Hi all,
It has been a very long time since I have posted on HC - mainly because of the dribble, but I am invested in AR1 and thought I might run through my investment thesis - take it or leave it, but the most important part of this whole post is the last paragraph.
Firstly lets look at the copper market:
We know there is a structural deficit in inventories, very low industry investment over the past 20 yrs, and massive drivers for the copper price. Whether that be the green energy revolution, china reopening, political strife in current major producing countries, or even a growing world population - the one constant is that copper is required in just about every application.
Copper prices are on the rise, and I think there is possibly a permanent shift underway in terms of pricing. I am a fan of Elliott wave theory and have added my wave count below for a potential prediction of the copper price.
Now let's zoom out a bit to the monthly chart. Effectively copper is in a big channel, I think with the pressures on the metal there is a chance that copper could break out of the top of the channel in the near(ish) future, meaning that the previous ceiling of approx 5/lb could become the floor at some point.
Lets drill into the company (pun intended):
Austral has a current JORC resource of 60MT @ 0.7% for 420,000t of contained copper, a SX-EW plant with 30,000t capacity that is only currently being used to about 30% and they have C3 costs of approximately 2.83/lb (which is good!). - this equates to about $9,155 per tonne AUD. Current copper prices are 4.12/lb (or 13,052 per tonne). This means that at current prices, AR1 makes about $3900 per tonne AUD. At current production of 33.5 tonnes of cathode per day (1000t per month), this is approximately 4m per month profit, or 52m per year. At $5/lb, it equates to approximately 6.7m per month noting that AR1 is only using 30% of its production capacity (oxides only at the moment). The company also has a good off take and JV partner in Glencore.
If they manage to diversify the plant into processing sulphides as well (management claim this is possible with little additional capex) then they can potentially double their net profit. In addition, at higher prices, lower grades become more viable and have the potential to increase the bottom line as well. The recent Lady Colleen scoping study shows this - now 60m NPV at 7.5% discount hardly blew my socks off (it would be much less at a higher discount), but it is a start, and with increased drilling, they may get it to a decent resource that is truly worth mining remembering that any NPV > 0 warrants attention.
Austral have a number of potential targets this year that could increase the mine life and resource base including:
- the drifter trend (16.05% rock chips) and encouraging previous drilling intercepts;
- Lady Colleen expansion (previous hits of up to 30m @ 2.35% and 31m @ 2.22%);
- 7m exploration budget to explore Flying Horse (JORC 14.5MT @ 0.77%), Lady Annie (JORC 12.17MT @ 0.76%), Enterprise, investigator and Neptune, with 6000m of planned drilling by May 23 on the oxide resources.
Their exploration is effectively self funded now, and being cash flow positive is a great advantage and likely means less dilution for share holders. I've seen some comments about the financial situation, but looking at it the company largely has 60m debt (acknowledge high interest rate, but 60m in debt is far from excessive for a company now producing IMO), and 44m in payables. Less the receivables (7m), cash of 1.5m, and 24m in inventories (I can't work out how they were valued but given they haven't been sold presumably at cost) - the result is that we effectively have 11.5m in payables (less if inventories were valued at cost and still have profit to be added) and 60m in debt. By my calculations, for Jan and Feb, AR1 should have made about 9-10m in profit (24m in revenue) which improves the situation remarkably (obviously assumes they sold everything).
AR1 has a market cap of 110m, and the top 20 owns about 80% (from the last report I could find), so it is tightly held. It is effectively valued as an explorer, but has positive cash flow, a fully functioning under-utilised plant and lots of exploration potential. The biggest weakness is mine life, but with a large amount of tenements (2100m2 and quite a few existing mining leases), that can change fairly quickly with a few decent hits. A very good (self funded) exploration budget provides the mechanism to do so, and I think that AR1 provides a very good risk reward proposition.
I think this company is headed towards a SP of 60c in the short to medium term (noting that this is my technical analysis target and not a fundamentals driven one) and if they get any really good hits (especially with a rising copper price), it could fly well past there.
Just my view.
PLEASE REMEMBER to Do Your Own Research. I have, but if you rely on mine without doing your own and it goes to shit, your decision and you live with the outcome - hopefully its all works out, but there are no guarantees.
(20min delay)