Sherlock Bay Nickel Corporation Limited (SHN) (Formerly Central Kalgoorlie Gold Mines Limited—CKG) Major Resource Upgrade and Aggressive Development Programme for Large Low Grade Nickel/Copper Project RECOMMENDATION - Speculative Buy Note: Investment in Shares or Options of Sherlock Bay Nickel Corporation Limited should be considered Speculative. Investors should seek appropriate advice before making a decision to invest in Sherlock Bay Nickel (see page 7). EQUITY RESEARCH 10 December 2003 Sherlock Bay Nickel Corporation Limited (“SHN”), formerly Central Kalgoorlie Gold Mines Limited (“CKG”), recently announced a major resource upgrade at the Company’s Sherlock Bay Project and the continuation of an aggressive development programme that if successful will see the project in production within 12 months. The Sherlock Bay Project parameters, recently released by SHN, demonstrate a relatively low capital cost for a project of this size and a low operating cost profile. Montagu has reinterpreted the data released by SHN in respect of the Project and derived a net present value per share (fully diluted) of 23 cents per share. With a current sub 10 cent share price we maintain our speculative buy recommendation (of May 2003). Share price has shown significant appreciation over recent months following shareholder approval of the Sherlock Bay acquisition and release of resource updates. Correspondingly this was at a time when retail investors had an increasing focus on nickel companies stemming from the continued strength in the price of the metal. A number of nickel analysts are forecasting a further strengthening of the nickel price in the near term. Key ASX Data * ASX Code SHN Market Capitalisation ($M) 28.2 Share Price (Cents) 8.2 No. Options on Issue (M)** 44.30 No. Ordinary Shares (M) 344 Listed Option Code CKGOE * All Key ASX Data as of 10th December 2003 ** Option Details: 25 million listed options exercisable at 20 cents on or before 31 Dec 03, 15 million unlisted options exercisable at 4.5 cents, 4.3 million unlisted options exercisable at 10 cents on or before 31 Dec 04 Directors: Mr Domenic Martino (Chairman), Mr Albert Gerick (Managing Director), Mr Mark Maine (Non Executive Director), Mr Garry Clark ( Non Executive Director). 2 A$M FY05(e) FY06(e) FY07(e) FY08(e) FY09(e) FY10(e) FY11(e) Tonnes Ore (m) 1.5 2.0 2.0 2.0 2.0 2.0 2.0 Revenue 60.0 80.0 80.0 80.0 80.0 80.0 80.0 EBITDA 34.6 45.4 44.8 43.8 42.9 41.0 40.8 NPAT 24.7 29.7 29.4 29.1 28.8 28.4 28.0 (based on resource of 13.5 mt—current measured resource of 9mt) Valuation (per share) Undiluted 9m tonne project $0.24 13.5m tonne project $0.30 Fully Diluted 9m tonne project $0.23 13.5m tonne project $0.29 Full diluted figure excludes 25 mil 20 cent Dec 03 options Project Economics
6 Month Price Chart 3 3 Project Profile The Sherlock Bay Nickel Project is a high tonnage low grade disseminated nickel sulphide deposit located 100km east of Karratha, 150km west of Port Hedland and 13 km north of the North West Coastal Highway in the West Pilbara mineral field. The Project’s geographical position supports the development of a mining and treatment operation with the existence of nearby infrastructure including the sealed highway, existing powerlines 10 km from the Project (if required) and a location on flat lying land. Furthermore, the existence of concentrate handling facilities at the deep water Port of Dampier 100km east of the Project further strengthens the Projects viability. Mineralisation at Sherlock Bay is unlike other Australian nickel deposits being hosted in a black chert unit within intermediate lava flows adjacent to the source ultramafic intrusions of the Archean. The deposit is considered analogous to the Thompson deposit in Manitoba and Bird Lake deposit in Ontario. We understand the deposit’s unique low MgO means that unlike many large low grade deposits, such as Mt Keith, where approximately 10% of the Ni resource is non recoverable due to the MgO content of the ore, at Sherlock Bay this is not an issue. As a consequence of this increased recovery due to favourable metallurgical properties, there is a significant impact on the economics of the Project. The deposit was initially drilled in the 1970’s by Texasgulf of Australia who completed 10,000m of diamond drilling before estimating a pre-JORC resource of 75 million tonnes grading 0.5% Ni and 0.1% Cu. The low grade nature of the deposit in combination with the low nickel price (and in the 70’s high Aus$) has previously inhibited its development into production with most operators often overlooking the potential of this type of deposit. On 27th of November 2003 the Company advised that it intends to “Spin Off” the SHN gold exploration assets into a separate entity (Lefroy Gold Ltd) and focus SHN on the Sherlock Bay Project. Due to the Sherlock Bay Project’s size and required commitment, both in terms of capital and logistical management, we believe that potential would exist for the gold assets within the Company’s existing portfolio to be neglected. We therefore view this as a positive move. Lefroy Gold Limited, will seek funding for the development of its core projects and at that time seek a separate listing on ASX. The projects to be “spun off” include the Eureka Project (which has a current resource of 64,200 oz Au @ 4.4 g/t), the New Bulong joint venture project and the Cat Camp Project. Sherlock Bay to be Sole Focus More recent share trading patterns indicate, to us, that the Company’s share price may have been impacted adversely by the activity of “day traders”. We anticipate that a sustained movement above 10 cents will result in a new level being established and a reduction in these influences allowing the share price to display a less erratic trend. After recent gains there is some down side risk to the $0.065 level however we are more inclined to the view of the securities establishing a new level. RESOURCE UPGRADE On 28th November 2003 the Company announced a major resource upgrade to 9 million tonnes grading 0.53% Ni and 0.10% Cu. The Company also announced that it was continuing with its resource d e v e l o p m e nt d r i l l i n g programme to continue to build on the current resource estimate. NAME CHANGE The company’s name has changed from Central Kalgoorlie Gold Mines Ltd to Sherlock Bay Nickel Corporation Ltd with the ASX code change to SHN being effected on 15 Dec 2003. The name change reflects the focus of the company on its key nickel project.
