M********Bank initiates coverage on BDR;BDR AU OutperformPrice...

M********Bank initiates coverage on BDR;



BDR AU Outperform
Price 15 Dec 10 A$0.69

17 December 2010
Beadell Resources
An emerging gold producer
Event
 We initiate coverage of Beadell Resources (BDR) with an Outperform
recommendation and 12-month price target of A$0.80ps.
Impact
 Emerging gold producer. BDR is a dedicated gold development and
exploration company that listed on the ASX in September 2007. BDR is
currently working towards bringing its 100%-owned Northern Brazilian Tucano
project into production in early 2012 while it also has a number of early-stage
gold exploration projects in Australia and Brazil.
 Tucano first production early 2012. Following a six-month intensive drilling
and resource estimation campaign, JORC resources total 90.4mt @ 1.5g/t for
4.3moz of gold, with gold mineralisation hosted in a banded iron formation.
The open pit material is to be processed through a CIL plant with recoveries
of 9398% and production targets of 150180kozpa over a +10-year LOM
with an estimated production profile in the early years approaching 200kozpa.
As a preliminary estimate, BDR is targeting cash costs of US$450500/oz.
The capex estimate for the upgrade of the process facility is US$6580m
(sunk capex to date of ~US$130m, incurred by previous owners).
 Valuation. Adopting a DCF methodology, we derive an equity valuation of
A$0.78ps or A$465m. Our 12-month price target of A$0.80ps represents a
15.9% TSR. BDRs exploration spend is estimated at A$15m in 2011 and
A$10m in 2012, predominantly focussing on its Brazilian deposits. An upside
scenario to our valuation exists if BDR is successful in reaching an agreement
with Anglo American regarding potential iron ore mining credits. Operating
cost savings of US$5080/oz (management guidance), higher mining rates
and US$5m reduced capital spend could see an uplift in our base case
valuation by ~A$0.15ps to ~$0.93ps.

Price catalyst
 12-month price target: A$0.80 based on a DCF methodology.
 Catalyst: Mining and environmental licence expected late 2010;
commissioning plant on budget and schedule, Potential Anglo American
agreement expected mid-2011, maiden reserve expected January 2011.
Action and recommendation
 In our view, the Tucano project provides BDR with a clear pathway to enter
the league of ASX gold producers and become a cash-generating company,
while continuing to progress its current suite of exploration projects.
 The recent sell-down of its major shareholder New Gold Inc (NGD, unrated) is
considered a positive for the stock as well as further exploration upside potential,
and thus we initiate with an Outperform recommendation (P/NPV of 0.9x).
 Given capital and timing estimates will be firmed up with the definitive
feasibility study, which is expected to be completed by the end of January
2011, we see this as the key short-term investment risk for Beadell.
17 December 2010 3
A path to becoming a gold producer
 Beadell Resources (BDR) is a dedicated gold development and exploration company that listed on
the ASX in September 2007. BDR is led by Peter Bowler and other senior management from
Agincourt Resources, which was taken over by the then Oxiana in 2007. BDR is currently working
towards bringing its Brazilian Tucano project into production while it also has a number of earlystage
gold exploration projects in Australia and Brazil.
Beadell valuation of A$0.78ps
 We initiate coverage of BDR with an Outperform recommendation and 12-month price target of
A$0.80ps.
 Adopting a DCF methodology, we derive an equity valuation of A$0.78ps or A$45m. This
comprises an asset valuation of A$442m (including corporate costs) and net cash of A$24m.
Consistent with our gold sector coverage, we have applied a 5% discount rate.
 The Tucano project in Brazil is the main value driver for BDR. We value Tucano at A$433m or
A$0.73ps.
 An upside scenario to our valuation exists if BDR is successful in reaching an agreement with
Anglo American regarding potential iron ore mining credits. Operating cost savings of US$50
80/oz (management guidance), higher mining rates and US$5m reduced capital spend could see
an uplift in our valuation by ~A$0.15ps to ~$0.93ps.

