Centrex Metals: Broker maintains "Speculative Buy" rating, undervalued by market

Centrex Metals (ASX: CXM) has earned itself a speculative buy rating and been deemed undervalued in a recent updated broker report as a result of significant resource upgrades and project advancement since May 2011, a strong board and management and the ownership of a potential port site.

The following is a copy of the report.

Key Points
- Significant resource upgrades and project advancement since our May 2011 initiation
- Resources for the Eyre Iron JV now close to the critical mass required for a 5mtpa magnetite operation
- Fusion Project chosen as initial preferred mine-site for Eyre Iron JV with WISCO
- Port Spencer (previously called Sheep Hill) studies continuing – the ownership of a potential port site is a major positive, and a discriminant between Centrex and other companies
- Trading near cash backing with close to $81 million in cash ($0.26/share)
- With income tax liabilities of ~$15 million factored out cash backing is ~$0.21/share
- At an EV of $0.07/tonne contained iron, the Company is significantly undervalued with respect to its peers

Our View
Centrex and JV partners, Baogang and WISCO, have made significant advances on the Eyre Peninsula magnetite projects over the last six months.

The advances include large resource upgrades, with resources at the Fusion project now approaching those we consider sufficient for a 5mtpa concentrate production operation.

It is expected that upcoming resource expansion drilling will result in sufficient resources being defined to support a viable project, and will dispel our previous concerns about the potential to define sufficient resources to support a viable project.

The resource work has also indicated that a high quality concentrate can be produced from a relatively coarse 75μm grind.

The Fusion Project has now been chosen as the preferred start up option for the Eyre Iron JV, and baseline environmental studies have now commenced.

The Company’s financial position is very strong, with cash of $81 million, or $0.26/share. If the current tax liability of $15 million is taken into account the cash backing is still $0.21/share, giving the magnetite projects a value of only $0.06/tonne which we consider significantly undervalued.

This cash position does give the Company the ability to pursue alternatives should the current projects not come to fruition.

Given the above, the strong board and management, and the ownership of the port site we maintain our SPECULATIVE BUY rating for Centrex.

Company Update
Additional progress payments – healthy $81m cash balance

Since our initiation report, Centrex has been paid an additional $26 million in progress payments plus $33 million into the JV’s. This includes $51 million for the second resource instalment on the WISCO JV – comprising a $26 million direct payment to Centrex and $25 million into the JV account, and $8 million for the Stage 3A progress payment on the Bungalow JV with Boagang.

The Stage 3A payment at Bungalow will allow work to continue steadily into a BFS rather than waiting for the end of Stage 2 (PFS study) in 2012. The early payment of this payment demonstrates the JV partner’s confidence in the project.

This payment has taken total payments to $24 million, and has increased Baogang’s share in the iron ore rights to 30%. Baogang has the right to earn a further 20% on payment of a further $16 million (Stage 3B).

The July payments of $51 million by WISCO were paid as agreed on the first anniversary of the execution of the JV agreement.

The direct payments to Centrex have taken the Company’s current cash position to ~$81 million, however the Company now has a ~$15 million tax liability to pay in the current financial year. Net of the tax liability Centrex has a cash backing of ~$0.21/share.

Significant resource expansions

Since our initiation report the Eyre Iron JV with WISCO has significantly expanded its resource base to 730Mt of magnetite iron ore, with this included within a total exploration target of 1,731-3,097Mt.

Our view is that the results, especially the 454.4Mt as defined to date at Fusion are positive, and go a significant way to mitigating one of the concerns raised in our research note of May 24, namely the risk of defining sufficient feasible resources to feed any proposed operation. With planned work now to include resource extension drilling, we believe that a critical mass will be achieved.

The current range of the resources and exploration targets at Fusion of between 650 and 850 million tonnes at say a 22% DTR would potentially be sufficient for a 5-6.5mtpa operation, assuming a 70% resource to reserve conversion.

In addition the work has returned excellent metallurgy results, showing that a high iron, low silica concentrate can be produced from a relatively coarse 75 micron grind.

Fusion Project selected as first preferred WISCO JV mine site

In October the Company announced that the Fusion Project, initially comprising the Kapperna, Brennand and Koppio deposits had been chosen as the preferred initial mine site.

The project is located within 40km of the proposed Port Spencer (previously known as Sheep Hill)
The JV has now commenced baseline environmental and social studies for the project, and is planning a large scale drilling programme to extend the current 454.4Mt resource. This programme is expected to commence later this year.

Progress on other WISCO JV tenements

The Eyre Iron JV has progressed work on other tenements:
- Process design and Infrastructure Study completed on Carrow, with the PFS report due in December
- Ongoing scoping study work at Greenpatch, including conceptual process plant and infrastructure studies, and resource modelling
- Regional exploration drilling at White Flat, Charlton Gully and Warunda

Bungalow JV progress

The Bungalow Joint Venture with Baogang has made significant progress, completing the Stage 1 scoping study and Stage 2 resource definition and geotechnical drilling programmes. Environmental, geotechnical and hydrogeological studies have now commenced.

Stage 3A, for which the $8 million progress payment has been paid, will largely include further resource definition drilling, metallurgical testwork and environmental studies.

Port planning is progressing

The Company has renamed Sheep Hill “Port Spencer”, and is progressing the Public Environmental Report (“PER”), which the Company plans to complete before the end of the year. The port development is a key part of the Company’s and JV partners’ strategy.

A design feasibility study has been completed by Parsons Brinckerhoff, which has further developed previously completed concept designs.

Aggressive ongoing work programme

Scoping and feasibility studies are ongoing, with an aggressive work programme currently underway. $100 million funding has been committed to date, with the potential for a further $16 million on the Bungalow project.
This work programme will provide a steady ongoing news flow with the following activities planned or underway:
- Ongoing PFS work at Bungalow, including resource definition drilling and metallurgical testwork, with this transitioning into a BFS
- Metallurgical and resource definition drilling, and environmental and social studies at Fusion, with commencement of the Feasibiity Study imminent
- Completion of PFS work at Carrow, with the report due by the end of the year.

Comparison with peers

We have compared Centrex with a number of developers/producers concentrating on beneficiation iron (BFO) projects. In addition, we have included Gindalbie Metals (ASX: GBG) and IMX Resources (IXR) who are currently producing (in the case of GBG it is DSO hematite – the magnetite is currently in development).

The two producers, GBG and IXR have the highest EV/tonne contained iron values which is to be expected. Despite being one of the most advanced of the other companies, Centrex, at an EV of $22 million, or $0.06/tonne for its 341Mt of contained iron is significantly undervalued when compared with its peers. The weighted average EV/tonne for the explorers/developers is $0.11/tonne. This does not include the two producers, Gindalbie and IMX.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/23869/centrex-metals-broker-maintains-speculative-buy-rating-undervalued-by-market-23869.html