Zinc: Developer IBG.asx Speculative Buy Share Price Price Target (12 month) $0.189 Brief Business Description: Hartleys Brief Investment Conclusion Chairman & MD Major Shareholders Nyrstar Int 26.5% L1 Capital 15.9% Glencore Xstrata 11.4% Company Address Issued Capital 368.4m - fully diluted (no conv. Notes) Market Cap - fully diluted Cash (31 Mar 13a)# A$3.0m Cash (31 Mar 13a) notes drawn A$53.0m Debt (31 Mar 13a)# A$0.0m EV EV* assume notes drawn & convert -A$31.2m EV/Resource Zn EV/Reserve Zn Prelim. (A$m) FY15e FY16e FY17e Prod (kt Zn eq) 0.0 0.0 186.9 Op Cash Flw -10.4 -19.5 85.3 Norm NPAT -10.5 -44.1 105.5 CF/Share (cps) -0.5 -1.1 2.6 EPS (cps) -0.5 -1.1 2.6 P/E -9.4 -4.0 1.7 Zn Pb Resources (Billion lb) 11.9 1.2 Reserves (Billion lb) 0.0 0.0 # we assume convertible notes are never drawn Trent Barnett Head of Research Ph: +61 8 9268 3052 E: [email protected]Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Ironbark Zinc Limited, for which it has earned fees and continues to earn fees. Analyst has a beneficial interest in IBG. See back page for details. 384.4m A$16.2m A$16.9m A$13.2m A$0.0011/lb - 31 May 2013 $0.044 Very large zinc development project in Greenland Jonathan Downes (Managing Director) Level 1, 350 Hay St Subiaco, WA, 6008 Deposit is large and implies long mine life. Marginally economic on consensus estimated zinc prices, very economic at industry (the upper end of sell-side consensus) forecasted prices. Peter Bennetto (Non Executive Chairman) IRONBARK ZINC LTD The next zinc rocket Ironbark Zinc Limited (“Ironbark”, “IBG”, “Company”) is a zinc focussed developer. The main asset is the Citronen project in Greenland, with a total resource (M+I+Inf) of 132Mt @ 4.0% Zn and 0.4% Pb and a high grade resource (M&I) of 52Mt @ 5.3% Zn and 0.5% Pb. It is located on the edge of a fjord in northern Greenland and can be accessed by sea for three months a year when the ice melts. The Company has recently released an updated feasibility study. The capex has fallen slightly from US$502m to US$484m but total costs are expected to be reasonably high. We assume costs of US$0.84/lb Zn net of credits (CFR, including royalties and our assumed smelter fees) – see Fig 5 on page 9. The mine plan is for underground ore to be mined first (11 years), and then progress to the lower grade open pits in years 11-14. The operation is expected to have a mining rate of 3.3mtpa (2.2mtpa processing). Operating costs are low at ~US$52/t ore, although the remote and isolated location means that shipping and logistics costs are meaningful, adding an extra ~$10/t ore. There are additional smelter fees of ~12-25c/lb, with the fee linked to the prevailing zinc price (adds 14c/lb or $13/t ore in our model). Needs upper end zinc price assumptions to be viable We assume a ~14 year mine life and a 3.3mtpa mine operation (2.2mtpa processing) beginning in late CY16 and payable zinc equivalent of >200k tonnes pa for the first two years before declining to ~160ktpa with a separate lead concentrate. We assume total cash costs of ~$80/t mined ore (~$0.84/lb zinc eq in early years). We assume ~$500m of capex spent over two years, funded ~70% debt. At current zinc prices (85c/lb), the project is not financially viable (NPV 12 ), in our view. Using our assumed zinc price profile (which is similar to consensus and above spot prices) our NPV 12 is marginally positive. The Company pre-tax estimated NPV 8 of US$609m is based on life of mine zinc prices of ~US$1.37/lb (in-line with industry estimates, but at the upper end of sell-side estimates). At US$1.37/lb, we conservatively (we assume substantial dilution) value IBG at 28cps. Excellent exposure to long term zinc…. Zinc prices have historically been very volatile and are currently trading below the mid-point of the ten year range (~US$0.30/lb to US$2.10/lb). Over the next few years several large mines will be depleted and should lead to a shortfall and lead to price increases. As the Citronen feasibility study results suggests, the incentive price for new mines is high. Consequently, we believe zinc prices will increase, and potentially be stronger than consensus and perhaps even higher than the assumptions used in the Company’s valuation. For example, at US$1.60/lb, our IBG valuation is conservatively 40cps. If we value IBG as a series of out-of-the- money AUD zinc calls (50% volatility), we derive a 19cps valuation. Retain Speculative Buy recommendation. Using our base case zinc prices we derive a marginally positive NPV 12 . Consequently, we view IBG as a high risk investment and speculation on rising zinc prices or a takeover. There is substantial upside if one uses credible, but higher than sell-side consensus, zinc price assumptions. We have a 19cps twelve month price target, based on better zinc prices. Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 May-13 Feb-13 Oct-12 Jun-12 Volume - RHS IBG Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS A$ M Ironbark Zinc Ltd Source: IRESS
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IBG - Ironbark Zincironbark.gl/wp-content/uploads/2013/09/Hartleys...Ironbark Zinc Limited (“Ironbark”, “IBG”, “Company”) is a zinc focussed developer. The main asset is
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NPV using spot fx, but zinc prices a US$1.60/lb, no equity dilution 1% $1.39 $1.56
Risk weighted composite $0.18
12 Months Price Target $0.19
Shareprice - Last $0.044
12 mth total return (% to 12mth target + dividend) 330%
NPV base case, assuming significant equity dilution
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
Page 10 of 12
CONCLUSION Using our base case zinc prices we derive a marginally positive NPV12.
Consequently, we view IBG as a high risk investment and speculation on rising zinc
prices or a takeover. There is substantial upside if one uses credible, but higher
than sell-side consensus, zinc price assumptions (ie if one uses the prices expected
by many industry sources rather than those expected by equity markets). We have
a 19cps twelve month price target, based on better zinc prices.
Fig. 7: Companies with high exposure to zinc prices are very volatile, but have an ability to
“rocket” from the bottom of a zinc cycle
Source: Hartleys, IRESS
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
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Fig. 8: Zinc Price assumptions
Source: Hartleys, Bloomberg
Fig. 9: Key assumptions and risks for valuation Assumption Risk of not realising
assumption Downside risk to
valuation if assumption is
incorrect
Comment
Fifteen year mine life Low Upside The current high grade resource implies a mine life of >15years.
Zinc price rises
Moderate Upside Our zinc price assumptions imply prices rise over coming years.
Large proportion of capex is funded with debt
Moderate to high Not meaningful The long mine life should support debt funding
Limited value for exploration and other projects
Moderate Upside The other assets may have exploration success
Conclusion Using our base case zinc prices, we do not derive a positive NPV for Citronen’s development. Consequently, we view IBG as a high risk investment and speculation on rising zinc prices.
Source: Hartleys
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HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052
Mike Millikan Resources Analyst +61 8 9268 2805
Paul Cartwright Oil & Gas Analyst +61 8 9268 2826
Peter Gray Oil & Gas Analyst +61 8 9268 2837
Janine Bell Research Assistant +61 8 9268 2831
Corporate Finance Grey Egerton-
Warburton
Head of Corp Fin. +61 8 9268 2851
Richard Simpson Director –Corp. Fin. +61 8 9268 2824