Avanco Resources Limited

Transcription

1 This is an extract of our full report. Please refer to our full report before making any investment decisions. Avanco Resources Limited I m big in Brazil Recommendation: BUY Copper producer with strong organic growth towards 50ktpa Dedicated & experienced in-country management team Significant upside to base case valuation ASX: AVB Share Price: $0.06 Target Price: $0.15 M/Cap.: $147.4M Valuation: $450M Shares: 2,457M Monthly T/over: $2.4M Brett McKay Matthew Schembri BMcKay@petracapital.com.au MSchembri@petracapital.com.au Petra Capital Pty Ltd

2 Contents Executive Summary... 4 Successful transition from explorer/developer to producer... 4 Antas output to lift from 12ktpa to 15ktpa at US$1/lb cash costs... 4 Staged development at Pedra Branca to deliver 25ktpa by ktpa Cu target within 4-5 years looks achievable... 4 Quality gold exposure via a low cost earn-in... 4 Dedicated in-country management team... 4 Material upside to our A$0.15/sh price target (1xP/NPV)... 4 Key risks... 4 Investment thesis... 5 Introduction... 6 Antas Copper-Gold Project (100%)... 7 Modelled assumptions for Antas Key production assumptions for Antas open pit operations Pedra Branca Copper Project Pedra Branca East the target of initial development Staged development approach has been given green light Modelled assumptions for Pedra Branca East Targeting 50ktpa Cu within 4-5 years Exploration strategy and potential in Carajás CentroGold (Gurupi) Gold Project Cash flow analysis Valuation Valuation sensitivity Risks Analysis Directors and Senior Management Appendix Resources and Reserves

3 Avanco Resources (AVB) BUY Share Price: A$0.06 I m big in Brazil Target Price: A$0.15 Avanco Resources Limited (ASX: AVB) is a mining, development and exploration company focused on copper and gold in Brazil. After recently building, commissioning and successfully ramping-up the Antas open pit copper mine, it is now targeting the rapid development of the nearby Pedra Branca underground copper deposit. Further, it has recently agreed to an undemanding earn-in for up to 100% of the undeveloped 3.1Moz CentroGold (Gurupi) Gold Project from TSXlisted Jaguar Mining Inc. With a growing copper production profile from 12ktpa toward 50ktpa over the next few years, exposure to an advanced gold project and good upside to valuation, we initiate coverage with a BUY and A$0.15/share price target (1xP/NPV). Antas to be the first of many successes in Brazil Antas copper mine successfully delivered on time/budget & quickly up to the 12ktpa Cu targeted run rate; permitting underway to increase output to 18ktpa The larger, high grade Pedra Branca copper project being rapidly advanced toward production via a staged development approach; first copper by end 2017 Aiming to be a 50ktpa Cu producer within 4-5 years CentroGold Gold Project could be AVB s third mine In-country management team actively supervising operating & development projects & permitting activities Antas producing 12ktpa Cu & 7kozpa Au at US$1/lb Antas fully ramped-up and operating at permitted 12ktpa rate; step up to 15ktpa expected during 2017 C1 cash costs US$1/lb, AISC around US$1.60/lb 7 year initial mine life, good potential to increase Recent commitment to build Pedra Branca East (PBE) Staged approached with low start-up capex, ore trucked to Antas for processing in 2017 & Mtpa project producing up to 25ktpa Cu & 17koz Au by 2020, US$150m capex; 11 year mine life Company Data Shares ordinary (M) 2,457 Market cap. ($M) month low/high ($) A$0.048 / A$0.084 Average monthly turnover / volume A$2.4m / 44.1M GICS Industry Materials / Diversified Metals & Mining Financial Summary (fully diluted/normalised) US$ Year end Dec 2016F 2017F 2018F 2019F 2020F Revenue (US$M) Costs (US$M) EBITDA (US$M) NPAT (US$M) EPS (US ps) PER (x) na na Cashflow (US$M) CFPS (US ps) PCFPS (x) EV (US$M) EV / EBITDA (x) Dividends (US ps) Yield (%) The Board Director Position Executive Colin Jones Chairman Non-Executive Anthony Polglase Managing Director Executive Simon Mottram Director Exploration Executive Wayne Phillips Director Operations Executive Luis Azevedo Director Legal/Reg. Executive Vern Tidy Director Non-Executive Luiz Ferraz Director Non-Executive Scott Funston Director & Co. Secretary Executive AVB performance over one year Group Cu output of 40ktpa, options to achieve 50ktpa 3.1Moz CentroGold Gold Project looks exciting Extensive dataset including 130,000m drilling (80% DD) Blanket Zone presents immediate potential for a low capex, fast start-up open pit development Material upside to our A$0.15/sh price target Price target set at 1xP/NPV based on Antas & PBE only A$40m (A$0.01/sh) nominal exploration value includes CentroGold & near-mine and regional opportunities 3

