bioheap, page-2

back of envelope calcs reveal: the new jbm is...fx Funny you should ask, Pedrof, I’ve been looking into that particular aspect myself! I was swamped in detail, and thinking of giving up, but your question has spurred me to complete my research, which I shall now share with anybody that wants to wade through my back-of-envelope calcs… (Spoiler: The findings are worth it!)

(Note: There are a lot of press releases, and reports that needed to have been foraged through for the relevant information to do these calcs. Mostly, though, I didn’t bother referencing them, below, but if anyone wants to verify them I have a fair handle on where I got most figures. It’s all available via ASX)

Make of the underlying what you will…

The recent FXR announcement of an agreement with Bioheap to use their bacterial leaching technology for the Whundo, Disseminated, and Sholl deposits is very interesting indeed. My research has produced some points in relation to such that may be of interest to others. For starters, I highly recommend interested parties take a look at:

"Feasibility Study Confirms Economics of BioHeap Nickel Process"
http://www1.titanresources.com.au/uploads/bioheap_feas_study_72.pdf

That's basically TIR's summary of their examination of the Bioheap technology after they ran some field trials up at Radio Hill, back when they owned it. It’s a meaty release, with lots of handy figures. In short, the figures didn't stack up back in 2002: Five million dollars profit forecast, but not high enough IROR to commit.

So, what's happened since then? Let’s look at reserves, costs, and revenue:

(1) Ore reserve: TIR had a Radio Hill Disseminated ore reserve of 800,000t (2 years at 400,000t). FXR claim a JORC resource of 1.32Mt @ 0.72% Ni, 1%Cu – but that’s not all reserve. I figure perhaps 75% will go into reserve, which would mean a reserve of 1,000,000t. This would mean that they have expanded the reserve about 25% beyond TIR, which seems reasonable given the extra drilling they have done since then. But they won’t leach it all, so let’s use a processing recovery figure of 75%, for each. (That may vary a bit, but it’s probably a reasonable number to use.) That means there is about 7,200t of contained nickel metal, and 10,000t of contained copper metal from the Disseminated resource at Radio Hill, of which, 5,400t of nickel may be recovered, and 7,500t of copper may be recovered.

At Sholl, FXR’s 2004 annual report has Sholl at 5.5Mt *inferred*, and in a recent announcement FXR claim a JORC resource of 3,000,000t @ 0.61% Ni and 0.71% Cu. Using our 75% figure again, we could expect they would convert maybe 2,250,000t into reserve from a JORC resource. Given that TIR claimed a reserve of 1.2Mt @ 0.6%, this may be a little high – though they have done extra drilling, so it may be reasonable to consider that it has expanded that much. Let’s call it 2,000,000t, to be on the safe side. Let’s also assume a similar 75% processing recovery figure for Sholl, as at Radio Hill. That means there is about 12,200t of contained nickel metal, and 14,200t of contained copper metal at the Sholl Disseminated project, of which 9,150t of nickel, and 10,650t of copper will be able to be recovered.

(Bear in mind, also, that the increased nickel price would have made a lot more of the Sholl resource economically viable, so it *will* be bigger than TIR’s reserve, I just can’t say for sure how much bigger yet, given the available data. I think 2Mt is a reasonable estimate for our purposes. Feel free to use whatever numbers you want in your own calcs!)


(2) Costs: Wages, fuel, and steel prices have all increased. To be conservative, let’s say, mining, processing, and admin costs have increased _across the board_ 30% over the last three years. Fair? TIR’s forecast cash cost of production figure for the underground Radio Hill Disseminated project of US$1.36/lb of contained nickel can therefore be considered to have increased to around $1.77/lb of contained nickel. Capital costs may have increased, also, say, one third, from AU$15M to AU$20M; i.e. US$1.50/lb to, say, $2/lb, also.

For the Sholl open pit, a waste to ore stripping ratio of 10:1 is pretty high. Given that they would be trucking the ore (or heap leach solution?) back to Radio Hill, too, then mining costs for this open pit will be relatively high. For lack of a better figure, let’s use the _underground_ mining costs of Radio Hill (US$2/lb of contained nickel) for mining at, and trucking from, the Sholl open pit. That’s *real* ballpark, but probably reasonable. It’s conservative, at least, and that’s the main thing. Capital costs seem to be a big saving here. I figure that’s why FXR have gone for the “Staged” approach in their 28 June Bioheap press release. That is, infrastructure planned for Radio Hill will be able to be used again for the Sholl project. I’d suspect it may be even less, but let’s use a figure of *half* the capital cost estimate of Radio Hill, for Sholl; let’s call it US$1/lb contained nickel. I think that may actually be overly-conservative, as most of this Sholl operation should be operating costs – but better to be safe, than sorry.


(3) Metal prices: This is the big change over the last three years. When TIR announced the results of their feasibility study, on 28 May 2002, nickel was about US$6500/t, and copper was around US$1600/t. Now, nickel is around US$15,000/t, and copper is currently about US$3650/t. More than DOUBLE! In fact, both are approximately 230% their 2002 price; a 130% increase…and with more upside forecast! http://www.lme.co.uk/nickel_graphs.asp
http://www.lme.co.uk/copper_graphs.asp

I understand, also, that the smelters/refineries take a fair chomp for taking it through to LME-grade metal, and that getting 75% of LME prices for your product is considered pretty standard. I’ll use that figure.


