AXIOM MINING LIMITED (AVQ)

Transcription

1 First Impressions 01 December 2014 AXIOM MINING LIMITED (AVQ) FIRST IMPRESSIONS Axiom Mining (AVQ) is an aspiring nickel laterite producer with an 80% interest in the Isabel nickel project in the Solomon Islands. As a first stage, AVQ intends to target ~2.0Mtpa (100% basis) of DSO nickel laterite. The company estimates the stage 1 project will cost ~US$25m. Nickel laterite remains an important source of nickel, utilised in production of Nickel Pig Iron which accounts for ~26% of global supply. Success for AVQ is dependant upon: 1) favourable conclusion of the legal case involving Sumitomo, 2) proving up a JORC resource, and 3) financing the project. Isabel nickel project - On the cusp Key Points Isabel project: AVQ s key asset is the Isabel nickel-laterite project in the Solomon Islands (80% AVQ). This project has been the subject of a legal case brought by Sumitomo against the Solomon Islands Government, Axiom and others - Sumitomo recently lost its case in the High Court of the Solomon Islands. An appeal is now pending (the Court of Appeal) which we understand is to be heard in Feb-15. Potential long-life, large-scale project: Work undertaken by previous owners defined a non-jorc resource of 159Mt ~ 1.05% Nickel, and 0.07% cobalt. AVQ has commenced drilling work to define a modest sized JORC resource (ie 10-20Mt). Low capex estimate: AVQ estimates that stage 1, which is intended to be a 2Mtpa DSO-laterite project, would cost ~US$25m. Relative to a market cap of around $45m. Low operating costs: Axiom estimate operating costs for the project of US$43/t (incl shipping, but excl royalties). In comparison, the spot price for 1.5% nickel laterite ore delivered to China is currently ~US$62/t (delivered). Potential for funding from customers or JV partners: There is potential for AVQ to receive some funding, be it via a partial project selldown or customer prepayments. Other projects: AVQ also has a number of other tenements, notably the West Guadalcanal tenements which AVQ believe are prospective for gold a drill program is currently underway. Catalysts: a) Resolution of the legal case with Sumitomo; b) drill results from current drill program at Isabel, c) completion of a maiden JORC resource; d) arranging financing for the project. Risks: a) The ongoing legal case brought by Sumitomo against Axiom and others in relation to the Isabel nickel project, b) any issues in proving up an economic resource, or the size of such a resource is smaller than targeted, c) development costs higher than the company estimates or a delay in the development timetable, d) regulatory delays. Phillip Chippindale, CFA phillip.chippindale@wilsonhtm.com.au Tel m Share Price Performance $ AVQ XSR Rebased Nov-13 Mar-14 Jul-14 Nov-14 1m 6m 12m Abs. Return (%) Rel. Return (%) Mkt Cap: $43m Enterprise Value: $41m Shares: 3,341m Sold Short: % ASX 300 Wgt: n/a Median T over/day: $0.4m Wilson HTM Equities Research Issued by Wilson HTM Ltd ABN Australian Financial Services Licence No , a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

2 Table of contents Isabel nickel project... 3 Nickel prices Other assets Board and senior management Substantial shareholders Risks Wilson HTM Equities Research 2

3 Isabel nickel project Overview AVQ has an 80% interest in the Isabel nickel laterite project on Isabel Island, Solomon Islands. The company s initial target is production of up to 2.0Mtpa of DSO nickel laterite. A second stage of the project involves potential on-site processing of the ore. The Isabel project comprises tenements on the Santa Isabel Island. Previous resource estimates by previous owners have identified a non-jorc resource of 159Mt ~1.045% Ni and 0.07% Cobalt (this estimate was completed in 1993). The Kolosori Ridge NPI orebody is identified as being the primary target and is characterized by minimal overburden of less than 0.5m, and resource mineralisation down to ~5.5m, but open at depth. The balance of the project is owned by the Kolosori tribe (10%) and Bungusule tribe (10%). Both of these tribes have free-carry on the project. AVQ has provided a preliminary estimate for capex the 2.0mtpa DSO project of US$25m. The project would be expected to employ around 5-8 expat staff, and local staff. We understand that no individuals reside on the company s tenements. FIGURE 1: LOCATION OF AXIOM MINING S KEY PROJECTS Source: AVQ Wilson HTM Equities Research 3

4 Mining & Infrastructure The Kolosori Ridge orebody is intended to be dug using bulk mining methods, with no necessity for drill and blast (we understand that free dig mining will be appropriate). The Kolosori Ridge orebody is located less than 500m from what AVQ intends to be the ore loading facility (AVQ owns, via 50 year leasehold, the land intended for the ore loading facility). The intention is for ore to be trucked from the mine to the ore loading facility. The ore is then to be loaded via a jetty onto barges, and then taken to a deep water point for loading of the DSO onto ships for transportation. There is the potential for the ships to be loaded at a port on land, however this is more capital intensive and is not included in AVQ s US$25m capex estimate. FIGURE 2: ISABEL PROJECT LOCATION OF PROPOSED MINE AND PORT INFRASTRUCTURE Source: AVQ FIGURE 3: ISABEL PROJECT Source: Wilson HTM Wilson HTM Equities Research 4

