nwa - Disallowed

New World Alloys (NWA)

A (relatively) low risk uranium play, and more importantly the owner of an exciting copper project in the DRC.

NWA, current market capitalisation $12m, has a few things going for it:

(1) 40% of the Batchelor uranium tenement in the NT. Korab (KOR), market cap $17m, has the right to earn 60% of Batchelor if they spend $600k over 4 years. One part of the tenement, U515, is quite literally a stone’s throw from the old Rum Jungle uranium mine which had grades of 0.25%, and a similar geology. Although KOR also has some gold assets, U515 is what is getting the market excited (KOR up 90% in the last month since IPO). There's also the potential for a maganese project to be developed at Batchelor (grades of 45%); viability if that project will depend on the availability of low cost electricity.

(2) NWA also has a copper smelting project - Nova - that has enormous potential....

The project is currently at stage 1, producing 250 tonnes of copper ingots per month (each fetching US $2500), and is already (marginally) cashflow positive. Performance has been encouraging. Historically:

March quarter:
- 352 tonnes copper blister produced
- Net operating and investing cashflows = -$338k

June quarter:
- Net operating and investing cashflows = +$17k
- Production 750 tonnes

September quarter (expected):
- Forecast production 750 tonnes. The September quarter was a period in which NWA intended to consolidate and reduce costs, as can be seen with new cheaper production techniques.
- Probably most interesting will be how much cost $avings can be achieved with new production techniques (used for only 100 of the 510 tonnes production so far quarter, more the next?). The fact that the rights issue will not proceed suggests that NWA is confident in its future cashflow situation so has called off a previously planned rights issue (which presumably has atleast something to do with the success of the new technique).

December quarter (expected):
- Expect a renewed ramp up towards 350 tonnes a month (1050 tonnes per quarter), subject to copper ore supply increases.

Stage 2 will see production ramped up to 1000 tonnes a month by next year (3000 tonnes a quarter, from 750 currently). Provisional financing of US$4.5m has been obtained from the IDC. Several important conditions are still to be met to secure this financing, most notable that NWA proves its supplies of copper are secure. It is difficult to assess the margins, but I’d estimate NWA will make $3m/year when stage 2 is fiully ramped up.

Stage 3 will increase production to 2000 tonnes a month (2000 tonnes x US$2500 = US$5m revenue per month or US$60m/year, up 10x current, and at an estimate $6m/year NPAT).

(3) Low market cap ($12m) relative to the above.

(4) Material insider buying – this is what got me interested in NWA when it was back under 3c.

Nova could well be worth $60m-$70m if it gets up to stage 3 (i.e. a 3-4 bagger). Batchelor? Well, who knows, really depends on the drill results and the uranium bubble continuing – but there's an old uranium mine 100 metres away and if there’s yellowcake at U515 then blue sky awaits. Total potential: 10 bags+. The pullback in the last couple of days represents a good entry opportunity.

However, bear in mind:
(1) Nova is in the part of the DRC that was racked by civil war for several decades = high political risks. Stability has however returned in the last 2 years.
(2) Financing risk – Nova isn't worth a lot if financing cannot be secured to expand to Stage II.
(3) Rum Jungle might be a dud and/or the uranium mania ends; though at the mo uranium is barely incorporated into the share price.
(4) This share is pretty illiquid - resulting in quite wild swings!