US Nickel (ASX: USN) is an Australia-based base and precious metals exploration company. It has three strategic assets located in the US, Canada and Australia.
The biggest asset, the Bullant Gold Project, is located in the north eastern goldfields of Western Australia, which has yielded considerable gold deposits.
The other Greenfield projects, Mid-Continent, located in Minnesota, US is at the southern margin of the Superior Craton and Snowbird, located in the North West Territories of Canada.
Geological surveys conducted by its previous owners, Indago and BHP Billiton, have indicated presence of base metals Ni, Zn, Cu along with Au and Ag mineralization at both the Mid-Continent and the Snowbird assets.
Purchase of the Bullant Gold Mine, is about to be completed. This mine has historically produced gold till 2009 but was decommissioned by Barrick Australia Limited, its original owner.
The company recently secured and relocated a gold ball mill, which will enable USN to commission its own gold processing facility at this project by early 2012 and provide meaningful cash flows.
In the interim the Company expects to commence gold production in the next few months via toll treatment arrangements for its mined ore from Bullant at other third party treatment facility‟s with-in close proximity and economical trucking distance.
The recent run-up in base and metal prices will benefit USN tremendously if it establishes reserves. At the current price, USN trades at a probability of only ~0.48% to achieve comparable peer Reserve/Area multiple.
We initiate coverage on USN with a price target of A$0.34/share, an upside of 82.7% from the last traded price of A$0.18/share.
Investment Arguments:
- Bullant Gold Mine Acquisition is Beneficial: USN has secured a gold ball mill with a capacity of 500,000 t/pa to commence processing from the Bullant Gold Mine by early 2012. Gold production will commence before the commissioning of the Company‟s own processing facility via the toll treatment of Bullant ore at nearby third-party treatment facility‟s within a few months.
This mine has historically produced gold and can provide meaningful cash flows that can be utilized for further exploration in USN‟s Greenfield projects. Our view is reinforced by an independent assessment by N H Cole and Associates, according to which the acquisition of this mine is value accretive for USN‟s shareholders.
- Strong Run-Up in Metal Prices: The economic recovery post 2008-09 financial meltdown has given a huge boost to metal prices. Gold prices increased 30% in 2010, silver prices surged 82%, while base metal prices have risen by 100% during the past two years. The outlook for base and precious metals is positive.
Even at current prices, USN can benefit tremendously upon establishing reserves due to attractive mine valuation. Alternatively, higher prices can make mining of low-grade/high-cost mines feasible which is particularly important for USN as the topography of its Greenfield projects may make extraction a high-cost affair.
- Strategic Location of Greenfield Projects: Snowbird is located among significant nickel and gold deposits including Nickel King, Ferguson Lake and Meadowbank. BHP‟s survey in 2005 resulted in possibility of high grade Zn, Cu, Pb, Ag, Au sulphide mineralization.
Subsequent analysis by USN has also detected significant Cu, PGE, Au, Zn and Ag in boulder and bedrock samples. Similarly, the Mid-Continent project is located near several world?class nickel sulphide deposits along or near its margins, including Thompson, Raglan and Voisey‟s Bay.
BHP Billiton and WMC Resources had detected high quality nickel sulphide targets using modern technology in their 2005 and 2006 exploration programs. Thus USN‟s projects are attractively located.
- Attractively Valued: We have valued USN on a Sum of The Parts basis. For Bullant Gold Mine we have relied on an independent assessment conducted by N H Cole and Associates and for Snowbird and Mid-Continent project we have estimated probable Reserve/Area and then applied a suitable peer EV/Reserves multiple.
We get 82.7% upside potential for USN‟s shares, which are attractively valued at this juncture.
KMC Price at posting:
5.6¢ Sentiment: Buy Disclosure: Held
