valuation discussion thread

Valuation and Discussion Shaw Research at Aug 07
60c.....
We have assumed the mine plan towards 1.5mtpa will be developed gradually, with a ramp-up towards this level from 2010 to 2012.
Total nickel recoveries are expected to improve from 82% at startup to 86% over two years. We have allowed for processing of 350kt
for FY08 increasing to 850kt FY09, with 72% of nickel and 35% of cobalt paid. We have allowed for gradual reduction in cash costs
from US$3.00/lb of contained nickel to US$2.30, under the 1.5mtpa scenario. This translates to US$74 down to US$44 per tonne of
ore mined.
Avebury will produce a high grade nickel concentrate, which will be trucked to the port of Burnie and shipped to China. We have
allowed for total transport cost of approximately US$57/t of concentrate. A 2% net smelter royalty is payable to Rio Tinto, past holders
of the tenements, with an additional 2% payable to the Tasmanian Government.
Based on our assumptions, we estimate AGM may achieve earnings (EBITDA) of US$49m in 2007/8, increasing to over US$100m for
FY09. This is highly dependent on the nickel price, as the Company is presently unhedged. We forecast a nickel price of just over
US$30,000/t in FY08, falling to US$26,000t in FY09. Our valuation is presently A$0.60ps, allowing some value for exploration potential
($30m) and based around a long term nickel price of US$15,000t or US$6.80/lb. Discount rate utilised was a nominal 10%, with
~US$20m capital allocated in FY10 for expansion to 1.5mtpa. We have assumed grade reduces from 1.15% to 1.0% over 2 years, with
life of mine grade estimated at 1.0% Ni. Valuation increases to ~A$0.90ps should a US$20,000t nickel price be utilised long term.
AGM has an offtake agreement with Jinchuan Group to take all concentrates for the life of the project (grading 22% Ni), and the group
has been assisting with funding, achieving an equity stake presently over 10%.
In summary, the Company retains considerable leverage to the nickel price due to lack of hedging arrangements in place, and should
be well supported provided the commissioning of the processing facilities remains on schedule and performs in line with expectations.
Excluding the nickel price impact, upside to the valuation exists from the potential to expand production beyond 1.5mtpa, and the ability
to both locate additional deposits within the tenements, or participate in other opportunities in Tasmania and beyond, potentially
reducing the single commodity price risk.