CARMICHAEL RESEARCH RESOURCES India Resources Limited (IRL) India Resources Limited ( IRL) was listed in mid-2007 with an objective to give investors an early exposure to the emerging Indian resources sector. IRL raised $10m through their IPO in early 2007 and a further $18.8m in late 2007. The flagship project is the Surda copper mine in Jharkhand, West of Kolkata (Calcutta) which was refurbished in 2007 and is anticipated to ramp up to full production in May 2008. IRL also has a number of green-fields exploration projects such as the Aravalli base metals project in Rajasthan, and three diamond exploration projects at Bhandara, Bundelkhand and Chigercherla. We initiate coverage with a Speculative Buy Recommendation. Key Points IRL recently released production data from the ramp up phase for the March quarter. Mined tonnages of 37,816t @ 0.9% Cu producing a concentrate of 1335t @ 23.5% Cu were reported. This is in line with IRL s stated ramp-up production targets, with full production at scheduled rates of ~36,000t/month commencing in May 2008. During 2007 the company re-established power, overhauled screens, the primary jaw crusher and 3 of the 5 available ball mills. IRL is also installing a new floatation cell in addition to new cyclones to replace old cyclone classifiers. As at the end of March, six cleaned out stopes were being mined with four new stopes brought into production during the quarter. Diamond drilling underway to classify the underground resources under Australian JORC classification by 2Q2008. NITON XRF scanner results at Wari prospect at the Arivalli Project has returned initial results from drilling of [email protected]% Cu. Drilling at Sindesar Khurd prospect returned NITON XRF results of [email protected]% Zn IRL holds a suite of diamond exploration leases. The Bundelkhand project consists of two reconnaissance permit 60km west of India s only producing diamond mine at Panna and ~40km North of Rio Tinto s Bunder diamond project. From total sales from the Surda Project of $159.4m, we estimate total EBITDA for the base case scenario at $49m, over a seven year mine life. NPAT totals $22.4m. EPS rises from 0.3 cps in 2008 to a maximum of 2 cps in 2009, on production of 4500t per annum on an undiluted basis. Current undiluted issued capital is 162.7m FPO A decision on the decline development proposal is due in 3Q2008. We recommend IRL as a Speculative Buy to risk tolerant investors seeking investment into a company with an early entry into the Indian resources sector. We have a valuation of $0.21/share which takes into account the current production scenario at Surda copper mine, plus the company s investments and cash reserves. 5th May, 2008 RECOMMENDATION: Speculative Buy VALUATION: $0.21 per share 6 month vol 77.1 m 12 month share low $0.10 12 month share high $0.32 Market Risk High Liquidity Risk Low Infrastructure Risk High Country Risk High IRESS & DJC Research ISSUED CAPITAL ASX IRL Share price $0.115 Mkt cap.1 $19.3m Ordinary shares on issue2 168.1m 1 Undiluted Source: IRESS 2 Includes Canadian issued shares and warrants 3 Various dates & Strike prices DIRECTORS Eoin Rothery Managing Director Andrew Simpson Chairman Michael Kiernan Vice Chairman Craig Readhead Non Exec Director Arvind Misra Director Operations David Humann Company ecretary Source: IRL MAJOR SHAREHOLDERS Territory Resources 9.50% Crawley Investments 6.11% ANZ Nominees Ltd 5.30% Captain Shailendra Singh 3.06% Source: IRL 12 MONTH PERFORMANCE Source: IRESS James Wilson Resource Analyst +61 8 9263 5276 [email protected] 2 2nd May 2008 CARMICHAEL RESEARCH RESOURCES Corporate Overview India Resources Limited ( IRL ) was listed in mid-2007 with an objective to give investors an early exposure to the emerging Indian resources industry. IRL raised $10m through their IPO in early 2007and a further $18.8m in late 2007. IRL has a number of projects throughout India. The flagship project is the Surda copper mine in Jharkhand, West of Kolkata (Calcutta) which was refurbished in 2007 and is anticipated to ramp up to full production in May 2008. IRL also has a number of green-fields and brown-fields exploration projects such as the Aravalli base metals project in Rajasthan, and three diamond exploration projects at Bhandara, Bundelkhand and Chigercherla. IRL has an experienced management team with a track record of involvement in successfully financing, developing, constructing, commissioning and operating mining projects. Fig 1 IRL Indian projects Source: IRL Surda Copper Project IRL has developed an alliance with Hindustan Copper Limited (HCL), essentially a minerals arm of the Indian Government which owned and operated the Surda copper mine. Surda is the second largest mine in a group of six within the region known as the Indian Copper Complex which was previously operated by HCL. Resources at Surda are non-JORC historic resources which were estimated in 2004 to be 26Mt @ 1.2% Cu. IRL has negotiated a special vehicle through its parent company Monarch Gold to recommission and operate the Surda Mine and concentrator at Mosaboni and to deliver concentrate to HCL. Under the obligations of the agreement, IRL is to guarantee copper in concentrate to HCL by June 2008, and also has a fixed sales price for the concentrate being sold to HCL. The licence is valid until 2014. All DJC modelling is based on this tenure period for our base case evaluations. 