Macarthur Minerals Limited (CVE:MMS) (ASX:MIO proposed) has attracted strong interest in its proposal to list on the ASX and this is supported by a buy recommendation from Breakaway Research along with a 6-month price target of 43 cents.
In a research report, Breakaway said the listing would enable the company to profile its “valuable” Lake Giles Iron Ore Project in WA “to an investor base more familiar with the earnings and cash flow potential of the project and its strategic positioning which is driven by rail and port access”.
Lake Giles is 175 kilometres northwest of Kalgoorlie and has substantial magnetite resources at Moonstone project and hematite resources across a number of deposits at the Ularring project.
Macarthur plans to exploit the hematite resource through tribute mining and to focus on the high-value, high-grade magnetite resource.
After working the project for the last 7-8 years, Breakaway said Macarthur had tailored the project to optimise future and growing demand for high-grade magnetite concentrate.
This strategy focuses on early cash flow targeting high-grade regions of the Lake Giles magnetite deposits.
The project will utilise available capacity on the rail network and export facilities through the Port of Esperance, which provide significantly lower transportation capex requirements than many other competing projects.
Proposed haul road from the project to Jaurdi rail siding and onto Esperance.
Lake Giles pros
Among the other benefits of Lake Giles outlined by Breakaway in the report are:
- Metallurgically the magnetite mineralisation has attributes which place its beneficiation performance ahead of many competing magnetite deposits. These include:
- Not surprisingly, the project delivers robust earnings and cash flows after production commences in 2022 at a 2.5 to 3.4 million tonnes per annum saleable magnetite concentrate production rate.
- Glencore has secured a 10-year offtake agreement which will assist the company to finance the A$315 million and $151 million direct and indirect capital costs respectively.
- Sustainable earnings and cashflows are forecast at around $60m and +$80m pa respectively and generate an NPV7.5 in excess of $900m.
- The Lake Giles Iron Ore project is also strategically located in the Yilgarn region where several recent transactions underpin the project’s value.
As part of the listing process, the company has lodged a prospectus with the ASX to raise up to A$7.5 million to complete a Bankable Feasibility Study for the Lake Giles Iron Ore Project.
The company is also planning to complete a 1 for 4 consolidation which will result in the theoretical share price exceeding A20 cents per share.
Breakaway said: "As a consequence, Macarthur Minerals should attain an ASX listing before the end of CY2019.”
Following are extracts from the Breakaway report:
The Lake Giles Iron Ore Project is approximately 175 km northwest of Kalgoorlie and encompasses 62 square kilometres of mining tenements covering the Yeriligee greenstone belt in the Yilgarn Region.
The project has specific attributes which make it superior to many competing iron ore (magnetite) projects including readily available infrastructure to enable rail hauls and export facilities as well as favourable mining and ore processing attributes.
The company and others have spent more than $62m in advancing the Lake Giles project towards development since 2006.
At steady state, the Lakes Giles Iron Ore Project will produce 3.35mt pa +65% Fe magnetite concentrate and generate a sustainable >$80m pa cash flow within a minimum 31-year project life.
Glencore offtake agreement
The attractiveness of the project is also supported by Glencore which signed a binding 10-year offtake and marketing agreement for the magnetite concentrate sales in March this year.
Indeed, this project underpins our forecast earnings and cash flows for the company and hence our valuation.
However, the company also has a number of early-stage exploration projects covering a variety of commodities and include:
- Gold and lithium (hardrock) projects located in the Pilbara WA;
- Hematite blending material;
- The Reynolds Springs lithium brine project located in Nevada, USA; and
- Nickel and cobalt prospects on parts of the Lake Giles Iron Ore Project tenements, WA.
As the company is clearly focused on bringing the Lake Giles Iron Ore Project into production, it has investigated options for advancing these projects to realise shareholder value without incurring expenditure or significant management time.
FEL joint venture
This includes a joint venture with Fe Limited (ASX:FEL) on the Pilbara projects after conducting geophysics and geochemical surveys to identify targets. Overall, Fe Limited has reported encouraging early-stage exploration results from the Hillside and Strelley project areas. Earlier in October 2019 Fe Limited announced it discovered a 14-kilometre long gossanous zone with anomalous copper and precious metals at the Hillside project along with a sub-parallel manganese-rich zone.
At the Reynolds Springs Lithium Project in Nevada, the company has recovered anomalous soil sampling recording up to 405 ppm Li and which has been confirmed by similar results by American Battery Metals Corp (OTCMKTS:ABML), which holds the neighbouring tenements.
Overall, we have assigned a nominal $10 million value to Macarthur’s exploration assets that are unrelated to its iron ore projects as they do have potential to yield a new discovery and would be valued around this level in a junior explorer.
Breakaway Research has modelled the forecast earnings and cash flows based on Preliminary Economic Assessment completed by the company along with in-house adjustments and recent findings.
Breakaway modelling is based on the financial year ending March 31 in line with Macarthur’s financial year-end and has assumed:
Share price is A$0.25;
- BFS will be completed by March 31, 2020;
- Project construction will take 24 months;
- First production and ramp-up commences in FY 2023;
- The project is financed by debt (65%) and 35% equity with the equity priced at no premium to the current share price despite the de-risking of the project to that time;
- Iron ore base price is US$86/t CFR China (real);
- Exploration assets are nominally valued at A$10m; and
- The issued US$6m Convertible Notes which have a 36-month term and a 12.5% coupon will convert at a price equivalent to 80% of the VWAP and with a floor price of C$0.10.