FAR EAST CAPITAL LIMITEDSuite 24, Level 6, 259 Clarence...

FAR EAST CAPITAL LIMITED
Suite 24, Level 6, 259 Clarence Street
SYDNEY NSW AUSTRALIA 2000
Tel : +61-2-92470077 Fax : +61-2-92470044
Email : [email protected]
www.fareastcapital.com.au
AFSLicence No. 253003 A.C.N. 068 838 193
2 February, 2006 Analyst: Warwick Grigor
This research report is provided in good faith from sources believed to be accurate and reliable. Far East Capital Ltd directors and
employees do not accept liability for the results of any action taken on the basis of the information provided or for any errors or omissions
contained therein. 1
OZEQUITIES
COMMENTARY
On Presentation
The Mining Investment Experts
AIM Resources Ltd (“AIM”)
“Very High Grade Zinc Project With Compelling Numbers”
AIM Resources is a stock we have had our eye on for
a while, especially following the release of a BFS last
December, which came out with some compelling
numbers. A recent breakout on the charts has
introduced some urgency in the release of this
commentary.
Timely Purchase in February 2005
AIM paid BHP and Metorex the amazingly cheap
price of US$1.1m for 100% of the Perkoa Zinc Project
a year ago. At the time zinc was not in favour, and the
location of the project in Burkina Faso probably raised
a few eyebrows amongst shareholders, but it now
looks to be a brilliant stroke of timing.
Bankable Feasibility Study Last December
The BFS calculated a NPV of US$147m for Perkoa
using a zinc price of US$1,815 pt (compared with the
latest price of US$2,350 pt). This equates to 38¢ a
share, pre-dilution for equity finance. On the hardnosed
rule-of-thumb that suggests a share price should
not be more than 33% of the estimated NPV at the
pre-financing stage, i.e. 12.5¢, the shares look
underpriced in the market place. Re-running the
numbers at the current zinc price would only make the
shares look even cheaper.
The cash operating cost estimate of US¢18/lb would
make it one of the lowest cost zinc mines in the world.
Treatment costs are estimated to be low at US$7.00 pt
(crush, dense media separation and flotation). Total
cash cost, including mining, overheads and transport
of concentrates is estimated at US$110 pt.
The capital cost estimate of US$72m cannot be
accused of being too cheap for a 500,000 tpa operation
(U$30m for the processing plant). A further US$30m
will be required as on-going development capital.
A 93% recovery rate to a clean 53% concentrate grade
is expected to yield about 62,000 tpa of zinc metal
based on a 500,000 tpa throughput.
Well Defined Resources
The BFS was completed on a proved and probable
reserve of 6.3 mt at 14.4% Zn, though there are areas
of the orebody that run at 30% Zn. The resource grade
of 16.4% Zn is considerably higher. It will be
interesting to see which figure the head grade
eventually resembles more closely.
It will be a decline and shaft underground mine with
the first primary ore only 40m below the surface. Cut
and fill and sub level up hole retreat mining methods
are proposed.
The planned mine life is 14 years but the two main ore
shoots are open at depth, below 500m. The Company
has another 31 exploration targets to advance in due
course and it would be reasonable to expect additional
resources to be discovered elsewhere on the tenement.
Infrastructure and Logistics
The first thought may be that logistics would be a
problem but the Company assured us otherwise.
Power would be generated on site with diesel fuel, and
water is readily available from a $6m earth dam
already constructed by the Government, in support of
the project. AIM expects that it will not need more
than 20% of the capacity of this dam.
Transport of concentrates will be a significant cost
item as they will have to be trucked 1,100km to a port
in Ghana, but the ability to back-haul freight should
mitigate against this impost.
Current Status
AIM is going through that period that usually seems to
drag on forever; the period between completing a BFS
and actually getting one’s hands on the money. The
initial timetable has slipped a few months and it now
looks like financing may be available in July 2006.
This suggests that an equity raising will happen
shortly before then. At this point we would guess that
$25-30m equity will be required, probably via an
institutional placement.
This sort of timing would enable production to
commence in the final quarter of 2007, with a
mandatory ramp-up up period thereafter. Maybe full
scale production could be achieved by late 2008.
How Stable is Burkina Faso?
Not many people have heard of Burkina Faso, a
French-speaking country inland from Ghana, in
Africa. Maybe that is good, as no-one associates it
with violence and coupe d’e tats. AIM assures us of its
stability, quoting a democratically elected President
and a peaceful society since independence in 1960.