2nd May , 2008 3 CARMICHAEL RESEARCH RESOURCES The Surda copper mine was in production from 1956 to 2003. The mine produced a total of 8.98Mt at 0.95% Cu. The mine operated two production shafts and one ventilation shaft, with variable mining methods used during the operation depending on the width of the ore lodes, including room and pillar, horizontal cut and post pillar methods. Mining was ceased in 2003 due to depressed copper prices and the Surda operation was shut down. The Masobani Concentrator is situated 5km southeast of Surda and was an asset included in the deal with HCL. It seems that the concentrator was shut down mid-process and a number of the mills and floatation cells were not cleaned out, so ore remained in the system at all points and had caused some damage over time. Fig 2 Surda Cross Section Source: IRL IRL has embarked on a significant cleanup and refurbishment process over the last 12 months reinstalling and repairing most of the corroded floatation cells, refurbishing ball mills and conveyors. Reported capacity is in the order of 900,000tpa with the company aiming for production of ~450,000tpa and a final product of 4500t of copper concentrate per annum. During 2007 the company re-established power, overhauled screens, the primary jaw crusher and 3 of the 5 available ball mills. IRL is also installing a new floatation cell in addition to new cyclones to replace old cyclone classifiers. Surda Geology Geologically the deposit mineralisation is developed over a 2.2km strike and is currently defined to a depth of 474m which is the lowest level of historical mining. Mineralisation is chiefly chalcopyrite and pyrite with no significant other copper bearing minerals present. The mineralised zone is generally tabular, 6m thick on average but can vary up to 20m thickness, generally dips 30-35 degrees to the north-east with mineralisation predominantly hosted within chlorite schist. Mineralisation is currently open at depth. 4 2nd May 2008 CARMICHAEL RESEARCH RESOURCES Mining at Surda Mining is currently in progress at Surda and has been ongoing since November 2007. Initially the company spent several months dewatering and refurbishing the underground mine, refurbishing headframes and generally bringing the mine into a workable state to Australian standard practices after it had remained dormant for some 4 years. The current hoisting capacity at the mine is ~500,000tpa from two shafts with concentrator capacity at 1,700tpd. IRL s target production is approximately 450,000tpa. Mining is currently being carried out on blocks 7,14,18, 30, 32 and 37. Fig 3 Mining blocks and underground mine schematic Source: IRL IRL recently released production data from the ramp up phase for the March quarter. Mined tonnages of 37,816t @ 0.9% Cu producing a concentrate of 1335t @ 23.5% Cu were reported. This is in line with IRL s stated ramp-up production targets, with full production at scheduled rates of ~36,000t/month should commence from May 2008. As at the end of March, six cleaned out stopes were being mined with four new stopes brought into production during the quarter. A diamond drilling program is also underway in order to more accurately define resources with the aim of producing a JORC compliant resource from historical holes sometime in 2H2008. The company reports that they are currently 20% ahead of scheduled ramp up. Fig 4 Surda March quarterly production Source: IRL 2nd May , 2008 5 CARMICHAEL RESEARCH RESOURCES Decline Feasibility IRL recently announced the identification of a historical geological ore reserve (Non-JORC) of 7Mt @ 1.2% Cu which forms part of HCL s original estimate of 26Mt @ 1.2% Cu (non- JORC historic resource) calculated in 2004. The ore model is likely to be drilled out with more detail, but effectively underpins a 7 year expanded case mine life and is forming the basis of a decline feasibility study which aims at doubling annual production. This in our view would significantly add value to the project moving forward. A schematic of the proposed decline is shown in Fig 3. Copper demand The three main drivers to copper demand are the performance of the developed economies; China; and