broker update

HAZELWOOD RESOURCES LTD (HAZ)
Ramp up on track at the ATC ferrotungsten plant
Hazelwood Resources Limited recently announced DecQ activities at its
majority owned Asian Tungsten Company (ATC) ferrotungsten plant in
Vietnam which commenced its production ramp up in mid 2013.
The Company produced 106 tonnes of saleable ferrotungsten product during
the DecQ with the remaining 215 tonnes from the 3rd campaign shipped
subsequent to the end of the quarter. From our modelling we estimate 3rd
campaign profit margins of ~10%, slightly lower than our long term
expectations (~13%) which we understand is due to seasonal movement in
the tungsten price. Feedstock costs were higher during the quarter with some
sales revenue still to be received this coming quarter. Recent purchasing for
the 4th campaign suggests margins will be back in line with our expectations.
Pre-feasibility completed for Mt Mulgine tungsten concentrator
A recent pre-feasibility study (PFS) for a concentrator at the Mt Mulgine
Tungsten project resulted in an estimated pre-production capital requirement
of A$31.5m. The 330ktpa concentrator could conceptually provide a third of
the required annual feedstock for the ATC plant based on CY15 ferrotungsten
production estimates. Our preliminary modelling suggests a small
underground mining operation at Mt Mulgine may add value for Hazelwood.
More importantly the project would allow HAZ to lock in a portion of its
feedstock costs, allowing greater leverage to the ferrotungsten spot market,
improved margins and a lower risk of feedstock supply weakness.
Benefits of 3rd campaign still to be seen
A majority (215t) of the 3rd campaign at the ATC plant was shipped
subsequent to the end of last quarter. This equates to a provisional invoiced
value of ~A$8.8M. We expect a small 4th campaign before the end of MarQ
to produce a total ~300t of saleable product for the quarter. This equates to
EBITDA of ~$1.5M based on current margins (~10%). Moving forward we
see consistent, cheap feedstock supplies critical to the success of the ATC
plant. History suggests the margin between feedstock costs and the saleable
product will improve although timing of payments and receipts can squeeze
this margin slightly. For this reason we expect some variance in margins
between quarters but long term margins to be in line with our expectations
(~13%).
Capital raising helps clear short term bridging debt facility
During the quarter, the Company completed a fully subscribed share
placement raising $5M @ 3.8cps and a well subscribed Share Purchase Plan
raising a further $0.9M @ 3.8cps. Funds were applied to ramping up
ferrotungsten production and helped clear a $3.5M short term bridging debt
facility. The Company is now able to negotiate with financiers a new debt
facility on improved terms.
Retain our Speculative Buy recommendation
Unfortunately the full benefit of the 3rd campaign at the ATC plant is not seen
in this quarter’s results as the majority of sales revenues are to be received
in the MarQ. The ramp up is in line with our expectations although a short
term increase in feedstock costs has squeezed margins slightly, we expect
margins to improve in subsequent campaigns and hence we retain our
Speculative Buy recommendation with a price target of 8.6cps.