5 FIGURE 4: ISABEL TENEMENTS ON SANTA ISABEL ISLAND Source: AVQ Wilson HTM Equities Research 5

6 Whats the plan? The company intends to develop this project using a staged approach: 1) Stage 1: Low capex option for 2.0Mtpa of DSO laterite. 2) Stage 2: On-site processing of the ore, which is likely to occur with a plant owned and operated by a third party. Non-JORC Resource Work by previous owner INCO, along with Kaiser engineers, amounted to a non-jorc resource of 159Mt at 1.045% Nickel, and 0.07% cobalt, for mineralisation only to a depth of ~5.5m. This non-jorc resource estimate was completed in the 1990s, following work by INCO in the 1960s and 1970s (including 43 diamond drill holes and over 4,000 test pits) and by Kaiser in the 1990s, when a further 34 test pits were dug. FIGURE 5: SCHEMATIC CROSS SECTION OF ISABEL, ALONG WITH POSSIBLE EXTRACTION PROCESSES Source: AVQ Wilson HTM Equities Research 6

7 TABLE 6: AVQ S ESTIMATES FOR PROJECT ECONOMICS Source: AVQ HISTORY & LEGAL CASE In 2010, Axiom Mining were granted a letter of intent by the Solomon Islands Ministry of Mines which allowed exclusive negotiations with landowners. Following negotiations with landowners, Axiom Mining Ltd formed a JV company in Dec-2010, Axiom KB Limited (80% AVQ, 10% Kolosori Tribe and 10% Bungusule Tribe) which was granted a Surface Access Agreement of the Isabel project. We understand that this was the first time a SAA had been granted over this project. Axiom KB Ltd also has a 50 year lease over the land which comprise the majority of the deposits. In April 2011, a prospecting licence was granted to Axiom KB Ltd. In 2011 Sumitomo lodged a civil claim against the government of the Solomon Islands and the landowners, and as part of this case enjoined Axiom Mining KB. On 24 September 2014 the High Court of the Solomon Islands (single judge) handed down a ruling dismissing the case by Sumitomo, including its more than 100 claims. In late October 2014, Sumitomo lodged an appeal to the Solomon Islands Court of Appeal. We understand that this would be the final avenue of appeal for this case. Axiom expect that the case will be heard in Feb-15. On 30 September 2014 Sumitomo brought an injunction against Axiom Mining from continuing work on this project. However, on 8 October 2014 the Solomon Islands Court of Appeal set aside this injunction. Further Axiom has filed a costs claim for the High Court proceedings, amounting to A$6.5m. This has the potential to be considered and adjudicated on before the end of CY14. Wilson HTM Equities Research 7

8 FIGURE 7: JV STRUCTURE FOR ISABEL PROJECT Source: Company presentation NEXT STEPS Following the recent win against Sumitomo, AVQ is commencing further exploration work. We understand from the company that one of the primary aims of this exploration work is to define zones with higher grades of nickel, which would form the focus for an initial DSO operation. A mining lease is still required to be granted. Environmental approvals are also still required. DRILLING PROGRAM A diamond drill rig arrived on site in late Nov The company has targeted a 60 day drill program, for around 60 holes down to a depth of ~20m. The drill program is targeting two separate zones, both located on the Kolosori ridge. The drill core is to be analysed in either Brisbane or Townsville. Once completed, this has the potential to defined a JORC resource. Over the next 6 mths or so, the company is aiming to define a JORC resource of 10-20Mt. This could coincide with completion of a pre-feasibility study based on the JORC resource. The company anticipates the 2Mtpa DSO operation would comprise a mining fleet of 2-3 excavators and 4-5 trucks, along with a small number of light vehicles. Wilson HTM Equities Research 8

9 FIGURE 8: EXPLORATION PERMITTING PROCESS IN THE SOLOMON ISLANDS Source: Axiom Mining FIGURE 9: AVQ S CAPITAL STRUCTURE Axiom Mining Ltd (AVQ) Shares on issue (m) Options on issue (m) Share price (A$ps) Dil. Mkt cap (A$m) 50.6 Mkt cap (A$m) 43.0 Cash (A$m), at 30-Sep-14, plus options issued since 2.3 Debt (A$m) 0.7 net debt (A$m) -1.6 EV (A$m) 41.4 Source: Wilson HTM, company data, IRESS Wilson HTM Equities Research 9

