scoping study refreshed, and Pre-Feasibility study released (November 2015). 2016: Initial Probable Reserve (to JORC Code 2012 standards) of 22.1Mlbs U reported March The Mulga Rock project The Mulga Rock project comprises two deposit groups located ~10km apart. Mulga Rock West (MRW) comprises the Emperor and Shogun deposits and Mulga Rock East (MRE), Ambassador and Princess. Resources are divided roughly evenly between the two prospect areas. The geology of the Mulga Rock project offers near surface lignite hosted ores, which are soft and easily mined sedimentary rocks, which should be amenable to cheap mining techniques. Figure 3: Mulga Rock East/West SOURCE: COMPANY 4

5 Project geology There are a number of different types of mineralisation at Mulga Rock. VMY has concentrated its studies on the near surface ores hosted in lignite (often referred to as brown coal a soft sedimentary rock formed from naturally compressed peat). Ore zones are 2-5m in thickness and have underlying Nickel-Cobalt-Zinc-Copper mineralisation in lenses from 0.5m 1.5m. Base metals are more prevalent at Mulga Rock East. Generally the ore zones are enriched just below the oxidation-reduction boundary, sub-horizontal and about 40m below surface. The uranium mineralisation and most of the base metals are fine grained, disseminated through and adsorbed on the organic matter. Mulga Rock ore is hosted within deeply weathered sediments. Ore is made up mostly of uraninite (U02) associated with metallurgically simple and soft carbonaceous material and lignite. The deep weathering also makes the orebody soft and friable. Figure 4: Mulga Rocks geology SOURCE: COMPANY Mulga Rock Project Uranium Resource (updated September 2015) A maiden resource was announced in 2009, which was generated from historical resource estimates, and which incorporated results from 766 of 2,012 holes drilled prior to VMY acquiring the project. The most recent update to the resource increased the mineral inventory to 520ppm (75Mlbs) U (released 17 September 2015). The updated resource estimate released in September 2015 increased contained uranium to 75Mlbs U308 (from 63Mlbs in 2014). Figure 5: Mulga Rock uranium resource SOURCE: COMPANY 5

6 Mulga Rock Project base metals resource (updated September 2015) Mulga Rock East (the Princess and Ambassador deposits) also contains a base metal resource. The mineralisation is associated with uranium and for the purposes of resource estimation the base metals within the existing uranium resource model have been included. The Mulga Rocks base metals resource includes only the metals within the boundaries of the uranium resource and will be recovered as part of the processing of the uranium ores adding a by-product credit. Figure 6: Mulga Rock East base metals resource SOURCE: COMPANY Nov 2015 Pre-feasibility study (November 2015) VMY announced the Mulga Rock Preliminary feasibility in November The study outcomes highlighted the following: C1 operating costs of US$31/lb U including base metal by-product credits over a mine life of 17 years with estimated production of 50.4Mlbs of U NPV 10 of A$431m including a 25% internal rate of return and a 3.9 year payback period at US$65/lb. Breakeven price of US$50/lb U Shallow open cut mining methods to a maximum of 74m. Simple processing technology with low-cost acid leaching and resin in pulp. Strip mining methods will be employed with pits back filled as the mining front progresses limiting the requirement for waste movement and minimising the environmental impact and rehabilitation. 6

7 The Mulga Rock prefeasibility study outlined simple mining operation with a 17-year mine life at low cost with a rapid payback period of 3.9 years. Figure 7: Mulga Rocks pre-feasibility study financial metrics SOURCE: COMPANY Understanding the uranium market Uranium 101 Uranium trades in restricted markets and is thus a more opaque and immature market than the precious and base metals markets. The fundamentals for uranium demand remain positive and are supported by a number of key drivers, which we highlight below: The spot price of uranium isn t the true price of all uranium sold: The spot price of uranium is now very weak, below US$30.0/lb. Around 3% of uranium is sourced from the spot market. Energy utilities buy on a long-term negotiated contract price, commonly with a delivery time-frame of +24 months. Because of this, the price for long-term supply is substantially higher than the spot price (See Figure 8). Examples of recent contracts above spot pricing: ASX listed company Peninsula Energy announced its sales and marketing strategy for its Lance project in Wyoming, USA on November 10, The announcement made reference to PEN contracting 1Mlbs of uranium sales from for US$73-75/lb U (roughly double the 2015 spot price). 7