4 Executive Summary Successful transition from explorer/developer to producer Following the recent completion and rapid ramp-up of the Antas Copper Project, AVB has made the successful transition from exploration and development company to an established copper miner with an enviable position in a prolific mineral belt. Antas was built within the US$50m budget and achieved targeted 12ktpa copper run rate within 3 months. This experience places AVB in a strong position to leverage off this success and embark upon further mid-sized developments with confidence. This is the approach being pursued at PBE which will lift copper output to 40ktpa by Antas output to lift from 12ktpa to 15ktpa at US$1/lb cash costs Antas is a high grade copper mine currently operating at 12ktpa annualised rate, with Sept Q production guidance of 3kt Cu and 1,750oz Au. With further permitting, the operation will achieve 15ktpa for at least 7 years at C1 costs of US$1/lb and AISC around US$1.60/lb. The orebody remains open at depth with mine life extension to come from either a larger open pit or an underground option. Staged development at Pedra Branca to deliver 25ktpa by 2020 AVB has recently committed to building the Pedra Branca East (PBE) copper project located 50km south of Antas. The PBE orebody will initially be developed at a smaller scale, with c.200ktpa of ore trucked to Antas for processing at the same time as the larger 1.2Mtpa project is constructed. 50ktpa Cu target within 4-5 years looks achievable With Antas at 15ktpa Cu and PBE at 25ktpa, AVB could deliver 40ktpa Cu by With spare mill capacity at Antas and significant potential to expand the Pedra Branca operation to include the adjacent Pedra Branca West deposit, we believe 10ktpa of incremental copper output is achievable. Quality gold exposure via a low cost earn-in AVB recently completed an undemanding deal to earn up to 100% of the CentroGold (Gurupi) Gold Project located 600km northeast of Antas/Pedra Branca. Extensive previous work defined a 3.1Moz resource including 2.4Moz in optimised open pits at 1.14g/t Au and 3.14: strip ratio. An initial work plan has been defined, with permitting the first key milestone; AVB are confident it has the right in-country expertise to complete this task in 4-6 months. A technical program aims to updated resource estimates and scoping studies over the next 3 months with the aim to establish a more appropriately sized and economically attractive project better suited to AVB s capacity. The near-surface, higher grade Blanket Zone has been identified as the main target for a low capex, fast start-up open pit development. There is also significant exploration potential within the 1,370km 2 tenement package which covers 75km strike of the prospective Gurupi greenstone belt. Dedicated in-country management team The majority of AVB directors either live or spend the majority of their time in Brazil. This strategy ensures careful management of operating, development and exploration assets, particularly in relation to permitting, regulatory and social aspects. It ensures most decisions are quick and well informed. Material upside to our A$0.15/sh price target (1xP/NPV) Our A$0.15/sh price target is set in-line with our NPV of the base case production plan at both Antas and PPB East at 10% discount rate. We are yet to incorporate CentroGold into our forecasts, instead including it in our nominal A$40m exploration value, which also accounts for both near-mine and regional exploration opportunities at Antas and Pedra Branca. Key risks Whilst a number of upside considerations can be identified, key risks relate to (i) gold price and currency exposure (ii) permitting (iii) funding (iv) weather-related disruptions and (v) geopolitical and country-specific risks in Brazil such as inflation. 4