Now let’s bring it all together and see how things shape up:

“Stage 2” – Radio Hill Disseminated project
Nickel revenue: 5,400t x US$15,000/t x 0.75 = US$60,750,000
Copper revenue: 7,500t x US$3650/t x 0.75 = US$20,500,000

Costs (Capital + Operating): (7,200t x 1000kg/t x 2.2lb/kg) x (US$2/lb + US$1.77/lb) = US$60,000,000

Profit: US$60.75M + US$20.5M – US$60M = US$21M


“Stage 3” - Sholl Disseminated project
Nickel revenue: 9,150t x US$15,000/t x 0.75 = US$103,000,000
Copper revenue: 10,650t x US$3650/t x 0.75 = US$29,000,000

Costs (Capital + Operating): (12,200t x 1000kg/t x 2.2lb/kg) x (US$1/lb + US$1.77/lb) = US$75,000,000

Profit: US$103M + US$29M – US$75M = US$32M

Combined profit for pursuing the Radio Hill and Sholl disseminated projects = US$53M.

With an exchange rate of, say, AU$1 = US$0.75, we get Aussie dollar profit = AU$71M.

A tidy sum, indeed, particularly given FXR’s puny current market cap of about $25M! (With all the usual caveats, and noting that I may well have missed some consideration, or made an error (if not several!) somewhere. Anybody?? Feel free to jump in and correct me if you see something. Am I being too conservative, or perhaps not conservative enough?)

Interestingly, $71M profit equates roughly to the number of shares on issue: 70M. So we can say that we are staring down the barrel at a total of about $1 operating profit per share. Over the next three to four years or so, that could translate into the equivalent of 25-30c per share dividend. And here’s FXR, trading at 36c! No wonder I’m frustrated with this stock, having bought in considerably higher! The former management regime managed to disillusion the market with their shenanigans, and drove the FXR price down to these ridiculously undervalued levels, but how long till the market realizes how good this opportunity is under the more highly-focused new management, I wonder? Maybe it’s just a matter of some analyst sitting down and doing the same sort of calculations that I just did, properly, and releasing it to his clients. A recommendation based on such would spread “rapidly”, I dare say, and we could look forward to a return to more appropriate share prices in short order. Anybody know an analyst that can start such a ball rolling? 


And how’s this for an interesting tidbit I stumbled upon, from the “About” section of http://www.jubileemines.com.au/ :
“ In 1997, Jubilee expanded its operations to include base metals exploration – a move which was rewarded with the almost immediate discovery of the Cosmos nickel sulphide orebody. THIS DISCOVERY RESULTED IN A MARKET RE-RATING OF JUBILEE and marked the commencement of an exciting exploration and development phase which culminated in April 2000 with the commissioning of a new, LOW-COST NICKEL MINING AND PROCESSING OPERATION.
The Cosmos Nickel Project is located in the Kathleen Valley area, approximately 30km north of Leinster in Western Australia. IN ITS FIRST TWO YEARS OF PRODUCTION, THE COSMOS NICKEL PROJECT GENERATED SALES REVENUE OF AU$251M WITH OPERATING PROFIT OF AU$77M AND NET PROFIT AFTER PROVISION FOR TAX OF AU$47M. ” [My EMPHASIS]

Now, let’s do a quick and dirty comparison of JBM and FXR:

Jubilee Mines (JBM)
Sales: $251M
Operating Profit: $77M
Shares Issued: 125,000,000
share price: $7.80
Market cap: $975M

Fox Resources (FXR)
[Projected] Sales: $284M
Operating profit: $71M
Shares Issued: 70,000,000
Share Price: $0.36
Market Cap: $25M

Does anyone else see a significant “market re-rating” of FXR (as per with JBM) coming? I sure do! 

No wonder nickel legend, Mr. Terry Streeter, has just bought into FXR in a big way; he’s clearly no fool, and has done the math, too!

It should be noted also, though, that this is for the Radio Hill and Sholl Disseminated projects only. I don’t have enough data to be able to take even a roughly fair guesstimate at the potential value of the Whundo project. With the ongoing exploration, it’s such a moving target that I’ll wait till it firms up a bit. With the recently announced spectacular 36m intercept, though, you don’t need the orebody to spread very far to blow past the 400,000t resource that they currently claim. For example, with an SG of about 3 (at a guess), we can work out the diameter of a cylinder *very vaguely* representative of the possible model. 400,000t/3 = 133,333m3. Divide by 36m, and you get the area = 3700m2. Divide by pi, then square root, gives a radius of = 34m. Given that they are drilling on a 40 x 40m pattern, if there is anything comparable in *any* of the surrounding holes, then we could say that the current 400,000t resource has been exceeded, and is likely to be even further exceeded, just on those holes, and ignoring all the other historic holes in which ore is known to exist. All those numbers will need to be added on to the profit from the above calcs. Whundo is a potential whale. I’m watching for the next Whundo-related announcement, or two, with great interest, indeed.

Oh, and I almost forgot: FXR actually have an existing, operating, producing nickel/copper massive sulphide mine at Radio Hill! Who knows what sort of profit figures are pumping out of there?? Add them in to the pot, also!

In short, Pedrof, TIR put $14M into this technology. FXR gets full access to that research, to guarantee the success of their projects, and the ability to do them at a time that is much more viable, in terms of nickel price. So, even if costs have increased about 30%, as revenue has more than doubled, return on investment now becomes very attractive. The market will clue-on about this some time in the not-too-distant future, and when it does, strap yourself in for the sharp ride up.

Thanks for inspiring me to push on with my (albeit rudimentary) calcs, Pedrof; it’s boosted my confidence in FXR no-end. I hope it’s helped you as much.

Nomen Nescio