keith goodes on albidon

quote:

Herewith our latest report on Albidon rating it as a BUY.



Albidon’s main discovery and project is called Munali about 60km south of Lusaka in Zambia. Zambia as a country is booming and they are upgrading the infrastructure at the same time (which being ex-British colonial was always fairly reasonable compared to some of the other parts of Africa).



Munali is one of those very rare highly sought after (by the majors) discoveries having the capability to become (what is called) a Tier 1 discovery with an after-tax profit value of >$1bn.



Usually such discoveries require lots of capex up front, quite commonly in the $bns, Munali is even rarer – it doesn’t, its capex requirement appears to be less than US$100m.



Usually one of the big impediments is putting in your own infrastructure, at Munali, its essentially already there. Munali has extremely good infrastructure : Electricity is cheap hydro-electric from two sources that both pass close to Munali. THE main road south is literally only a few km away (it’s the same route that Livingstone traveled on when he went from Angola to Mozambique in December 1855 and gave his name [the red one or Munali] to the pass in the hills that he went through), there is plenty of water with the Kafue gorge being only 20km away, and there is a nearby railway siding about 20km away down something that resembles a fairly good quality haul road (linking to the main road).



Mining laws in Zambia are good, it seems to be relatively easy to get approvals probably because it has a mining history due to the Copperbelt (I worked there in the early 1970s and hence have a relatively high background knowledge of Zambia), tax is only 25%, no Govt induced percentage involvement, royalties of only 0.6% applicable as an incentive to new developments, and all capex written off up front for tax purposes – should mean no tax paid at Munali for possibly the first 2 years or so.



Now the orebody. It was actually quite interesting to visit Sally Malay after Diggers, and then go to Zambia and visit Munali as both orebodies do in fact (in my opinion) have a number of similarities (coincidentally there is also a management connection). The orebody is Nickel with copper-cobalt and platinum-palladium by-product credits which are significant at about US$13-US$14mpa (after estimated smelting charges) –but still significant (using copper at US$4200/t [currently it is US$7500/t], platinum at US$1100/oz and palladium at US$300/oz).



The BFS is based just on the Enterprise orebody in the south-eastern corner of the ellipsoid shaped intrusion (long axis nw/se), and only to about 550m below surface (its open at depth) which has delineated a contained resource of almost 110,000t Ni at about a grade of 1.4%Ni. It is an underground mine, most of the orebody is expected to be bench stoped at 3m to 11m wide, but there is a chunk in the centre that is 24m to 38 wide which is expected to be mined by low-cost sub-level open-stoping. Based on the core, ground conditions appear to be good.



Looking through the sections, while the orebody does appear to plunge north and have a higher grade 2m or so skin on the footwall, there is a high grade zone (2.5% to 3%Ni or so) that can be tracked from section to section through the orebody, and appears to be at least 100m high, which could (/should ?) occasionally give rise to much higher annual grades than we have used in our modeling.



The orebody appears to be related to the gossans that litter the rim of the intrusion, and the sheet-like orebody has been extended NW with a few disruptions into Voyager and the NW orebody (see figure 4b on page 4 of the report). Voyager would you believe was missed by a previous major exploration team because they sited their swimming pool on top of it – it has a good look-out position (……..usually you look under the plant for the missed orebody, not under the exploration swimming pool !). The orebody is open at depth and still “open” to a number of interpretations as to what happens further down.



ALB’s share price has recently started to recover, up about 20c from $1.40 to $1.60 in the past week before dropping back yesterday (2 November) to $1.45. However, it should be recognized that ALB’s share price has sat at about A$1.30 to A$1.50 since late July as the market waited for the details of the funding package which occurred recently at A$1.20 and the share price dropped back to that before its recent recovery. Consequently ALB has not participated in the share price rally that almost all the other nickel companies have enjoyed after Diggers and has hence been relatively overlooked and become undervalued.



Our NPV at US$7.50/lb (US$16,500/t) Ni is more than double the current share price at just over A$3 (being A$3.17/share). The nickel companies at present appear to be trading on the basis that nickel is almost at US$18,000/t which could translate into ~A$3.60/share for ALB. If we were to use US$22,000/t or US$10/lb from 2008 and a number of brokers have since followed the LME traders in increasing their numbers to that level [and higher], then ALB could be worth almost A$5/share (actually A$4.85). However, we have often given comparisons at US$30,000/t, (it is currently ~US$33,000/t or US$15/lb and expected to peak at US$20/lb in the coming year) and on that basis ALB could be worth >A$7/share. Development ore is expected from about July 2007, with production currently expected from mid-2008 (for simplicity and the fact that most plants being commissioned overrun their construction times, we have assumed July 2008, but it could easily be earlier).



The C1 cash costs for their payable nickel (assuming that they receive 68% of their production [we have sensitivities from 30% to 34% as possible nickel smelter charges]) would have to be one of the lowest in the industry at about US$1.65/lb. We have our C3 total costs about 70c higher than that at about US$2.35/lb, (which is higher than the BFS, but we have been more conservative than the BFS on required and sustainable capex requirements).



ALB’s life in the BFS is based on Munali having a 10-year life at 9000t contained Ni pa, to which we have added 3 years, which given the available information should easily be attainable – and that results in a market cap of about A$500m at US$7.50/lb Ni. However, it has to be recognized that Munali could be capable of a US$1bn profit.



And if you want more there are additional possibilities at T1 and Chikani (both of which we visited – see page 5 of our report), and other recent anomalies announced in the latest SQ06 report 25km South of Munali. There is also uranium potential with a delineated 2200t U308 banded sandstone resource being explored by Energy Ventures (farming-in) southwest of Munali (pages 5 & 6 of the report), some nickel JVs with BHPB that BHPB are taking to the next phase, and probably a 3% royalty interest in a PGE orebody in Tanzania being heavily explored by Lonmin (/Lonplats).





Hence Albidon is rated as a BUY