mine supply. Consistent with the economic outlook above, the US, Europe and Japan are likely to reduce copper demand as their economies slow. This is particularly so in the ailing housing sector in the US, whose economy accounts for 13% of global copper demand, according toFortis Bank. Working in the opposite direction is the influence of China which has provided much of the increased demand for copper, as in most metals. A slowing economy in China means growth at sub-10% levels is still likely to provide significant support for copper prices. The recent spate of bad weather in China caused shutdowns to the copper smelters which have resulted in LME stockpile draw-downs and a tightened market, sending copper spot prices above US$8,000 per tonne a recovery of 29% from the recent lows in mid December 2007. A recovery that seems to have gone almost unnoticed by the investment community which has been more focused on recent events in the financial sector. Fortis estimate that copper prices could slump to 40% of highs seen in 2007 (to US$5,250/t), however we believe the combination of a still growing China and supply shock is likely to keep copper prices above that level. Power supply issues in Chile have recently resulted in reduced output in the country s major copper mines. Supply shock would include the effect of political upheaval and policy change in Africa. Recently both the DRC and Zambia, both major producers of copper, have released details of policy change in their respective mining industries. The DRC want higher percentages of projects whose agreements were negotiated prior to the new mining code legislation The upshot of the likely continued effects of supply shock lead us to believe the copper price will remain at high levels for much longer than many expect. We do not believe copper prices will fall to much lower than US$6,000 in 2008 and 2009, but may reach technical support at US$5,500 per tonne on short-term dips. Regional Projects IRL has a number of regional projects throughout India, these are at various stages of development. Arivalli Project Arivalli is located in Western India near the town of Udaipur, Southeast of New Delhi. IRL has 2 reconnaissance permits (RP) which were granted for a period of 3 years back in October 2005, so renewal is likely to be negotiated later in 2008. The first permit is 50km northeast of Udaipur and the second permit is 20 km southeast of Ajmer. Compilation of Geological Survey of India (GSI) summary reports has identified several highly prospective areas for copper, zinc, lead as well as gold lying within the Relmagra Reconnaissance Permit. HCL has excised areas that contain existing resources within the lease. 6 2nd May 2008 CARMICHAEL RESEARCH RESOURCES Fig 4 Arivalli Projects Relmagra RP Source: IRL Scout RC drilling of the project was conducted in August 2007 with best results to date of [email protected]% Cu within a coincident north-north eastern trending zone some 450m long at Sathuddia. IRL intends to drill it s top 5 ranked Arivalli targets during 2H2008. The company has decided to build a purpose built specialised light weight multipurpose drill rig (capable of RC and diamond core work) supervised by Swick Drilling at a cost of ~$200,000 which will be used in the 2008 drilling program. Scout holes have been drilled to date at Relmagra RP on Sathuddia, Wari and Sindesar prospects, with chemical results from the initial program listed below at Sathuddia. A further 14 holes were drilled at Wari with highlights of [email protected]% cu recorded using the portable XRF Niton scanner however we await confirmation of the result with chemical assays which should be returned by 2Q2008. Drilling at Sindesar Khurd returned NITON XRF results of [email protected]% Zn, however we await the results of these samples by chemical assay for confirmation also. Fig 5 Drill results from Arivalli Project Source: IRL 2nd May , 2008 7 CARMICHAEL RESEARCH RESOURCES Diamond Exploration The company owns 3 diamond leases within India. The Bundelkhand, Bhandara and Dharwar projects throughout northern, central and southern India. Dharwar comprises five prospecting licences totalling ~25km2 located in the Wajrakarur kimberlite field in Southern India. IRL was granted the leases in late 2007. The Bundelkhand project consists of two reconnaissance permits 60km west of India s only producing diamond mine at Panna and ~40km North of Rio Tinto s Bunder diamond project. The Bhandara Project is at the most advanced stage of development. The project includes seven granted reconnaissance permits covering an area of 8,044km2 in Western Orissa. A further 3 applications for RP s in the neighbouring state completes the project area of just
IRL Price at posting:
2.0¢ Sentiment: LT Buy Disclosure: Held
