Metals X Ltd - (MLX.ASX, $0.14/sh, Mkt Cap $231m). Exploration success & improvements in head grade & productivity set for Renison. BUY PT $0.35/sh
Last week MLX announced underground exploration drilling has successfully delineated strong Stratabound skarn style mineralisation outside of the known mineral resource. The discovery is hugely significant given the implication of this work supports earlier drilling targeting and suggests that all stratabound primary dolomitic units of the mine sequence stratigraphy are repeated and continuous into the hangingwall of the Federal Basset Fault, located deeper in the mine. Tin production at the Renison underground mine for the past 45yrs has mainly come from two mineralisation styles: Stratabound Skarn (~145,000t Sn) and Stratafault Skarn/Fault (~75,000t Sn), with almost all of stratabound production being sourced from the near surface dolomictic units.
In simple terms, this discovery provides Renison with the potential for a repeat of the substantial stratabound ore at depth with a corresponding substantial increase in the tonnes per vertical metre within the mine. The underground exploration program at Renison continues with further news on drilling to follow. In July, the FY12 drilling program increased its Reserve life by 23% to 45.7kt of contained Sn and Resource by 13% to 153.5kt providing the Renison underground mine with Reserve life of ~6 years and a Resource life of ~14 years. On the operations front, we expect the September Quarterly report due this week to highlight mine production improvements at Renison with a slightly higher head grade and improved tonnes to lower operating costs and assist with improved margins after a poor June quarter hampered by a seismic event. The tin price during the September quarter also delivered a strong bounce a low of ~US$18,000/t in July/August to the recent October high of ~US$22,000/t. We expect head grade and productivity improvements will continue into the December quarter as Renison begins to mine the higher grade ore areas including Area 4 (1.94% Sn vs Reserve grade) from November. We estimate higher grades can lift tin production from a current run rate of ~5ktpa to something closer to the target 8ktpa delivering significant margin improvements as C1 cash costs fall below $14,000/t (MLX targeting $12,500-$13,000/t over the longer term). While the tin price has continued to trade up and down in 2012 (US$18,000 – 25,000/t), a recent publication by ITRI (Sept 2012) on the forecast outlook for tin metal supply/demand outlines the next five years will benefit the producers given: (1) limited supply to come online from new projects with many uneconomic at current prices, will take time to develop and require investment in a capital constrained environment; (2) Production falls in China and Indonesia will continue; (3) New applications for tin will draw on current and future supply. The following chart demonstrates a bullish view on the 3-5yr forecast for supply constraints and prices pushing past US$30,000/t.
Source: ITRI, September 2012
We rate MLX a BUY and PT $0.35/sh. We see MLX as a diversified investment opportunity with multi commodity exposure (Tin, Gold and Nickel). Our PT is derived using a sum of parts valuation which includes an NPV on both the gold and tin assets, a risked EV/Resource metric for Wingellina and current market pricing for equity valuations. Catalysts include: Production improvements at Renison Q4 2012; DFS and funding strategy for the Central Murchison Gold Project Q4 2012; and Wingellina EIA and potential JV partners Q1 2013.
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