Ranobe is a tier one asset and an accretive acquisition
Our analysis has determined that the acquisition of the Toliara Sands Project (host to the 857Mt Ranobe Resource) is significantly value accretive adding 12c/share to our target price on a fully diluted basis. In addition, the transaction adds strategic value to BSE through diversified production and substantially extended mine life potential. This asset is a good fit for BSE, representing more of the same, given its similarities to Kwale in terms of high grade, a sector leading revenue to cost ratio, simple dry mining and a similar (arguably less complicated) processing route. In addition, like Kwale, the project is close to port. A purpose built haul road and ship loading facility, as well as the large resource base, provides considerable flexibility and scaleability on size and phasing of production to meet market, opex or funding constraints.
Kwale offers a very profitable base for growth
Management have built and currently operate a quality project at Kwale. Kwale is in a leading position in terms of revenue to cost ratios that has resulted in very impressive EBITDA of $110m in FY17. Simple dry mining and a high proportion of high value rutile in tandem with a well-run operation and ship loading facility at Mombasa positions BSE for another profitable year in FY18. Aggressive pay down of net debt to US$87m (from strong Kwale cash flow) and the increased mine life expectations associated with Ranobe should please those investors previously concerned about debt and mine life.
Investment thesis – Buy, Target Price $0.65/sh
Our SOTP valuation consists of an NPV valuation on the Kwale Mine and a risked 0.6X NPV on the Ranobe development project. We also include cash, exploration potential, options, performance rights and dilution from the current equity raise. Peer analysis supports our view that BSE is a high quality, but undervalued story that is further enhanced by the accretive acquisition of a tier one asset. We expect the market to view this acquisition favourably and initiate with a BUY and Target Price of $0.65/sh.
22 December 2017
Earnings Forecast
Year ending 30 June 2017a 2018e 2019e
2020e
Column 1
Column 2
Column 3
Column 4
Column 5
0
Sales (A$m)
201
239
262
249
1
EBITDA (A$m)
110
133
153
132
2
NPAT (reported) (A$m)
21
51
64
44
3
NPAT (adjusted) (A$m)
21
51
64
44
4
EPS (adjusted) (¢ps)
3
4
5
4
5
EPS growth (%)
n.a
57%
21%
-32%
6
PER (x)
8.9
5.6
4.7
6.8
7
FCF Yield (%)
49%
nm
30%
nm
8
EV/EBITDA (x)
2.5
2.1
1.8
2.1
9
Dividend (¢ps)
-
-
-
-
10
Dividend Yield (%)
0%
0%
0%
0%
11
Franking (%)
0%
0%
0%
0%
12
ROE (%)
9%
16%
15%
9%
SOURCE: IRESS
BELL POTTER SECURITIES LIMITED ABN250063907721
AFSL 243480
SOURCE: BELL POTTER SECURITIES ESTIMATES
DISCLAIMER:
THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 30 THAT FORMS PART OF IT. DISCLOSURE: BELL POTTER SECURITIES ACTED AS A BROKER OF BSE'S DECEMBER 2017 PLACEMENT AND ENTITLEMENT OFFER AND RECEIVED FEES FOR THAT SERVICE.