4 SHN has recently moved to strengthen its board with the appointment of Mr Domenic Martino as chairman and Mr Mark Maine as a non executive director. These appointments will we believe provide the Company with a greater corporate focus as it moves into an important period where it will be seeking funding for the development of the Sherlock Bay Project. The financial model parameters have been constructed using estimates released by the Company which have been reinterpreted by Montagu where we considered it appropriate to do so. The company has been consulted in respect of base assumptions to establish that they are not unreasonable. The mining and financial assumptions are at this point in time general in nature. The valuation model estimated by Montagu has used an approach based upon the latest resource estimate issued by the Company as a base case (i.e. 9mt) and the stated next level target (13.5mt) as the upper level. We consider that there is potential for the Company to deliver the higher resource figure at the conclusion of its current resource drilling programme. We therefore also present the analysis using an upper level (13.5mt) parameter. It is believed that the Company will have shifted from an open cut mining model to a bulk underground model after three to four years, assuming that the emerging evidence of grade increases at depth is confirmed. The strip ratios used in later years (in the model) can be considered as a proxy for the higher mining costs arising as the Project would move to a bulk underground model. The Company intends to produce either a Ni hydroxide or Ni carbonate which will have 25% to 30% contained Ni. This is a significantly higher metal content than in most standard Ni concentrates and unlike Ni concentrate, could be processed directly at a refinery. We believe that because of this, the product should be in demand by metal producers. While we acknowledge the resource level released in the 1970s by Texasgulf of 75mt grading 0.5% Ni and 0.1% Cu, at this time we do not consider it appropriate to model this resource as it is not classified as adhering to JORC resource reporting standards. The revenue model assumes a constant nickel price of US$11,000 p/t and an exchange rate of $0.75. It must be noted that base metal prices and exchange rates will fluctuate significantly over the forecast period. The nickel price at the time of publication was US$13,280 p/t and the exchange rate $0.74. For the purposes of the model we have assumed that the project will be fully debt funded. To date the Company has not confirmed any debt funding arrangements. We have also assumed that the December 2003 options series, that is exercisable at 20 cents, shall lapse without exercise. The improvement on the nickel price over the last 12 months has seen a number of companies aggressively pursue the development of their projects bringing them closer to production status. At the same time there have been a significant number of new nickel exploration companies that have successfully sort to list on ASX. This activity has created a significant level of interest by investors in the sector as some outstanding increases in investor value have emerged. We have provided a summary of a selection some of the emerging nickel producers at the conclusion of this note and the position that SHN has within this group. We consider that SHN compares favourably with other prospective nickel producers in its potential to provide investors with value appreciation. Investors need to be aware that normal share market risk conditions apply including commodity price, currency fluctuations, supply and demand, sentiment and general economic outlook. Normal exploration development, mining and processing and environmental risks also apply. New Board Appointments Financial Model Emerging Australian Nickel Producers Risks Associated with investment in Sherlock Bay Nickel Corporation Limited