5 Investment thesis AVB is focussed on discovering, building and operating copper and gold projects in Brazil. It has developed a unique model involving a targeted approach to mid-sized assets where it can leverage off extensive in-country management and expertise to advance projects quickly and cheaply. Its first success has been the recently completed Antas open pit copper-gold project, with the $50m project being built in under 12 months (Figure 1). Antas ramped up to the targeted 12ktpa Cu rate quickly, with plans to produce 15ktpa Cu over a 7 year mine life at US$1/lb C1 costs. Whilst Antas is a modest mine, it has given AVB confidence to commit to the development of the larger Pedra Branca coppergold mine located 50km to the south west. This project will be staged, with imminent construction of the box cut, portal and decline built to support a 1.2Mtpa project. Limited ore tonnages (c.200ktpa) from the start-up operation will be trucked to Antas for treatment whilst the 1.2Mtpa processing plant is constructed onsite. The operation aims to deliver 24ktpa Cu and 17kozpa Au for 11 years. This strategy appears sound and aims to deliver additional copper into a higher price environment. Combined copper output from Antas and Pedra Branca will reach 40ktpa by 2020, with AVB s stated 50ktpa target within 4-5 years appearing achievable given the optionality in the asset base. We have yet to include this upside in our forecasts (Figure 2). The recent CentroGold transaction has diversified the AVB asset base, with a large gold project and prospective tenement package now added to the expansive copper footprint it has in the Carajas region. With a 3.1Moz resource and an extensive dataset, CentroGold provides AVB with good potential to define another mid-sized, economically attractive development opportunity which can rapidly move toward production. Our base case valuation of A$0.15/sh for AVB assumes the current 7 year open pit mine plan at Antas and an 11 year underground operation at Pedra Blanca East. The allocation of a conservative A$40m (A$0.01/sh) to exploration value aims to account for the 3.1Moz resource base and exploration potential at CentroGold, near-mine extension potential at both Antas and PBE (depth and satellite ore sources) and regional exploration opportunities. With a well-defined development model, experienced in-country management, strong organic production growth, solid project pipeline, extensive exploration potential and significant upside to our A$0.15/sh valuation, we initiate coverage with a BUY recommendation. Figure 1: Antas open pit Figure 2: Forecast Cu production & AISC by asset Source: AVB Source: Petra Capital 5

6 Analysis Avanco Resource Share Price ($) A$0.059 US$0.04 (AVB) Iss. Shares (M) Oct-16 Issued shares (M) Source: Petra Capital Fully Diluted (M) Year End December Mkt Cap. ($M) A$145M US$110M PROFIT & LOSS 2016F 2017F 2018F 2019F 2020F 2016F 2017F 2018F 2019F 2020F Revenue US$M Resource Reserve Operating Costs US$M Antas Exploration US$M Tonnes Mt Other US$M Copper grade % 1.43% 2.53% EBITDA US$M Gold grade g/t Depreciation & Amort. US$M Contained copper t 237,000 91,621 EBIT US$M 0.4 (4.0) Contained gold oz 167,000 64,294 Net Interest US$M 2.4 (1.0) (1.3) Pre-Tax Profit US$M (2.0) (3.0) Pedra Branca Tax US$M 0.1 (0.5) Tonnes Mt Net Profit US$M (2.1) (2.5) Copper grade % 2.80% 2.1% Abnormal US$M Gold grade g/t Reported Profit US$M (2.1) (2.5) Contained copper t 289, ,480 Dividends Paid US$M Contained gold oz 221, ,142 Adjustments US$M Antas CASHFLOW Production Net Op Cash Flow US$M Ore milled Mt Net Interest US$M (0.7) (2.8) 1.3 Grade - copper % 2.27% 2.10% 2.10% 2.60% 2.60% Tax Paid US$M (0.1) 0.5 (2.6) (10.5) (10.6) Grade - gold g/t Operating Cash Flow US$M Grade - silver g/t Recovery Copper % Net Capex US$M (20.4) (34.0) (74.0) (54.0) (24.0) Recovery Gold/Silver % 88% 90% 90% 90% 90% Exploration US$M (2.0) (4.0) (5.0) (5.0) (5.0) Copper in concentrate t 10,618 12,096 12,096 14,976 14,976 Investing Cash Flow US$M (22.4) (38.0) (79.0) (59.0) (29.0) Gold in concentrate oz 6,817 6,945 6,945 8,681 8,681 Free cash flow US$M (10.2) (23.5) (44.5) Silver in concentrate oz C1 Costs US$/lb Net Borrowings US$M (30.0) 0.0 AISC US$/lb Dividends US$M Equity Issues US$M Pedra Branca Other US$M Production Financing Cash Flow US$M (30.0) 0.0 Ore milled Mt Grade - Copper % 2.20% 2.60% 2.30% 2.15% Net IncreaseCash US$M (6.8) 6.5 (14.5) Grade - Gold g/t Recoveries - Copper % BALANCE SHEET Recoveries - Gold % Cash US$M Copper in concentrate t 1,137 5,939 20,885 24,252 Other Current US$M Gold in concentrate oz 882 4,905 17,361 18,581 Current Assets US$M C1 Costs US$/lb Fixed Assets US$M AISC US$/lb Exploration US$M Other US$M REVENUE Non Current Assets US$M Antas US$M Total Assets US$M Pedra Branca US$M Borrowings US$M Total US$M Payables US$M COSTS Other US$M Antas US$M Current Liab US$M Pedra Branca US$M Borrowings US$M Corporate US$M Provisions US$M Total US$M Other US$M CAPEX Non Current Liab US$M Antas US$M Total Liabilities US$M Pedra Branca US$M Total Equity US$M Total US$M RATIO ANALYSIS US$ US$ US$ US$ US$ ASSUMPTIONS EPS (0.1) (0.1) Exchange Rate A$/US$ PER x na na Copper price US$/lb EPS Growth % (264.9) 18.5 (673.4) Copper price A$/lb CFPS Gold price US$oz 1,275 1,310 1,300 1,300 1,300 PCFR x Gold price A$oz 1,718 1,795 1,793 1,857 1,857 DPS Yield % 0% 0% 0% 0% 0% NPV (+1Yr) A$M A$/sh. Payout Ratio % 0% 0% 0% 0% 0% Antas 193 $ 0.07 Gearing ND/E % -26% -23% 8% -9% -28% Pedra Branca East 221 $ 0.07 Interest Cover x na Exploration (incl Centrogold) 41.1 $ 0.01 EBITDA Margin % EBIT Margin % 0.8 (5.6) Corporate costs (47.8) $ (0.02) Return On Assets % 0.3 (2.3) Net Cash (Debt) 43.1 $ 0.01 Eff Tax rate % Total $