10 FIGURE 10: AVQ S INDICATIVE PROJECT TIMELINE Source: AVQ Wilson HTM Equities Research 10

11 Nickel prices CHART 11: RAW ORE NICKEL PRICES US$/t Apr May Jun Jul Aug Sep Oct-14 Shanghai metals market, % Ni (US$/t) Nickel ore price, 1.8% Ni, CIF (15-20% Fe, 30-35% water) Source: Bloomberg, Wilson HTM CHART 12: LME NICKEL PRICE V NICKEL LATERITE PRICE US$/t Apr May Jun Jul Aug Sep Oct-14 Source: Bloomberg, Wilson HTM Shanghai metals market, % Ni (US$/t) LME Nickel price (US$/t) - RHS 21,000 20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 Clear correlation between the LME nickel price and the Nickel laterite price CHART 13: LME NICKEL PRICE V LME NICKEL INVENTORIES t 450, , , , , , , ,000 50, Nov Nov Nov Nov Nov-13 LME Nickel warehouse stocks LME Nickel price (US$/t) - RHS 31,000 28,000 25,000 22,000 19,000 16,000 13,000 10,000 Source: Bloomberg, Wilson HTM Wilson HTM Equities Research 11

12 CHART 14: CHINESE NICKEL ORE IMPORTS tonnes 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Nov Nov Nov Nov Nov-13 China customs Ni ore Import - Other China customs Ni ore Import - from Philippines China customs Ni ore Import - from Indonesia Source: Bloomberg, Wilson HTM Other assets West Guadalcanal, Solomon Islands (Gold) In early 2014 AVQ acquired a prospective tenement in Guadalcanal, Solomon Islands. Exploration by previous companies have identified gold and silver mineralisation. It is Axiom s view that this ground is highly prospective for epithermal gold/silver. Axiom is currently undertaking an initial diamond drilling program, which is targeting the Hoilawa epithermal gold-silver corridor. FIGURE 15: WEST GUADALCANAL TENEMENT Source: AVQ Quang Tri Project, Vietnam (Gold) AVQ s management believe that these tenements are prospective for Sepon-style gold mineralisation. However, Axiom has now put its Vietnam operations to maintenance only. We understand that Axiom retains the Quang Tri tenements, and maintain a modest office in Vietnam. Wilson HTM Equities Research 12

13 Cardross Project, Australia (Gold) This project comprises 267sq.km, which is prospective for gold. We understand that AVQ are looking at a possible divestment of this project, or entry into a JV. Others AVQ has a number of other tenements, however we understand that each of these are lower priorities. Wilson HTM Equities Research 13

14 Board and senior management Given the company s size and cost constraints, AVQ is operating with a 2 man board comprising Stephen Williams as Non-exec Chairman, and Ryan Mount (Managing Director and CEO). Stephen Willliams, Chairman and Independent Director Corporate lawyer for 35 years and a Senior Partner at Kemp Strang Lawyers. Strong corporate governance and experienced in international corporate transactions. Non-executive Director of PrimeAg Aust. Ltd. Former Chairman of Coffey International Limited for 16 years Mr Ryan Mount CEO & Managing Director Director since April 2009, appointed CEO in June Led the restructure of the company in 2009 and Previously 10 years experience in Australian and international financial markets and corporate advisory. Instrumental to the Company s development in the Solomon Islands. Mr Sailesh Solanki Chief Financial Officer Experienced executive with a history of financial leadership with Australian mining companies operating in Asia and Pacific Islands. Former Group Finance Manager of Allied Gold Limited, where he was instrumental in establishing and managing the finance functions during the development and the commissioning of Solomon Islands s Gold Ridge Mine. Former manager at Emperor Mines Limited and Intrepid Mines Limited, based in Australia while establishing and managing the finance operations in Fiji, PNG and Indonesia. Former auditor, a CPA and holds a Bachelor of Business (Accounting). Substantial shareholders There is only one substantial shareholder, Drake Private Investments LLC. Drake is New York-based private hedge fund, founded by Mr Anthony Faillace. Substantial shareholders Drake Private Investments LLC 10.27% Wilson HTM Equities Research 14

15 Risks Legal risk AVQ is still involved in a legal case in relation to the tenements for the Isabel nickel project. There is potential that there may be adverse findings in this case that may adversely impact AVQ s interests in the Isabel tenements. Financing risk There is potential that AVQ may need to raise extra equity capital. There is also the potential that the company will raise debt, and the ability for it to complete this is uncertain. Resource risk AVQ does not have a JORC-compliant resource estimate for its projects. There is a risk that AVQ may not be able to define a JORC-compliant resource, or that any such resource in the future is smaller than anticipated or lower quality (due to grade, etc) than targeted. Such changes could affect AVQ s development and mining plans. Development risk Key development risks include: 1) Development costs higher than the company estimates, 2) a delay in the targeted development timetable. Political risk The introduction of, or changes to, policies, taxes, royalties, legislation, practices or administrative action may adversely affect AVQ s aspirations. operations. The obligations and entitlements of AVQ as interpreted by relevant authorities may change and there is no guarantee that these changes will not disrupt operations and financial performance. AVQ relies on the maintenance of satisfactory relationships with various government authorities for the ordinary conduct of business. We also note that royalty rates are yet to be negotiated in relation to AVQ s projects. Commodity price risk AVQ s share price will be exposed to movements in the market price of nickel and especially nickel ore, both in the short and long term. Any sales on the spot market or referenced to spot prices will be exposed to short term movement in the relevant prices. Wilson HTM Equities Research 15

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