We met with MBN management for an update on the company�s Santa Rita nickel mine located in Bahia, Brazil. The operation has suffered from start-up issues mainly as a result of the deposit containing a chloritic alteration associated with vertical faulting which was not identified prior to production. This has significantly hampered nickel recoveries. However, the company has recently changed management and raised US$165mn to assist in placing the project back on-track. Based on our analysis we have derived an NAV of $2.91/sh which we discount by 20% to derive our $2.33/sh target price. Therefore with a 41% return to the current target price we are upgrading to a BUY (from SELL).
Investment Highlights
� Ramp-up Issues to continue in Short Term; Mostly Resolved within 12 months: In the short term, we expect nickel recoveries to remain in the mid-50�s until the installation of a wash plant in the June quarter 2011 which will bring recoveries into the mid-60% level. This is lower than the original nameplate of 70% due to the chloritic alteration. This was previously unidentified due to the fact that metallurgical testing was done using vertical drill holes and thus missed the chloritic vertical faulting. We believe production issues will be mostly resolved within our 12-month timeframe and the stock will react positively and trade towards our $2.33/sh target price and up to $2.91 NAV as production issues are resolved.
� 7.1mtpa (25kt Ni) from 4.6mtpa (10kt Ni): MBN is a CY11 production story with CY10 production forecast to be ~9.5-10kt in concentrate (our estimate 9.7kt). We expect production to begin to improve in CY11 increasing to 15kt before moving to 25ktpa from mid-2013. Recoveries are expected to move toward mid-60�s towards end of 2011.
� Well Cashed Up to Place Production On-Track: MBN is well cashed up, we calculate that MBN has access to approximately A$230mn due to the successful closing of a US$165mn placement at A$1.60/sh. The funds will contribute to debt repayments, general working capital and plant expansion.
MBN Price at posting:
$1.66 Sentiment: LT Buy Disclosure: Held
