numis note

Numis: Wolf Minerals (Buy, TP: 23p) Fully Fanged and Ready to Bite
We resume coverage with a BUY recommendation and 23p target price, following the recent £99m equity raising. Wolf is now fully financed and permitted, and has started development of the Hemerdon mine in Devon to become a profitable UK tungsten producer. We believe Wolf has done an excellent job of establishing a robust project with low cost and capital intensity, in a supportive and developed mining town. We see upside to our valuation and expect the share price to re-rate as it moves into production and starts to generate profit. We view Wolf as a rare opportunity of a low-risk investment into an attractive tungsten market.

• Ready to roll. In March, Wolf successfully completed its A$183m (£99m) equity fundraising, approved by shareholders at the recent EGM. When the shares list on 20 May, this will increase its market cap to £138m (807m shares). Our post-financing TP is reduced to 23p, from 30p, due to a lower than forecast placing price and larger than expected raising from particularly onerous debt service and overrun requirements placed by debt lenders. However, in our view, with permitting already complete, the re-financing removes the last significant key risk to the project. Construction commenced in February and the official ground breaking ceremony was held in March, marking Hemerdon’s trajectory to be the first new metal mine in the UK for 45 years. Production is expected to start in Q3 2015.
• Robust, simple project. Hemerdon has a substantial resource base of 54M mtu at a moderate grade of 0.19% WO3. A simple 3Mtpa open pit/gravity operation is envisaged to produce 345,000 mtu pa at a C1 cost of $109/mtu (net tin credits), at the bottom of the cost curve. Capex is expected to be £123m, giving a low capital intensity of $66/tpa. The project is located in a mining town with excellent infrastructure, being fully permitted with no environmental concerns. Offtake and marketing are secured.
• Plenty of upside. As we roll forward into production, we see a 36% upside to our TP over the next 3 years (37p). We also believe mine life will be extended beyond the current 9 years by expanding the pit and steepening the walls. We see potential for an underground operation, opportunities to optimise the plant and upside from country rock processing and aggregate sales. Assuming this upside, our best case TP is 32p.
• Profit potential. From FY16 onwards, we forecast Wolf has the potential to generate A$60-80m in profits (3-4x P/E), EBITDA of A$100-110m (c.2x EV/EBITDA), FCF of $70-90m (3-4x P/CF) and dividends with a yield of +8%.
• Attractive market. Tungsten is classed as a strategic metal due to its unique properties (used in drill bits etc). The market is forecast to move into deficit with supply unable to keep up with rising demand and limited projects on the horizon. We are yet to see a price response as prices have drifted lower to $365/mtu, on a lack of consistent buying, but experts forecast a pick up in H2 (Numis LT price is conservative $450/mtu).