Geopolitical risk is something that is very hard to
assess. It would not be unreasonable to discount a
stock operating in a black African country, compared
to Australia, but how should it be rated next to a
country like Indonesia?
The level of weighting given to geopolitical risk in the
investment decision making process varies with the
market cycle. At this juncture it seems to be of lesser
importance as investors are aggressively chasing
resources all around the world. Normal market risk
seems more of an issue today.
Keep in mind that when AIM moves to an
Exploitation Licence, for project development, it will
Far East Capital Ltd/OzEquities Junior Resource Company Comment
This research report is provided in good faith from sources believed to be accurate and reliable. Far East Capital Ltd directors and employees
do not accept liability for the results of any action taken on the basis of the information provided or for any errors or omissions contained
therein. 2
have to transfer a 10% interest in the project to the
Government.
Other Projects in the Portfolio
AIM is a specialist African play, also having a copper
exploration project in Zambia and a PGM, Ni, Cu
resource in South Africa.
In Zambia, AIM is earning a 70% interest in the
Mumbwa copper/gold project by spending US$3m.
BHP can claw back 80% of the project by reimbursing
500% of the exploration cost i.e. US$15m, leaving
AIM with 20% free carried.
A 5,500m diamond drilling program comprising 10
holes is scheduled for April. If previous drill
intercepts achieved by BHP can be duplicated we
could see some speculative fervour.
The Mokopane PGM project in South Africa is
substantial, with an inferred resource of 39 mt at
0.146% Ni, 0.085% Cu, 0.22 gpt Pt and 0.33 gpt Pd,
but this will probably struggle to be developed on
these grades. Maybe it is a project for the long term
possibilities.
Too Many Shares on Issue
With 514 million shares on issue, the Company has
been captive to day-traders. This tends to cloud the
view for serious investors. It would be reasonable to
expect a consolidation of the shares some time over
the next six months, perhaps on a 10 into 1 basis.
Normally this “haircut” is not beneficial for the
shareholder in the short, but the pain is short lived if
the company is on a good growth curve.
The Bottom Line
AIM looks like a company with a bright future. The
fundamental analysis stacks up very well, and there is
a good blue sky element with the Zambian
copper/gold project. It should suit both short term
traders seeking to benefit from the high zinc prices
and a strong news flow over coming months, and long
term investors looking for a growth stock. Equity
funding will not be a major hurdle for such an
attractive project. The cash balance is a modest $3.5m
today.
Zinc Stocks Are All the Rage
Who would have thought that zinc could be so
popular? With the price now in excess of US$2,300 pt
(US$1.04/lb) zinc producers are experiencing
unprecedented levels of profitability. The share prices
have moved accordingly. The following table gives
share price movements over the past three months
demonstrating that we are in a zinc boom at present.
A quick summary of the prospective cash flow
multiples of emerging zinc producers shows that the
fundamentals are excellent and the estimated cash
profit margins, on numbers released by the companies,
is unprecedented.
It would be a mistake to assume that these levels of
earnings are sustainable throughout the life of the
mine, but this still leaves plenty of room for profitable
trading on the sentiment in the interim. A very
important consideration in the development of these
mines is the much greater range of options open for
financing. Usually it is very difficult for juniors to
fund base metals project, but this may be a once-in-alifetime
opportunity for the juniors.
Contact OZEQUITIES NEWSLETTER “Australia’s Most
Comprehensive Daily Digest of Equities News”, at
[email protected]. Tel: +613 97485033. Warwick
Grigor is a director of Far East Capital Ltd, an ASIC
Licensed research and investment firm. He and his
associates have no material interest in the securities of
Company Ltd. This report provides information of a
general nature and it does not contain a recommendation,
express or implied, to deal in the securities mentioned
herein. A professional investment advisor should be
consulted before acting on the contents of this note.
Copyright © Far East Capital Ltd 2006
Share Prices Gain
1/11/05 1/2/06
AIM 5.1 8.2 61%
CBH Res. 21.5 28 30%
Herald 62 135 118%
Jabiru 20 29.5 48%
Kagara 169 307 82%
Perilya 81 193 138%
Terramin 35 82 134%
Union 6.8 9.1 34%
Cash Flow Cash Cost Margin
Multiple US¢/lb
AIM 0.3x 18 478%
Herald 0.4x 31 235%
Jabiru 1.5x 10 940%
Terramin 0.5x 20 420%
Union 0.6x 30 247%
Zinc US$2,300 pt $1.04 /lb