The above is not a comprehensive list. Company Shares on Issue (m) 12 month price range (cents) Latest Price (cents) Market Cap ($m) Commentary Sherlock Bay Nickel Corporation Ltd. (SHN) 344.4 2.2 – 11 8.2 $28.2 Resource 9mt @ 0.53% Ni could deliver free cash flow of +$20m pa for initial 4-5 years of mine life. Low Capex/Opex project with relatively short lead time to production. High quality product from metallurgical perspective. Risk is that company is building from low operational base and will need to move rapidly. View Resources Ltd. (VRE) 559.5 (+250m incentive shares) 0.8 – 9.7 7.4 $41.1 (excl incent. shares) VRE hopes to be mining ore by the end of 2003 with an initial focus on the high grade Zone 29 resources of 74,000 t at 3.9%. Company has recently advised of the addition of some strong management. Recent promising results and strong alliances have pushed the share price however short term delivery of market expectation will determine whether the stock has run ahead of itself. Allegiance Mining NL (AGM) 242.7 3.5 – 21 16.0 $38.8 AGM has been a long time operating in a promising region of Western Tasmania. Project is expected to have a reasonably long lead time with potential production in the medium term. AGM has put in place a $3m facility to fund feasibility (3 year time horizon) and development of an underground exploration drive. The company may require further funding to complete this work. Land holding is considered very strong but may be testing its limits in terms of valuation given the company’s current position. Worth watching for future developments. Titan Resources NL (TIR) 177.3 11.5 – 62 40 $70.9 Recently announced the completion of feasibility study on its Widgeemooltha Project and is expected to have delivery of first concentrate scheduled for mid 2004. Historically TIR is a strong performer with solid management. Also owns one of the three main Bio Leach processes (book value $28m) the commerciality of which outside company owned projects is still to be established. Sally Malay Mining Ltd (SMY) 134.4 20.5 - 75 72 $96.8 Off-take and finance ($55m) in place. A 750,000 tpa plant under is construction with first concentrate shipment scheduled for Q3 2004. In-situ metal 65,000t Ni, 27,000t Cu 3,360t Co, producing 7,000t to 8,000t Ni in concentrate pa. Note that financing and off-take arrangements have somewhat capped the company’s upside exposure to the Ni price. Project NPV @7.5% is $149m. Australian Mines Ltd (AUZ) 124.1 11 - 27 19.5 $24.2 Recently announced decision to mine at the Blair project together with $3m finance facility. Project NPV @ 5% $8.7m. Ore reserves of 140,500t @ 3.06% Ni. Seen by the market as relatively small project with limited upside but positioned to move rapidly into production and provide with solid cash flow over short mine life. EMERGING AUSTRALIAN NICKEL PRODUCERS
Assumed that the project is to be fully debt funded . Issued Capital (undiluted) 344 M Issued Capital (fully diluted) 363 M Project NPV 10% (13.5mt) $103.4 M Project NPV 10% (9.0mt) $81.9M FY ending 30 June 2005 2006 2007 2008 2009 2010 2011 Production Ore Mined Mtpa 1.5 2.00 2.00 2.00 2.00 2.00 2.00 Waste Mined Mtpa 3.00 6.00 9.60 13.60 16.40 16.40 16.40 Ore + Waste Mined Mtpa 4.50 8.00 11.60 15.60 18.40 18.40 18.40 Ore Processed Mtpa 1.5 2.00 2.00 2.00 2.00 2.00 2.00 Nickel Grade % 0.53 0.53 0.53 0.53 0.53 0.53 0.53 Copper Grade % 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Cobalt Grade % 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Nickel Recovery % 80% 80% 80% 80% 80% 80% 80% Copper Recovery % 80% 80% 80% 80% 80% 80% 80% Cobalt Recovery % 50% 50% 50% 50% 50% 50% 50% Ni Carbonate Grade % 25% 25% 25% 25% 25% 25% 25% Cu Grade % 5% 5% 5% 5% 5% 5% 5% Co Grade % 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% Contained Ni Ktpa 6.360 8.480 8.480 8.480 8.480 8.480 8.480 Contained Cu Ktpa 1.200 1.600 1.600 1.600 1.600 1.600 1.600 Contained Co Ktpa 0.075 0.027 0.027 0.027 0.027 0.027 0.027 Revenue Exchange A$/US$ 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Ni Price US$/lb 5.00 5.00 5.00 5.00 5.00 5.00 5.00 Cu Price US$/lb 0.90 0.90 0.90 0.90 0.90 0.90 0.90 NSR Ni Metal Value % 62.5% 62.5% 62.5% 62.5% 62.5% 62.5% 62.5% NSR Cu Metal Value % 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% NSR Co Metal Value % 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Revenue Ni A$m 58.4 77.9 77.9 77.9 77.9 77.9 77.9 Revenue Cu A$m 1.6 2.1 2.1 2.1 2.1 2.1 2.1 Revenue Co A$m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total A$m 60.0 80.0 80.0 80.0 80.0 80.0 80.0 A$m June 05 June 06 June 07 June 08 June 09 June 10 June 11 Revenue 60.0 80.0 80.0 80.0 80.0 80.0 80.0 Operating Costs 25.4 34.3 35.2 36.2 37.1 38.2 39.2 Net Revenue 34.6 45.7 44.8 43.8 42.9 41.0 40.8 CapEx (incl. expl.) 10.5 0.5 0.5 0.5 0.5 0.5 (2.0) Interest 1.5 1.5 1.2 1.0 0.7 0.4 0.0 Tax 6.3 12.7 12.6 12.5 12.3 12.2 12.0 Debt 0.0 3.5 3.5 3.5 3.5 10.0 0 Net Cash Flow 16.3 27.5 26.9 26.4 25.9 18.8 30.8 SHERLOCK BAY PROJECT NPV CALCULATIONS
SHN Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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