Macquarie Site Visit Takeaways from last weekAurelia Metals (AMI...

Macquarie Site Visit Takeaways from last week

Aurelia Metals (AMI AU)Exploration yielding resultsKey pointsSite visit takeaways included the positive exploration results realised at both Hera and Peak driven by a re-instatement of exploration spending.In our view, exploration success thus far is highly encouraging, with strong potential to materially extend mine lives at both mines.The Pb+Zn circuit upgrades at Peak are on track for 3QFY20 with the project to improve process volumes, mining flexibility and payabilities.Event We attended an investor and analyst site visit to AMI’s Hera and Peak Gold and Base metal mines.Impact Hera – Federation looking the goods: Drilling at the Federation Prospect ~10km south of Hera is continuing to return encouraging results since its April 2019 discovery. Federation has now been found to extend beyond the original geophysical anomalies. This realisation adds a large amount of prospectivity at Federation both near-surface and along strike. Peak - Pb+Zn circuit upgrade remains on track: The A$53m Lead (Pb) and Zinc (Zn) upgrade to the Peak plant remains on time and budget with completion expected in 3QFY20. The upgrade will enhance mining flexibility and allow for high-grade Pb+Zn ores to be processed at an 800ktpa run-rate. The upgrade will also allow for separate PB and Zn concentrates to be produced, which will improve smelter payabilities.Earnings and target price revision Lifting our exploration spend in FY21 and FY22 to be in line with FY20E ($15m) sees EPS fall 16% and 13% in FY21E-22E. Extending our mine life assumptions at Hera by ~1 year sees FY23E and FY24E EPS lift 44% and 26%, respectively. The mixed earnings changes see no change to our $0.65/sh target price.Price catalyst 12-month price target: A$0.65 based on a Blend of 50% 1.0x NAV and 50% 3x OCF methodology. Catalyst: Completion of the Pb-Zn upgrade at Peak will be a positive milestone for AMI. Exploration at both Peak and Hera has the potential to add materially to mine life and grade profile.Action and recommendation Maintain Outperform. AMI’s exploration spend has previously been constrained by limited cash flow. In FY19, A$7m in exploration spending has yielded highly prospective discoveries which have the potential for meaningful mine life extensions. Importantly, this success is in close proximity to established infrastructure with Federation ~10km from Hera, while Kairos lies directly beneath the underground crushing and hoisting infrastructure at Peak. With a A$15m spend in FY20 we expect positive results to continue while the process upgrade at Peak will give AMI greater flexibility to exploit potential resource additions.