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Australian Equities Research

Anvil Mining Ltd (AVM $1.75) –Buy, upgrade from Hold

.Price Target: $3.75/sh

Reason For Update:

Company update

What We Know

· Ausenco has been engaged to recommence engineering and design services on the Kinserve Stage 2 60kt SX-EW project.

· Kinsevere Stage 2 construction was halted last year after spending some US$180m. A further US$200m is required to complete construction of this high quality asset.

· Kinsevere has current reserves of 20.2mt @ 3.81% Cu for 770kt of Cu within a total oxide resource of 27.5mt @ 3.8% Cu for 1,044kt of Cu. Current reserves support a mine life of ~ 13 yrs. It is a high quality asset with estimated C1 operating cost of US$0.88/lb and total cost of ~ US$1.10/lb.

· The mining convention issue that have been overhanging the company for the past 18 months have been resolved. AVM has sufficient cash to meet the its entry premium of US$15m to Geccamines (US$10m in July’09 and US$5m by Jan’10)

· AVM has reverted back to HMS production at Kinsevere and forecast production of 9kt of cu at an operating cost of US$0.50/lb until the end of Q3. AVM will receive around 40% of LME price ie ~ US$0.90/lb at current prices.

· Dikulushi and Mutoshi remain on care and maintainence

· At the end of Mar’Q AVM had cash of ~ US$35m with no debt.



What We Think

The commitement to re-employ Ausenco on the engineering and design suggests to us that AVM are increasingly confident of securing finance to complete the construction of Kinsevere.



The resolution of the Mining convention issues removes a major hurdle for financers and we are hopeful something will be forthcoming over the next three months. If this is achieved it is possible that construction could re-start by the end of CY’09 with first production in early CY’11.



We believe AVM will look to secure the necessary funds from a mixture of development banks, traditional banks and maybe strategic partners.



Kinsevere is a high quality, long life, low cost copper project. At our forecast US$2.50/lb copper price this project can generate EBITDA of US$150-170m pa for +13 yrs.



The DRC has also seen some corporate action in recent months with Moto Gold Mines the subject of two offers from Red Back and more recently Randgold. In addition Camec which onw the Mukondo Mountain cobalt mine in the DRC announced a preliminary approach on a possible takeover.



Importantly the large Tenke Fungurume project (reserve of 100mt @ 2.27% Cu and 0.33% Co) is now in production with 1st shipment made in April’09.



Investment Case:



AVM has significantly underperformed its peers (EQN, ABY, PNA) over the past six months due to the funding uncertainty as evidenced by the graph below





At current prices AVM has an Enterprise value of ~ A$120m, representing a discount of ~ 50% of the already sunk capital at Kinsevere. It has not had a share price bounce like many of its copper peers despite the thawing credit markets and improved copper prices.



With the increasingly likelihood of securing funding to complete Stage 2 Kinsevere we now model in this project based on the BFS parameters as opposed to just the status quo we previously modelled. At a 10% dcf valuation our AVM valuation is ~$7.50/sh, however with the financing risk still out there we have discounted our price target to 50% of our valuation at $3.75/sh.



The key share price catalyst is the potential to secure the US$200m need to complete Kinsevere Stage 2. We believe this is increasingly likely and on a risk return basis AVM stands out. More risk adverse investors may wish to wait for greater clarity once financing is achieved, however in our view the stock is likely to be strongly re-rated once financing is secured.