outlook for 2014

A few (well...as usual a little bit longer) final thoughts at the end of 2013.

Maybe worthwhile to come back was UBS wrote just a few weeks ago. Important: The assumptions have been made based on a long-term copper price of US$ 2.55/lb.

In our view (UBS view), the results (note: of the PFS) were a little underwhelming and demonstrated that the project was likely to return unfavourable economics under the UBS price deck, which assumes a long-term Cu price of US$2.55/lb.

Construction of a simple project utilizing the PFS physicals and the UBS price deck generated a 5.5% IRR and $25m NPV. However, we believe the addition of more contained copper from a higher resource grade should translate into improved economics. For instance, if we simply increase the grade in our simple model by the 16% uplift seen in the resource, our IRR would lift to 9.5% and the NPV would jump to $170m. Assuming the optimisation study could improve recoveries to 80% from the 76% detailed in the PFS, then the IRR would lift to
circa 11% with an NPV of $230m. If we were to then assume that the $358m of capital estimated in the PFS could be lowered by 10%, then the IRR would lift to over 12% with an NPV of circa $250m. At spot prices (note: 13. December CU was at US$/lb 3.27 – today 3.35), this would be a 15% IRR.

Results from the update should by completed by April 2014.

To make it short: Optimized PFS could return substantially better economics. Even based on the rather conservative UBS view of a long-term copper price of US$ 2.55 the project might return an interesting IRR and NPV.

And with regard to long-term copper prices as we know the views are different. Personally I think that we will see continuing growth in emerging markets and an economy that starts to improve in Europe. That will help China’s economy improve as Europe trades more with China than it trades with the U.S. It seems that Europe has turned the corner or at least bottomed out. The interest rates are and will stay low and this will help the economy.
China and India are looking to develop their domestic infrastructure. This will mean continued demand for industrial commodities. Overall the commodities are doing well when you have the engines of America, Asia … and Europe all positive. That’s when you have a huge demand for commodities. On the other hand – as we know - the cost to explore, extract, process is going up at an inflation rate higher than anything published by any government. Environmental regulations in addition are making everything more expensive. That means that the copper (or other commodities) are there but it is not so easy to extract them from the bottom.

With other words: a stable or raising copper price in connection to an optimized PFS could dramatically improve the attractiveness of the Kitumba project itself. A project which might be worth something like A$ 200-300m or something like 1 to 2 A$ per share. Even considering a dilution or a joint venture this are interesting figures.

The outlook for zinc has also improved substantially in the last few weeks. In the past couple of weeks, more analysts have come out of the woodwork in support of zinc.“Zinc could well finally break out of the … $1,800 to $2,000 range and return into the early 2011 range between $2,400 to $2,600 on the 3-month benchmark contract,”. There are even more optimistic views on zinc saying that the price could return to the US$/ton 3000-4000 in 2015/2016. Well we will see.

Based on the Patersons recommendations of 2012 the cash cost including credits (silver, lead) should be in the US$/ton 1360 area. Said this and considering that just a few days ago Glencore was of the opinion that the want to produce 90’000 tons of Zinc next year this would mean that Perkoa could return ar approx. US$ 67m profit overall ( or 75m A$). There of 27 % the BTR stake = A$ 20m. This might be a to optimistic view but I guess not completely unrealistic. By the way the leverage with regard to raising zinc price is also substantial (e.g. at a zinc price of US$/ton 3000 the “profit” would raise to roughly A$ 45m. So in my view Perkoa alone at current zinc price should support a SP of approx. 50 cents.

My conclusion:

The overall view on BTR could change pretty dramatically in the next couples of months. In addition to that I am still convinced that there is more copper in the Mumbwa area – especially at Kakozhi where we have already seen some very encouraging drilling results. An according drilling campaign might return interesting results.

With a new management coming on board I am quite confident that at the end of 2014 the SP will be higher then at the end of 2013.

Said that I wish everybody here a happy new year and a healthy and successful 2014!!!