7 Petra Capital Level 17, 14 Martin Place, Sydney NSW 2000 ABN ACN AFSL Director: George Marias +61 (0) Research (Resources): Brett McKay +61 (0) Research (Resources): Matthew Schembri +61 (0) Research (Industrials): Michael Henshaw +61 (0) Research (Industrials): George Kopsiaftis +61 (0) Research (Industrials): Nick Berry +61 (0) Research (Industrials): Killian Murphy +61 (0) Research (Property): Jonathan Kriska +61 (0) Sales: Frank Barila +61 (0) Sales: Shane Gavegan +61 (0) Sales: Mark Innes +61 (0) Sales: Richard Macphillamy +61 (0) Sales: Vincent Pisani +61 (0) Sales: Michael Vincent +61 (0) Sales: Colin Redmond +61 (0) Sales: Daniel Gardiner +61 (0) Sales: Peter Veldhuizen +61 (0) Corporate (ECM): Conrad Anderson +61 (0) Administration: Krystle Garven +61 (0) Administration: Amelia Holland +61 (0) Administration: Samantha Tingley +61 (0) Administration: Silvia Fratta Pasini +61 (0) Administration: Larissa Falvo +61 (0) Legal & Compliance: Stephen Newton +61 (0) Financials: Tony Christelis +61 (0) Disclosure This document has been prepared in Australia by Petra Capital Pty Ltd which holds an Australian Financial Services License AFSL Petra Capital Pty Ltd is an ASX Market Participant. Petra Capital Pty Ltd and its associates, officers, directors, employees and agents, from time to time, may receive brokerage, commissions, fees or other benefits or advantages, hold securities in companies researched by Petra Capital Pty Ltd and may trade in these securities either as principal or agent. Disclaimer The information or advice contained in this report has been obtained from sources that were accurate at the time of issue, however the information has not been independently verified and as such, Petra Capital Pty Ltd cannot warrant its accuracy or reliability. Persons relying on this information do so at their own risk. To the extent permitted by law, Petra Capital Pty Ltd disclaims all liability or responsibility for any direct or indirect loss or damage (including consequential loss or damage) caused by any error or omission within this report, or by persons relying on the contents of this report. This report is published by Petra Capital Pty Ltd by way of general information or advice only. This report does not take into account specific investment needs or other considerations that may be pertinent to individual investors. Before making any investment decisions based on this report, parties should consider, with or without an investor adviser, whether any relevant part of this report is appropriate to their financial circumstances and investment objectives. Petra Capital Pty Ltd is a licensed institutional/wholesale stockbroking firm. The report is only intended for institutional and sophisticated clients to whom Petra Capital Pty Ltd has issued the report. Petra Capital Pty Ltd is not licensed to advise retail investors retail investors should contact their own stockbroker or financial adviser/planner for advice. 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