Broken Hill Prospecting Ltd (ASX:BPL) is leveraged to strengthening heavy mineral sands (HMS) markets and future cobalt demand, prompting Independent Investment Research (IIR) to set a 12-month price target of 23 cents.
The target set by the independent investment research house is more than three times the company’s current price of 7.2 cents.
BPL’s market cap at August 16 was $10.55 million, diluted for in-money options, and cash at hand at June 30 was $2.09 million.
READ: Broken Hill Prospecting adds to its extensive exploration portfolio in the Broken Hill district
The company is focused on a suite of highly prospective exploration and development properties in the Murray Basin of NSW, Victoria and South Australia, and in the Broken Hill region of NSW.
BPL project location map.
The JV has the Thackaringa Cobalt Project (TCP) 25-kilometres from Broken Hill, which is operated by COB, a special purpose vehicle spun out of BPL in early 2017.
COB fully funds activities as part a farm-in and royalty agreement with BPL.
Under the terms of the agreement, COB can earn 100% of the TCP, with BPL retaining a 2% net smelter return royalty on any cobalt produced.
COB has earned 51% with its submittal to move to 70% ownership being reviewed by BPL after the recent completion of a pre-feasibility study (PFS).
Thackaringa Cobalt Project mineral resources.
BPL also has the right to base and precious metals over the TJV tenements and has over 200 square kilometres of other base and precious metals and industrial minerals rights in the area.
Another key focus is the Murray Basin HMS properties, which at 7,300 square kilometres make BPL the largest landholder in the basin.
The Murray Basin is a proven HMS producer, hosting some of the highest unit value deposits globally, with Iluka and Cristal also active in the region.
The Murray Basin Mineral Sands Province showing selected deposits.
BPL has taken an anti-cyclical approach, picking up tenements at a time of low titanium and zircon prices with the majors retreating.
This pegging followed a comprehensive data review which identified areas where mineralisation had been previously been found but considered too small for the majors.
READ: Broken Hill Prospecting adds to mineral sands ground and is the Murray Basin’s largest tenement holder
BPL’s strategy is to upgrade these to resources and then look at a low capital cost staged, sequential development using mobile plant.
Following is an extract from IIR’s report.
Highly prospective properties: BPL’s holdings are highly prospective for the minerals sought.
This has been confirmed by the HMS occurrences identified in the data compilation in the Murray Basin, and the results of previous base and precious metals, and industrial minerals exploration in the Broken Hill tenements.
Returning value: The 2017 spin-out of Cobalt Blue (one of the best performing IPOs at the time) was a canny market move, and returned significant value to shareholders via the inspecie distribution of COB shares.
At the peak, the COB shares were worth 40 cents per BPL share, and are still worth 14 cents per BPL share.
The company has also realised value through the $3.1 million sale of HMS properties as part of the settlement of litigation.
Low-cost exploration for significant returns in the Murray Basin: Current activities in the Murray Basin are largely involved in the compilation, review and interpretation of historic exploration data, with these low-cost activities identifying quality targets for further work.
Infrastructure rich, recognised mining destinations: The Broken Hill area is historically a major mining area and is well served with infrastructure.
Likewise, the Murray Basin is a proven HMS producer, with the BPL tenement areas generally being well served by infrastructure.
Strong resources markets: This particularly applies to the HMS markets, with these now recovering after a period of low prices.
In addition, cobalt prices are forecast to remain strong for the foreseeable future largely due to the growing demand for batteries for electric vehicles.
Experienced and committed personnel: The company’s personnel have extensive technical
and commercial experience in the resources industry, including in the key target commodities and regions.
Fully funded over the rest of 2018 and steady news flow: The company has a fully funded active exploration, appraisal and development program over the rest of 2018 which will result in a steady news flow.
This is funded by current cash reserves and the obligations of the JV partner at Thackaringa.
Price target of 23 cents/share: Our price target is based on the value of the current projects and the risk-weighted value of payments due on the development of the TCP. Exploration success on the other projects will result in significant upside to this.
SWOT analysis - Strengths
Prospective projects in world-class regions: Both the Broken Hill block and Murray Basin are world-class mineral provinces for their respective resources - the prospectivity of BPL’s holding has been borne out by the results of historic and current exploration.
Creating and returning value: This is particularly relevant to the COB spin-out, which, at the price high of $1.67/share, had created $58.5 million of value for BPL shareholders.
Experienced people with skin in the game: BPL personnel have extensive experience in technical and commercial facets of the resources industry, and in particular have experience pertinent to the company’s projects and strategy.
Mineral sands strategy: The strategy of looking for the ‘cast-offs’ of major companies in a weak mineral sands market looks like it will return good value, with the results starting to show.
It has often been shown that projects that would not meet the size/return hurdle of majors prove to be excellent growth assets for junior companies.
In addition, the proposed low capex production strategy should help ease any financing should there be the decision to develop any of the HMS projects.
TJV tie in with LG International: This could have important ramifications for technology sharing and the financing of the TCP.
LG Chem, an affiliated company, is a major end-user of cobalt in batteries and will require security of supply going forward, with the TCP potentially providing this.
Mineral sands: This is a market perception issue (and not an issue with the quality of the company’s projects), with mineral sand projects, when in the exploration and resource definition generally only garnering mild interest in the market.
It is only when potential investors can see material progress with regards to development (including offtake and financing) that markets will sit up and take notice.
Highly sensitive TCP: The TCP is highly sensitive to commodity prices, exchange rates and operating costs, which may make it difficult to finance, particularly with the expected $550 million upfront capital.
This was reflected in the market’s reaction to the release of the PFS, with the share price initially falling by 37% on the back of the release, however, it recovered to trade at about 5% below the pre-release price.
Although financially viable at current cobalt prices, and those forecast by CRU, +20% falls in the cobalt price make it a far riskier commercial proposition.
That being said, we may see end users looking to security of supply, and not concentrating so much on the economics of a project.
It also needs to be said that the majority of proposed cobalt projects are high cost and metals price sensitive.
Discovery and resource definition: This is the key opportunity in the properties other than the TCP, with the results of historic exploration and the geological setting highlighting the potential for meaningful HMS resources in the Murray Basin and discovery in the Broken Hill tenements.
Additional resources and consolidation in the TCP: There are significant areas of cobalt mineralisation hosted by other companies in the Broken Hill area, as well as additional discovery potential within the TJV ground.
The addition of extra resources through consolidation or discovery will help the economics of any future cobalt operation, through the extension of mine life and/or increasing throughput.
Other projects: There is the opportunity to pick up additional ground and projects when and if high-quality properties become available.
Metallurgy: This is the key technical threat/risk at the TCP, with further work, including a pilot plant required to prove up the planned processing route (and in particular product recovery), and to demonstrate that products will meet the specifications of end users.
Permitting: This is a perennial threat for resources projects, however, we see this as not the potential for a failure to permit, but as permitting taking longer than expected.
Financing: This applies to the TCP, which may be difficult to finance, given the relatively high capex and the generally volatile nature of cobalt prices.
Should the project be developed, however, BPL will be immune from the cost of financing, in that it should have no effect on the royalty.
Lack of exploration success: This is self-explanatory, and affects all explorers.
Prices and markets in general: These are constant threats to junior resource companies, and in the case of BPL these are particularly pertinent with regards to HMS and cobalt.