Monday 20 February 2012

Centrex Metals current valuation out of kilter with cash backing

Centrex Metals (ASX: CXM) holds iron ore rights over 16 exploration licence areas on the Eyre Peninsula and is developing the Eyre and Bungalow Magnetite Joint Venture Projects, which host combined Inferred Resources of greater than 700 million tonnes and provide significant additional exploration potential at both project areas.

These projects have financial support from major Chinese steel manufacturers, with Wuhan Iron and Steel “WISCO” partnering at the Eyre Project and Baotou Iron and Steel partnering at Bungalow.

The Company is developing its own port facility at a location known as Port Spencer, which is located close to the Eyre Joint Venture on the Spencer Gulf, and is funding the project on a 50/50 basis with WISCO. 

Port Spencer will also serve as the export facility for Bungalow magnetite concentrates and haematite lump and fines produced from the Company’s 100% owned Wilgerup project, as well as local agricultural products that are produced along the Eyre Peninsula.

Share Price: $0.29
Issued Capital: 313.6m shares
Market Cap: $84.6m

Summary

The Eyre Iron Joint Venture with WISCO has defined an Inferred Resource of 613.6 million tonnes in the Carrow and Fusion project areas, and confirmed that Fusion with Inferred Resources of 454.4 million tonnes is the preferred site for mine development.
The partners intend to prove up enough additional iron ore resources to provide feedstock for an initial mine life of 20 years.

The Bungalow Joint Venture with Baotou has accelerated its development program, and now hosts an Inferred Resource of 103 million tonnes and hosts exploration targets in the 530 to 750 million tonne range. The partners have accelerated resource definition and development plans with the export of magnetite concentrate planned through Port Spencer.

The Company has received approval from the South Australian Government to mine its Wilgerup haematite resource and plans to export 1.6 million tonnes of lump and fines per year through Port Spencer.

Port Spencer was declared a major project by the South Australian Government in early 2011, and the Joint Venture partners are in the final stages of completing a Public Environmental Report, which has received strong support from the grain, fishing and business communities on the Eyre Peninsula. The partners plan to export up to 15 million tonnes of magnetite per year.

Analysis

All three Joint Ventures are fully funded through to completion of feasibility studies, and the Company currently holds cash of $81.7 million, less a tax liability of $14.4 million, this provides cash back equal to $0.21 a share.  This is against a share price of just $0.29.

In turn, this places a valuation of just $23.6 million on three proposed iron ore mines, one proposed port and a portfolio of exploration assets.  Or, the magnetite projects are valued at just $0.08 per tonne.

Clearly, this under-valuation will not be on offer indefinitely – volatile macro markets notwithstanding.  Investors will ultimately move to close the valuation gap by bidding Centrex shares higher.

Cash and Funding for Operations

WISCO has already paid A$77.5 million to Centrex to obtain a majority 60% interest in the Eyre Iron Joint Venture, and is committed to spending $75 million on exploration and study costs, and pay an additional sum of $186 million for its share of the iron ore rights.

WISCO plans to fund the project through to completion of a Bankable Feasibility Study, and provide financial and technical support to develop the project.

WISCO has made payments of $50 million and $25 million into a 60/40 Joint Venture account that supports all exploration and development efforts at the Eyre Joint Venture.

Baotou has committed a total of $30 million to secure a 30% interest in the Bungalow Joint Venture, with an option to purchase an additional 20% for a total of 50%.

The most recent payment of $8 million was fast tracked after completion of a positive Scoping Study and provides the Bungalow Joint Venture with sufficient funds to complete 20,000 metres of drilling over the next 5 to 6 months, complete ongoing metallurgical test work, commence studies to support a mining operation, and prepare for a Pre-Feasibility Study.

Baotou can then, at its own discretion make a further payment of $16 million to advance the project to the next development stage. Baotou has also agreed to provide financial and technical support to build an operational mine at Bungalow.

