RFC Ambrian update

Our roadshow for Tim Carstens of Base Resources*† comes to an end today. While overall feedback from the meetings has been universally positive, it is the spread of investors that have been taking meetings with Tim (over this week and the company’s two other roadshows in April and July earlier this year) that impresses. It’s not just mining funds, but long-only UK fund managers, hedge funds, value funds, private wealth managers and so on.

Investors are underweight natural resources and Base ticks all the boxes for investment. Like its peer group, Base’s share price was walloped last year even though Tim and his team got the company’s Kwale Project in Kenya into production in 2014 on time and on budget. Capacities for ilmenite, zircon and rutile production were all met as scheduled, but debt levels were perceived as high and the underlying commodity market was very weak. Despite management being acknowledged as having done an exceptional job, Base had to battle headwinds not of its own making.

The year 2016 has been transformational. While zircon and rutile prices have remained reasonably strong over the period, the ilmenite price has recovered very strongly. Base is signing contracts at US$110/t. There were worries that this was just a seasonal blip, but this has carried on into the autumn and the market is looking forward with anticipation to the next TZMI report on pricing in early November. Talk is that we could even recover to US$150/t by summer 2017, and this is extremely significant for Base; every dollar improvement in pricing goes straight to the bottom line. Debt is being paid back rapidly; having seen net debt peak at US$225m last year, it has now fallen to US$150m. At this rate, this could be completely cleared by the end of 2018, allowing returns to accrue to shareholders, not just the banks.

On top of this, drilling of community bore holes around Kwale showed significant unexpected mineralisation. Exploration licences were applied for (and granted quickly), and a drill rig should be on site at the end of the month. Exploration drilling in mineral sands is extremely cheap as the drill rig is fitted on the back of a Toyota Hilux and a significant drill programme can be completed for as little as US$1.5m. If all goes to plan, and Tim is confident, then the resource and mine life at Kwale can be expanded. The Mivumoni zone adjacent to the higher-grade Southern Dune at Kwale looks particularly interesting. Base is also doing a bit of exploration across the nearby border with Tanzania where there is the prospect of being able to truck concentrated ore to Kwale’s MSP plant quickly and easily. This is really exciting for existing shareholders. In other generally positive sector developments, we’ve had the restructuring at Kenmare completed (with a major new shareholder getting involved) and the takeover attempt of Sierra Rutile by Iluka.

This is the perfect storm of positive news that Base needs to get its share price moving up. The stock is currently trading at A$0.15 (or 8-9p); Jim Taylor’s recent target price upgrade (Base Resources — Valuation Update, 21 July 2016) was to A$0.30, so we see another doubling of the share price from here. I think this is entirely plausible given the reception of our latest marketing.