8 The uranium price weakened in 2014 as a result of the Japanese reactor shutdowns post-fukushima. However, with the restart of the Japanese nuclear program, we note the uranium price is once again regaining upside momentum. Figure 8: Uranium price spot pricing vs long-term pricing USD 75 USD 65 USD 55 USD 45 USD 35 USD Spot Price US$/lb Long term price US$/lb SOURCE: UXC The incentive price Market participants talk about the incentive price of uranium. This is the pricing required to encourage new supply. A number of factors are contributing to higher longer term incentive price expectations in the sector such as: Current pricing has frozen new developments: Production shortfalls are obscured by existing stockpiles. The visible price the spot price remains weak limiting the appetite of equity investors and debt-funders. It will take years to get a uranium project going: Uranium projects require long lead times to move into production. With feasibility, design, federal and state environmental approvals, federal approval of sales contracts and funding, it commonly takes a decade to get a mining project up and running. World consumption is growing: World consumption of uranium in 2014 was 155Mlbs vs 147Mlbs of mine production, with the balance made up from the Russian Highly Enriched Uranium agreement, which was completed in The prospects of higher uranium prices are real, in our view, on the lack of new supply, dwindling stockpiles and growing demand for energy security. Figure 9: Incentive price to support new supply SOURCE: COMPANY Nov

9 The next 10 years Expectations of demand versus supply imply a growing supply gap is forming. The increase in reactor builds and the dwindling of secondary supplies, combined with the economic challenges faced by the existing producers is limiting the amount of new production coming on-line. The forward looking estimates for reactor growth imply a large portion of new demand will come from China and India over the next 10 years. Figure 10: New reactor outlook SOURCE: CAMECO By % of supply needs to come from new sources Cameco, the world s largest uranium producer, forecasts annual global uranium consumption at 260Mlbs (240Mlb reactor demand + 20Mlbs strategic stockpile demand) from the projected 526 reactors (versus 433 currently). It estimates that around 20% of global supply (>400,000lb/pa U ) will be required from new sources. Figure 11: World uranium demand to 2019 (kt U308) Figure 12: Forecast uranium consumption SOURCE: BREE SOURCE: CAMECO 9

10 Projected pricing The outlook for pricing in the medium to long term remains positive. Recent data released by the Bureau of Resources and Energy Economics implies that prices are likely to rise between 2015 and 2019 in response to tighter market supply. This is largely dependent on the pace of the re-start of the Japanese nuclear power program and the construction rate of China s reactor program. The Bureau of Resource and Energy Economics forecasts prices to rise between now and 2019 in response to a tighter market supply. The pace of Chinese reactor construction and Japan s nuclear power restart remain the key factors affecting the projection of prices going forward. Figure 13: Forecast uranium prices SOURCE: BREE 10

