hang on lol...$2 dividends aren't sustainable

Alright people, you asked for it. You wanted me to explain why I am so doubtful of CDU as a company, and here is my wrap. I've already expressed my concerns with Wilgar, so here is the low down on LM.

We've heard it a lot; people have been spruiking the $2 dividend once CDU "goes mining", but it clearly is not sustainable.

Why?

Firstly let us look at what would be required for a $2 per annum dividend.

- all NPAT being paid out to shareholders
- a NPAT of roughly ~$320M depending on how many shares are bought back on market by the company
- assuming company tax of 30%, you would need an operational income of $455M before tax

3Mtpa @ $17.47 per tonne equals around $52M a year being spent just to keep the mine running.

In other words, even if you ignore overheads, CDU need to make revenue of approximately $510M per annum to be able to distribute $2 per share dividends on an annual basis.

At a price of $9000/t, and assuming AUD/USD parity, you would need production of approximately 56ktpa of copper.

From a 3MTpa operation, this would require consistent grades of approximately 2% over a ten year period. The company would need an inventory of 566,000 tonnes of 2% Cu at Rocklands to support the proposed 10yr 'high grade' operation.

Now there are two (possibly three) sources which confirm that this is not going to happen.

1. The JORC. Right now, with a cut-off grade of 0.8% Cu, the company has only defined 30Mt @ 1.7% Cu. This equals 515,000 tonnes of copper, which is less than the required 566,000 tonnes. Now the problem is not just limited to the 51,000 tonne difference. According to the company's own resource estimate, they have 515,000 tonnes of M&I&I copper at a 0.8% Cu cut-off, but not all of this copper can neccessarily be mined economically. The company has failed to put out a reserve figure over the past five years, despite continuously drilling the thing to bits. In other words, it is highly unlikely that CDU will have a big enough copper reserve to support the proposed 10yr 'high grade' operation, because the in-situ resource itself is not even big enough.

2. Ah yes. The JORC doesn't give justice to the native copper, I hear you say. Okay, lets look at one of CDU's own diagrams.

Apart from the top layer of high grade material in LM Central, there actually isn't a great deal of mapped copper higher than 2% discounting the surface patches in the Southern Siltstone and Rocklands South. In other words, just looking at the above diagram which is CuDECO's very own, it appears that the intrusive dolerite (which the mineralisation is associated with) is actually of quite a moderate/low grade.

Now the problem here is not that some of Rocklands is of a low grade, it is how little of Rocklands is actually high grade. Look at the above diagram. It is pretty clear that native copper is not just going to 'appear' when they start mining. They've already mapped it out, and I dare say that no more than 15% of the above diagram is a colour other than orange/yellow. If you agree with me on that, then only 15% of the region would be considered 'high grade'. In fact that might even be pushing it a bit, because 1%-2% Cu is a common occurrence elsewhere. So if you were to ignore the dark pink patches, then its hard to see any more than 1 in every 10 of those assay blocks having Cu above 2%.

What am I saying here? Well to those who tell everyone to hold on and wait for the native copper to come out by the truckload, perhaps have a long hard look at the maps of CDU's assays. Even the above diagram is a bit misleading. You could be fooled into thinking that everything behind the high grade blocks, is further high grade mineralisation.

Not so...

Here we see the primary mineralisation occupies a significant majority of Rocklands, with no more than 5% of it being labelled as native/high grade copper.

So what am I getting at here? $2 dividends aren't sustainable and this is for a few reasons. Let me summarise....

1. CDU doesn't have a big enough resource for it, let alone a reserve.
2. To those who tell us that the JORC is worthless and there is a stack of native copper down there, the above two diagrams of the tenement tell us otherwise.
3. Even if there was enough copper down there, you are relying on many things falling your way (such as the resource tax not getting through and productivity running at 100% efficiency).

Long story short, I'm not saying that Rocklands is worthless, not at all but stop spruiking the dividend story fellas. I would ask you to think again if you truly believe you are getting those $2 reimbursements on your shares each year. The above analysis suggests otherwise.

And by the way, saying something witty about OceanWide falls on deaf ears. They are here to support the project, not talk up $2 dividends. I'm sure they are here for a healthy return on their investment if everything goes to plan, but it won't be anything like what some of you are predicting with your $2 returns each year.