Centrex Metals reported September quarterly operating costs of $922,000 related mostly to administration of all ventures. The Company holds cash of $81.7 million, which was bolstered during the quarter by payments totaling $26 million from Joint Venture Partners.

This puts Centrex in an extremely strong financial situation, and after deducting a tax liability of $14.4 million, provides a very significant cash pool of $67.3 million for further expansion of the asset base, along with new exploration programs and for acquisitions.

Management and Shareholdings

David Klingberg serves as Chairman, and has 34 years experience as a professional engineer. He is a former Chancellor of the University of South Australia.

Jim White serves as Managing Director, and is a metallurgist who was the General Manager of One Steel’s Whyalla Steelworks, and was involved with the successful implementation of the Project Magnet iron ore export development.

Graham Chrisp is a Non-Executive Director, is a Civil Engineer with extensive experience in business operations, design and construction of roads, earthworks, and mineral and property development. He is a founding director of Centrex, and controls 101.5 million shares in the Company.

Chinese steelmaking interests are represented by WISCO, with the second largest shareholding on the register of 40.4 million shares for a 12.88% interest.  Baotou owns 21.9 million shares for a 6.98% interest. The top 20 holders control 250.7 million shares for a very high 79.94% interest.

Eyre Iron Joint Venture with Wisco
The Eyre Iron Joint Venture is funded by WISCO, which is one of China’s top five steelmakers and is seeking a long term supply of magnetite ore.  

The partners have already established a JORC compliant Inferred Resource at the Fusion Project of 454.4 million tonnes at a grade of 22.8% Fe, utilizing Davis Tube Recovery that can be upgraded to a magnetite concentrate grading 66.1% Fe from deposits at Iron Mount, Kapperna, Brennand and Koppio prospects.

An additional JORC Inferred and Indicated Resource of 159.2 million tonnes at a DTR grade of 27.8% Fe, producing a concentrate of 66.9% Fe has been defined at Carrow, which is located 40 kilometres to the northeast of the resources at Fusion, for a total of 613.6 million tonnes within the WISCO Joint Venture Project area.

The partners have completed initial studies and have chosen Koppio, Brennan and Kapperna, which are all aligned along the same 20 kilometre long strike line, for development of their first long life iron ore mine.

A major infill drilling program is planned along all three deposits and holds potential for an additional 200 to 400 million tonnes of iron ore resources to be added to the mineable resource base.

The Iron Mount deposit, which sits on the edge of the Fusion Project area, may contribute resources to the latter stages of a proposed 20 year mine life.

Baseline environmental and social studies are underway, and large diameter drilling is collecting samples for metallurgical testing and for the upcoming Feasibility Study. Earlier metallurgical testing confirms that the deposits can produce a high quality magnetite concentrate blend.

The partners plan to transport the iron concentrate over a low impact slurry pipeline that will extend 40 kilometres to a planned port at Spencer. A desalination plant will be constructed next to the port that will supply water for the mine and will contain a return pipeline back to the water treatment plant.

Construction of the Fusion Mine is expected to commence in 2013.

Bungalow Joint Venture
Bungalow

The second iron ore Project is known as the Bungalow Joint Venture, and is with Baotou Iron and Steel Group, which is one of China’s top ten steel producers and is also seeking a secured supply of magnetite for its steel making process. The Bungalow project area is located 100 kilometres to the northeast of the site that is proposed for Port Spencer.

The partners previously announced a JORC compliant Inferred Resource of 103 million tonnes at Bungalow South, Zone 36, and Bungalow Central, and an exploration target of 530 to 750 million tonnes at Mimbrie, Bungalow North, Bungalow Central, Bungalow South, and Zone 36.

A drilling program of 21,682 metres was completed in August and results are awaited. Geotechnical studies have commenced at the sites of proposed mining pits, along with process engineering and transport studies. Water bore drilling, base line environmental monitoring, and acid mine water assessments have also started.

