research note

Sirius Resources (SIR)

Analyst: Geoff Breen, RBC Capital Markets

Recommendation: Outperform (initiation)

Price target: $A3

Thursday’s close: $2.36

Reason: A quality mine in the making at Nova, plus strong exploration potential

Comment: We initiate on emerging nickel producer Sirius, which discovered the Nova nickel-copper deposit, with outperform, speculative risk rating. Four months ago, Sirius discovered the high-grade Nova nickel-copper deposit in Western Australia. In our view, Nova is one of the best discoveries in Australia for a very long time and we believe it has the potential to become a quality mine as early as 2016. We estimate a maiden resource of at least 12 million tonnes at 2.5% nickel and 1% copper by April 2013 and before December 2013, a reserve of 10Mt containing around 250,000t nickel and around 100,000t copper, with $350 million capex that assumes equity of $150 million in the first half of 2014 and $170 million of debt. Production is estimated to be about 23,000 tonnes per annum of nickel and 10,000tpa copper at around $US2.50 per pound of nickel for 10 years. The project internal rate of return is estimated at 48%, a 2.5-year payback. We see many similarities with the discovery and development of Sandfire Resources' DeGrussa copper mine and believe it is a good guide to Sirius' path to production. We see further upside. Positive attributes include: high nickel grades, large tonnage, promise of simple metallurgy, competent ground conditions, and absence of native title or obvious community issues. News flow will be a strong share price driver. Typically, Canadian massive sulphide nickel ore bodies with a similar geological setting tend to occur in clusters. We believe there is potential for multiple discoveries near Nova, especially along the 3km IP corridor and at Conductor 5, and as such, a new mining district could unfold given there are a number of untested geophysical anomalies yet to be drilled. For Nova, we estimate a "Base-Case" value of $A562 million or $2.15/share and a "risk-weighted" upside scenario of $711 million or $2.72, assigning weighting scenarios from 10Mt through to 15Mt of reserves. We assign a 40% probability of Sirius repeating the exploration success at Nova. Our bull-bear scenarios see potential upside to $4.00 and downside to $2.00/share. Control lies with the major shareholder Mark Creasy (23% equity), also a 30 % JV partner in the Nova project.