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Metro Mining expected to generate underlying earnings of $2.5 billion from Bauxite Hills

The bankable feasibility study for Bauxite Hills points to annual earnings of $145 million.
Metro Mining expected to generate underlying earnings of $2.5 billion from Bauxite Hills
Bauxite Hills has a mine life of 17 years with permitting to substantially increase production

Metro Mining Ltd (ASX:MMI), a soon-to-be bauxite producer recently notched up its six-month anniversary from the date the company completed a $38 million capital raising.

Funds have been used in the construction and development of its Bauxite Hills Project which is forecast to generate underlying earnings of $2.5 billion over a 17 year mine life. 

Mining operations at Bauxite Hills remain on schedule to start April 2018.

The project spans a large tenement package of 1800 square kilometres in the Cape York region of Queensland.

Shares have doubled since capital raising

The raising was priced at $0.135 per share, a 10% discount to the previous day’s closing price.

Investors who participated in the raising and existing shareholders have watched its shares more than double since then, hitting $0.30 on January 4.

This is the highest level Metro Mining has traded at since acquiring the mine in 2014.

Ready access to capital driven by project confidence

Metro has conducted two capital raisings for a total of circa $61 million, and these have been instrumental in the company’s progress on a corporate and operational front.

Both were well supported, a reflection of management’s track record of underpromising and outperforming.

It also indicated the positive manner in which large corporates view the project.

The 2017 mine construction program has recently been delivered on time and within budget.

READ: Metro Mining's construction of the Bauxite Hills Mine is on time and within budget

Ready access to funds also paved the way for the acquisition of Gulf Alumina in 2017.

Placements provide funding for development and acquisition

The Gulf Alumina acquisition was a transformational development for Metro as it added considerable scale to the Bauxite Hills project and provided essential infrastructure.

Its positive impact on the company's production capacity was considerable as it almost doubled reserves and resources.

Simon Finnis, managing director, said: “Apart from the obvious addition of bauxite resources and reserves, and access to existing infrastructure, it allowed us to increase production over an extended mine life.

“This gives us significant advantages over our peers and added appeal to Chinese customers who are increasingly looking for long-term secure supplies of bauxite.”

Reserves estimate is the basis for global scale operation

A bankable feasibility study (BFS) established a resource of circa 145 million tonnes and reserves of 92 million tonnes.

The reserves estimate is the basis for the company's global scale bauxite mining operation.

Metro's  BFS highlights some impressive financial metrics, but perhaps the most eye-catching is the nominal cost compared with the subsequent life of mine earnings.

The initial capital costs for the project is $35.8 million, and the mine life is 17 years with a payback period of less than two years.

An internal rate of return (IRR) of 81% based on underlying earnings of $2.5 billion is comparatively high compared with many other mining projects.

Offtake agreements provide earnings predictability

One of the other benefits of consistently meeting milestones is often the attraction of high profile customers.

This has come to fruition for Metro with two China-based entities, one state-owned, negotiating offtake agreements for 13.5 million tonnes in the first four years of production.

Xinfa Group is one of the largest integrated aluminium companies in China with refining and smelting operations across four provinces.

It has signed a binding offtake agreement, committing to 1 million tonnes in the first year of operation and 2 million tonnes per year for each of the following three years.

Chinese state-owned enterprise agrees to take 6.5 million tonnes

A similar 6.5 million tonnes offtake agreement was negotiated in December with Chinese state-owned enterprise SPIC Aluminium and Electric Power Investment Company Ltd.

Finnis said: “Once again this demonstrates the strong appetite for our bauxite in the Chinese refining market, and validates our mining and marketing strategy.”

READ: Metro Mining signs new offtake for Queensland bauxite mine

The agreement is in the form of a non-binding memorandum of understanding which incorporates the supply of 500,000 tonnes in 2018.

This increases incrementally to 3 million tonnes in 2021.

Metro has also negotiated another non-binding agreement of 2.5 million tonnes, and management expects further interest from other Chinese end-users.

Substantial amount of production covered by offtake agreements

Metro will commence production in April at an initial rate of 2 million tonnes per annum, increasing to a steady state 6 million tonnes per annum over the first four years.

This indicates that offtake agreements will account for a substantial proportion of production over the next four years.

Industry dynamics appear to be working in Metro’s favour with some Chinese producers having to close mines due to environmental issues.

Price movements have indicated this trend with domestic bauxite prices in China’s Henan Province increasing circa 40% to RMB500 per tonne between 2016 and 2017.

In tandem with this trend has been the emergence of new alumina refineries in China which are seeking long-term, high-volume bauxite supply.

Production could increase to 10 million tonnes per annum

Metro has environmental approvals in place which will allow production of up to 10 million tonnes per annum, leaving it well-placed to ramp up output if required.

This would require an expansion of the company’s existing processing facilities.

However, at that stage the company’s cash flow could see it in a position to self-fund the development of a plant with additional capacity.

BFS indicates steady state annual underlying earnings of $145 million

The BFS indicates annualised production of 6 million tonnes per annum, generating average annual underlying earnings of $145 million.

The pre-production capex is priced at $35.8 million with a planned expansion in years two and three priced at an additional $36.7 million.

The case for further, currently unplanned expansion could be strengthened should the company have exploration success across its large tenement position, resulting in increased resources and reserves.

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