Baotou has committed a total of $24 million to acquire a 30% interest, with an option to increase that to 50%. The most recent payment of $8 million follows the completion of a positive scoping study, and now puts the project on a fast track into Stage 3A, which includes further resource definition drilling of 20,000 metres over the next 5 to 6 months, metallurgical test work, and commencement of studies to support a Mining Lease Proposal and a Pre-Feasibility Study.

Desktop environmental reviews have started for development of the pipeline corridor and plant site, and additional metallurgical testing to separate hematite from magnetite will also be undertaken.

Baotou can then, at its own discretion, make a further payment of A$16 million to push the project to the next development stage. Baotou has also agreed to provide financial and technical support to develop a mine if it so chooses.

Port Spencer Joint Venture
Shiploader

Centex Metals has also established a 50/50 Joint Venture with WISCO to develop Port Spencer, which has been designated as holding “major project status” by the South Australian Government. A  Public Environmental Report is being prepared that will incorporate design work for port facilities for submission to regulators for an approval to commence construction that is expected in the first quarter of the coming calendar year.

The Port facility will allow direct loading of vessels that can handle a water depth of 20 metres, and will be located 500 metres from the shoreline. The Port will require no dredging, and have a multi-use capability that will also handle shipping of local agricultural production, and have a total capacity of 20 million tonnes per year.

The partners expect to complete a Bankable Feasibility Study and receive Development approval for Port Spencer in 2012.

Wilgerup
W

Wilgerup contains a JORC compliant Indicated Resource of 13.2 million tonnes at 57.7% Fe containing 10.4 million tonnes of massive haematite grading 59.7% Fe, and an Inferred Resource of 0.75 million tonnes at 56% Fe, containing 0.5 million tonnes of massive haematite grading 58.7% Fe., all at a cut off of 55% Fe.

The South Australian Government has provided approval for mining at Wilgerup.  Mining operations will be from an that open pit that provides access to 10 million tonnes of ore over a 6 year life of mine, with an annualised production has rate of 1.6 million tonnes.

The haematite ore will be crushed and screened to produce lump and fines, which will be trucked over a distance of 140 kilometres to Port Spencer for export.

Centrex plans to continue exploration and resource definition on the property once mining operations are established.

Catalysts

-    Scoping and feasibility study work and results
-    Resource drilling
-    Metallurgical work

The Joint Ventures at Eyre Iron and Bungalow have multiple factors in their favor that include the production of marketable concentrates and good recoveries at relatively coarse grind sizes.

The successful production of coarse ground ore also reduces power requirements that can be drawn at low cost from a local connection to a national power grid for more competitive power rates.

High filtration rates from the tailings will allow dry stacking to be considered. This reduces water and disposal costs, and eliminates significant environmental and compliance costs associated with construction of conventional tailings dams and facilities.

All of the deposits currently under development require short transportation distances to port, and allow for low cost slurry pipeline transportation.

Centrex had earlier stated that it was aiming to establish an initial mining operation capable of processing 3 to 5 million tonnes of iron ore concentrates per year for 15 to 20 years, but this may appear to be a conservative assumption based on bullish developments at both projects.  

The Joint Venture partners have committed $91 million to both magnetite projects, with $27 million already expensed and with potential for another $24 million to be provided by venture partners. The Wilgerup project will be financed entirely by Centrex.

At the conclusion of the development process Centrex will garner ongoing cash flows from three mines and one port facility, and currently provides investors with a very attractive entry point.
 
Analysis

All three Joint Ventures are fully funded through to completion of feasibility studies, and the Company currently holds cash of $81.7 million, less a tax liability of $14.4 million, this provides cash back equal to $0.21 a share.  This is against a share price of just $0.29.

In turn, this places a valuation of just $23.6 million on three proposed iron ore mines, one proposed port and a portfolio of exploration assets.  Or, the magnetite projects are valued at just $0.08 per tonne.

Clearly, this under-valuation will not be on offer indefinitely – volatile macro markets notwithstanding.  Investors will ultimately move to close the valuation gap by bidding Centrex shares higher.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/25271/centrex-metals-current-valuation-out-of-kilter-with-cash-backing-25271.html

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