 We conservatively assume a slower than expected production ramp-up and production levels
below management guidance (due to lower mill throughput in the earlier years and lower end-ofgrade
guidance reflecting our concern of the integration of gold and iron ore mineralisation in the
latter years). That said, there is potential production upside if the Anglo co-mining agreement is
signed providing lower mining costs, a higher reserve base and extending the economic depth of
mining.
Funding required to develop Tucano project
 BDR had a cash balance of A$19m as at June 2010. So far this year, BDR is expected to see its
cash level increase to around A$65m through a number of events:
Sale of Amap iron ore royalty payment. +A$31.25m. Completed 6 December to the global
natural resources royalties company, Anglo Pacific Group plc (APF, not rated).
Three-month royalty stream. +A$1.5m. Royalty payable from July to October.
Mining fleet sale. +A$12m. Looking to potentially sell current mining fleet to a mining
contractor. Fleet is four to five years old and requires a significant amount of capital to
upgrade the fleet as well as the purchase of two front-line diggers. BDR would look to take this
PPE off balance sheet.

Fig 4 Sources and uses of cash

 Given estimates of A$65m cash on its balance sheet combined with A$6585m of remaining
capital expenditure, a ~A$50m debt facility is likely (providing for ~A$40m working capital).
Management has commented its unwillingness to return to the equity market for funding purposes.

Production and cost targets
 While we acknowledge there is a lot of work to be done as part of the definitive feasibility study
(expected completion late January 2011), followed by plant construction, if we apply high level
conceptual parameters including a 33.5mtpa CIL plant, head grade of between 1.52.0g/t and
recoveries of 9398%, they are supportive of BDRs stated production targets of 150-180koz pa
over a +10 year LOM.
 As a preliminary estimate, BDR is targeting cash costs of US$450500/oz. Mining costs are based
off the actual mining costs in 2008, work by Coffey indicated that cost improvements are likely to
be achieved through improved fleet utilisation. Mill costs are based on preliminary work by Coffey,
which is based on testwork and information from Coffeys database of plants with similar
parameters.
 If BDR is successful in reaching an agreement with Anglo American regarding potential iron ore
mining credits, management estimates potential cost savings of US$50-80/oz. Thus net cash
costs could trend as low as US$370450/oz.
 Following an expected SAG mill delivery in October 2011, BDR is expecting first gold pour in
February 2012.
P
Resource Estimate
 Beadell recently updated its JORC resources at the Tucano project to 4.3moz, up 48%. Global
JORC resources for Tucano now total 90.4mt @ 1.5g/t for 4.3moz of gold, at a 0.5g/t cut off,
comprising 19.5mt @ 1.5g/t gold for 1.0moz of oxide, which will form the main ore source for the
first three to four years of the operation followed by the primary ore which comprises a resource of
63.6mt @ 1.5g/t for 3.1moz of gold.
 Following an extensive drilling campaign, Beadell expects to release a maiden JORC reserve
statement in January 2011.
 Beadell is moving towards a decision to mine at completion of the DFS at the start of next year
and look forward to joining the ranks of mid-tier gold producers by early 2012.

Gold market outlook
Riding the liquidity wave
 Gold has leapt towards US$1,400/oz in the past few months as first the anticipation and then
realisation of further monetary easing by the Federal Reserve (or QE2) provided the catalyst for
the recent jump. This, however, hasnt been a gold specific event, with most asset classes have
been rising strongly and gold surprising lagging in the precious metals and general commodities
spectrum.
 The current environment is proving to be hugely topical for gold. The prospect of a currency war
and talk of a return to a gold standard based monetary system could have massive implications for
gold.
 We think the key issue for gold in the medium term is liquidity, as this is what provides the fuel for
investors to continue to accumulate gold over time. With the Fed now embarking on QE2, the
prospects for strong liquidity growth certainly seem good. How strong liquidity growth and the gold
price proves to be largely depends on the response from the rest of the world to loose monetary
policy from the Fed. For some countries, domestic monetary policy will also be kept loose as to
avoid a significant appreciation in local currencies, which would be procyclical. Further QE,
however, is not unequivocally positive, with those countries that are facing problematic inflation
facing the prospect of stricter policy controls, which does heighten the risk of a sharper policyinduced
slowdown in some parts of the world.