Page1
Analyst
Duncan Hughes 618 9326 7667
Authorisation
David Coates 612 8224 2887
Recommendation
Buy (Initiation)
Price
$0.25
Target (12 months)
$0.65 (Initiation)
GICS Sector
Materials
Expected Return
Capital growth
Dividend yield
Total expected return
Company Data & Ratios
Enterprise value
Market cap
Issued capital
Free float
Avg. daily val. (52wk)
12 month price range
Price Performance
Absolute Price
160% 0 160%
$314.4m $227.9m 747.2m 40.7% $415,000 $0.185-$0.36
Column 1
Column 2
Column 3
Column 4
0
(1m)
(3m)
(12m)
1
Price (A$)
0.31
0.28
0.20
2
Absolute (%)
-18.53
-10.11
27.16
3
Rel market (%)
-20.30
-16.60
17.50
$0.40 $0.30 $0.20 $0.10
$0.00
Dec 15
Jun 16 BSE
Dec 16
S&P 300 Rebased
Dec 17
Jun 17
Base Resources Ltd (BSE)
22 December 2017
Contents
Investment Case ............................................................................ 3 An Accretive Acquisition............................................................... 6 Peer Analysis ................................................................................. 7 Valuation......................................................................................... 9 Company Overview...................................................................... 12 Kwale Mineral Sands Mine, Kenya (100%) ................................. 13 Toliara Sands Project, Madagascar (100%) ............................... 18 Kenya and Madagascar ............................................................... 22 An overview of the mineral sands sector .................................. 23 Board and Management .............................................................. 24 Base Resources Ltd (BSE).......................................................... 26 Resource Sector Risks ................................................................ 28
Page 2
Base Resources Ltd (BSE) 22 December 2017
Investment Case
BSE owns high quality, high value but undervalued assets
Our peer analysis shows that BSE has high grade and high value material that can be mined relatively simply at low cost. As a result BSE’s revenue to cost ratio, a key measure in the sector, is very high. Despite this, BSE’s EV/EBITDA indicates BSE is undervalued against peers. Our SOTP valuation also indicates substantial upside on the current market valuation for BSE and an implied capital return of 160%.
BSE looks undervalued against peers and our SOTP
Column 1
0
Table 1 - BSE sum of the parts valuation (A$m)
1
Fair Value Calculation Discount rate NAV (AUD $M) NAV "X" Factor NAV T arget (AUD $M) T arget SP (AUD $)
2
Kwale (100%)Kwale .Exploration Upside Ranobe (100%)Toliara Exploration Upside Unpaid capital to buy Toliara Cash from optionsCash (est.12 mths / end qtr.)**10% $329.6 M $20.0 M10% $583.8 M $30.0 M$0.0 M $24.6 M $72.4 M1.00 X 1.00 X 0.60 X 1.00 X 1.00 X 1.00 X 1.00 X$329.6 M $20.0 M $350.3 M $30.0 M $0.0 M $24.6 M $72.4 M$0.26 $0.02 $0.27 $0.02 $0.00 $0.02 $0.06
3
Total NAV $1,060.4 M $826.9 M $0.65
SOURCE: BELL POTTER SECURITIES ESTIMATES. * FOR FURTHER DETAIL ON THE VALUATION METHODOLOGY PLEASE SEE THE VALUATION SECTION ON PAGES 9-11. ** INCLUDES RESTRICTED CASH
Ranobe is a strategic and accretive acquisition
Our analysis has determined that the acquisition of the Toliara Sands Project (host to the 857Mt Ranobe Resource) is significantly accretive adding 12c/share to our target price on a fully diluted basis. In addition to being demonstrably value accretive, the transaction adds strategic value to BSE through diversified production and substantially extended mine life potential. The transaction also lifts BSE’s revenue earning potential per tonne of ore mined from our estimate of US$12.75/t for Kwale alone, to US$14.06/t when Ranobe is included in potential future production.
Ranobe a tier one asset and excellent fit for BSE
We believe that Ranobe is a tier one asset owing to its sector leading high grade and substantial, long life resource base (>35 years). This asset is a good fit for BSE, representing more of the same, given its similarities to Kwale in terms of high grade, a sector leading revenue to cost ratio, simple dry mining and similar (arguably less complicated) processing route. In addition, like Kwale, the project is close to port and offers BSE the opportunity to build and design haulage and ship loading facilities – a venture completed very successfully at Kwale. The purpose built haul road and ship loading facility, as well as the large resource base, provides considerable flexibility and scaleability on size and phasing of production to meet market, opex or funding constraints.
Timed for improving markets
Mineral Sands pricing has improved recently and is expected to improve further. Demand is expected to continue to rise with global GDP, but maturing projects appear unable to meet demand from 2020 onwards with tightening supply likely to drive up prices. BSE’s current development plan positions Ranobe to meet this supply tightening and benefit from forecast higher pricing.
Ranobe adds 12c/sh, strategic value and diversification
High grade, simple mining and flexibility
Pricing improved and expected to continue to improve
Page 3
Base Resources Ltd (BSE)
22 December 2017
KP2 will increase mining rate to compensate for lower grades
Off a strong base at Kwale
Management have built and operated a quality project at Kwale. Kwale produces high value rutile, ilmenite and zircon products at low cost. As a consequence Kwale is in a leading position in terms of revenue to cost ratios that has resulted in very impressive EBITDA of $110m in FY17. Simple dry mining and a high proportion of high value rutile in tandem with a well run operation and ship loading facility at Mombasa positions BSE for another profitable year in FY18.