11 VMY financial data Year to 30 Jun (A$ m) AIFRS AIFRS AIFRS AIFRS AIFRS P rice target (A$ ) 0.47 Income statement 2014A 2015A 2016F 2017F 2018F Valuation (A$) $ 0.47 Divisional sales Total revenues Valuation summary A$ m A$ ps DCF valuation inputs EBITDA Mulga Rock Rf 5.25% Depreciation & amortisation Exploration Upside Rm-Rf 6.00% EBIT Total operations Beta 1.20 Net interest expense Net Debt/Cash CAPM (Rf+B 11.0% Pre-tax profit Corporate Overheads Tax rate (t) 30.0% Tax expense Total valuation WACC 11.26% Abnormals - pre-tax Shares NPAT Abnormals - post-tax M inorities Reported NPAT Cash flow statement 2014A 2015A 2016F 2017F 2018F P roduction (M lbs) 2015A 2016F 2017F 2018F EBITDA Uranium Production Cash flow from operations Capex Key assumptio ns 2015A 2016F 2017F 2018F Disposals USD / AUD exchange rate Acquisitions Cash flow from investing Incr/(decr) in equity P er share data 2015A 2016F 2017F 2018F Incr/(decr) in debt No. shares Ordinary dividend paid EPS (cps) Other financing cash flow EPS (normalised) (c) Cash flow from financing Dividend per share (c) Inc/(decr) cash Dividend payout ratio (%) 0% 0% 0% 0% Equity FCF Dividend yield (%) 0% 0% 0% 0% Balance sheet 2014A 2015A 2016F 2017F 2018F Operating performance 2015A 2016F 2017F 2018F Cash & deposits EBIT growth 106% 0% -47% 0% Fixed assets NPAT growth 29% 6% -46% 0% Other assets Normalised EPS growth 140% 6% -51% -9% Total assets Asset turnover (%) 0% 0% 0% 0% Short-term borrowings EBITDA margin (%) NA NA NA NA Long-term borrowings EBIT margin (%) NA NA NA NA Interest bearing debt Net profit margin (%) NA NA NA NA Total liabilities Return on net assets (%) -309% -237% -133% -102% Share capital Net debt / (cash) (A$m) Other reserves Net debt/equity (%) -112% -152% -113% -19% Retained earnings Net interest/ebit cover (x) Total equity ROIC (%) 45% 1878% 999% 999% Total shareholders' equity Total liabilities & SE Valuation sensitivity to discount rate (A$ / share) Total revenues and EBIT (A$ m) WACC 0.00% 5.00% 10.00% 12.50% 15.00% A 2015A 2016F 2017F 2018F Total revenues EBIT SOURCE: MORGANS RESEARCH, COMPANY 11

12 Queensland New South Wales Victoria Western Australia Brisbane Sydney Melbourne West Perth Stockbroking, Corporate Advice, Wealth Management Stockbroking, Corporate Advice, Wealth Management Stockbroking, Corporate Advice, Wealth Management Stockbroking, Corporate Advice, Wealth Management Brisbane: Edward St Armidale Brighton Perth Brisbane: Tynan Partners Ballina Camberwell South Australia Bundaberg Balmain Domain Adelaide Cairns Bowral Farrer House Norwood Caloundra Chatswood Geelong Gladstone Coffs Harbour Richmond Gold Coast Gosford South Yarra Ipswich/Springfield Hurstville Southbank Kedron Merimbula Traralgon Mackay Neutral Bay Warrnambool Milton Newcastle Mt Gravatt Newport Australian Capital Territory Noosa Orange Canberra Redcliffe Port Macquarie Rockhampton Scone Northern Territory Spring Hill Sydney: Level 7 Currency House Darwin Sunshine Coast Sydney: Level Tasmania Toowoomba Sydney: Hunter St Hobart Townsville Sydney: Reynolds Equities Yeppoon Wollongong Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual s relevant personal circumstances. Morgans Financial Limited ABN , its related bodies corporate, directors and officers, employees, authorised representatives and agents ( Morgans ) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever Disclosure of interest Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission. Regulatory disclosures Analyst owns shares in the following mentioned company(ies): - This report was prepared solely by Morgans Financial Limited. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Morgans Financial Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports. Recommendation structure For a full explanation of the recommendation structure, refer to our website at Research team For analyst qualifications and experience, refer to our website at Stocks under coverage For a full list of stocks under coverage, refer to our website at and Stock selection process For an overview on the stock selection process, refer to our website at If you no longer wish to receive Morgans publications please contact your local Morgans branch or write to GPO Box 202 Brisbane QLD 4001 and include your account details