KP2 expansion at Kwale underway as planned
Whilst on site we viewed the effectiveness of the hydraulic mining at Kwale. Kwale’s geology is well suited to this lower cost mining process. Hydraulic mining enables more productive, less dilutive and more efficient mining of Kwale as the mine plan enters lower grade (South Dune) portions of the resource from FY19. The KP2 expansion will lift the mining rate to an optimised >16Mtpa and increase the WCP capacity in order to keep MSP production at current levels. As a result of the improved production efficiencies, BSE raised its production guidance for FY18. However, mine life has fallen to 5.5 years, making the acquisition of the long life Ranobe Project very timely.
Pay down of debt, extended mine life and potential target
Aggressive debt pay down (US$39m in FY17) from net debt of US$200m in 2014, is expected to continue. BSE closed out the Taurus debt facility in July 2017 and had net debt of US$87m at 30th September 2017. We expect debt to be fully paid down by mid 2019. The aggressive paydown of debt (from strong cash flow at Kwale) and the increased mine life expectations associated with Ranobe should please those investors that were previously concerned about debt and minelife. The strategic value of a long life asset and improving balance sheet could also potentially position BSE for takeover as it develops Ranobe towards production.
But balance sheet will fund Ranobe rather than pay dividends
However, whilst 2019 is expected to see current debt paid down, the development of Ranobe will call on Kwale cash flow and, should a decision to build Ranobe be made, a call for additional debt funding will come. BSE is unlikley to be paying dividends until well beyond 2021.
Favourable fiscal regime to continue at Ranobe
Kenya and Madagascar are both reportedly very supportive of BSE’s plans. Both countries offer very favourable fiscal policies that add to the economics of both Kwale and Ranobe and help offset perceived risk in these African nations.
Building on strong management track record
Management has a strong track record of building and operating a mineral sands project in Africa. We believe BSE’s operational and balance sheet management experience leave them well placed to successfully develop Ranobe and continue very profitable production at Kwale.
Kwale’s sector leading R/C delivered $110m FY17 EBITDA
Debt pay down and increased mine life will be attractive to investors and corporates alike
Ranobe likely funded from cash flow and new debt facility
Fiscal policies help offset some country risk
Management well placed to add shareholder value
Page 4
Base Resources Ltd (BSE)
22 December 2017
Figure 1 - SWOT Analysis-
Strengths
Undervalued, high revenue/cost assets
Diversified through 2 projects
Low cost and simple mining. HMU cost
saving at Kwale
High grade operations
Generating strong cash flow margins
Capable management
Favourable tax regimes at both operations
No strip or overburden
Quality product, rutile is high value
Ranobe is an accretive acquisition
Threats
Price volatility
Political/social risk in Africa
Exploration risk
Land acquisition & relocation at Ranobe
Potential causeway flooding risk at Ranobe
SOURCE: BELL POTTER SECURITIES
Weaknesses
Reserves and study awaited at Ranobe
Relatively short mine life at Kwale
Debt repayments and high capex at Ranobe
limit dividend potential
Grade falling at Kwale
Relatively low visibility on exploration upside
at Kwale
Opportunities
Prices and demand on the rise
Exploration upside
Production of finished Zr & Ru from Ranobe Management know how from Kwale can be
used at Ranobe
Sensitivity Analysis
The following matrices compare a varied range of long term price assumptions (post 2020) with discount rate. As shown in figures 2 and 5 below, BSE’s valuation is most sensitive to changes in ilmenite pricing and FX. This sensitivity reflects the fact that Ranobe is a high grade ilmenite project and that commodity pricing is in US$ whilst BSE is valued in A$.
SOURCE: BELL POTTER SECURITIES ESTIMATES *LT = POST 2020 SOURCE: BELL POTTER SECURITIES ESTIMATES. *LT = POST 2020
SOURCE: BELL POTTER SECURITIES ESTIMATES. * LT = POST 2020 SOURCE: BELL POTTER SECURITIES ESTIMATES. * LT = POST 2020
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