SRZ and Tin base case

I thought it might be worthwhile to collate a summary of the current tin market and the potential of Stella Resources (SRZ)

Tin:The wallflower metal

(Note this analysis was undertaken on theweekend 20-21 November - all prices as at 19 November)

As the tin price approachesUS$40,000/tonne and given recent movements in the tin market, a brief review oftin price drivers is appropriate.

TinPrice US$/tonne

The tin price is up almost 200% sincethe depths of Covid in March 2020 where the price plunged to US$13,375/tonneand is approaching a 100% gain for 2021. It has been reported that the tininventory at the London Metal Exchange warehouses is down to a supply of justone day. The price rise is due to a number of factors including:

Supply:

· - Following a decade of lower prices,the prevailing price environment has disincentivised new production and tindevelopers have struggled to gain access to finance. We know however thatgenerally in markets the maxim that “Low prices are the best cure for lowprices” eventually applies.

· - Lockdown restrictions that have beenimplemented in Indonesia and Malaysia (which combined count for 30% of globaloutput) have restricted supply.

· - Myanmar is the third largest producerof tin globally and it’s supplies primarily are sent to China. Myanmar’s outputhas been significantly affected due to the military coup.

· - Many western customers areincreasingly becoming concerned about ESG and the ethical sourcing of their tinsupply chains. Traditionally, 50% of tin globally is sourced from alluvial tinmining which can include practices such as dredging in Indonesia and semi-illegalmining in Malaysia.

· - China is a major source of tin andthe supply chain concerns relating to other China controlled materials are alsorelevant to the tin market.

Demand:

· - Traditionally, tin has not beenperceived as a ‘glamour’ metal. The historic predominant uses of tin have beenfor the plating of steel cans for use as food containers and for making bronze.Those days are long gone.

· - Whilst tin is still used for historicuses, the primary industrial use of tin is now it’s use as solder inelectronics and semi-conductors. It is literally the glue that is holding thetechnological revolution together and will continue to do so as the worldenters into the age of 5G and the ‘Internet of Things’.

· - Tin has also been described as “theforgotten foot soldier of the energy transition” with other modernindustrial uses of tin including use in solar panels, as a performanceenhancing component in battery anode materials, as a catalyst in hydrogen fuelcells and an alloy with niobium for superconducting magnets.

· - Tin now has critical metal status inthe US, China and Australia. The EU is expected to follow.

· - Some in the market have recognisedthe importance of tin for some time. As shown below, in 2018, Rio Tinto hadidentified tin’s importance to new technology and the new economy. The currentprice movements might result in the wider market taking more notice.

Source: Rio Tinto and thepresentations of various tin explorers/developers

Equilibrium:

· - The above dynamics suggest the slowpace at which global tin supply has recovered from the covid-19 pandemic hasbeen outstripped by the rapid recovery in demand.

· - Some commentators suggest that thetin price might eventually pull back as producers in SE Asia come back online.Earlier this year however, the International Tin Association suggested that tinproduction in 2020 dropped only 8 per cent, which might suggest the increase indemand effect is of a greater magnitude than the loss of supply effect.

· - Fitch is on the record as suggestingthat “market tightness should begin to ease by the end of 2021, and this shouldstart to drag prices lower” whereas the International Tin Association believesthe refined tin market is to enter a significant deficit after 2023.

· - Fitch can be classed as less bullishfor the tin price in the short to medium term, however Fitch still indicatethat rapidly growing demand will lead to a tin market in deficit by 2026. Itshould be noted that Fitch has also been required to progressively update theirforecasts for the tin price over 2021 as the upward climb in price has beenunrelenting.

The conclusion to be drawn from theabove is that whilst short term price movements are somewhat uncertain and someforecasters expect a pull-back, ongoing demand is likely to be significant witha price signal sufficiently high required to stimulate new tin supply to meetthe burgeoning level of increasing demand.

ASXTin Stocks comparison:

The below comparison has beencompiled for ASX listed tin stocks in a similar fashion that was undertaken forthe Uranium sector which I have previously completed. The number of tin stockslisted on the listed ASX is fewer in number so the options for investment aremore limited. The experience with the uranium sector has been that a bandwagoneffect occurred whereby as the Uranium price spiked, the number of ASX listedcompanies which suddenly announced uranium projects exploded. Many of thesecompanies are not even remotely close to defining a resource which makescomparison difficult. There are only a few of these types of companies whichhave emerged so far in the tin sector.

Source: Compiled by the author

As per the previous comparison of ASXUranium Tin stocks listed on the ASX, it is important to read the comparisonholistically, mindful of the full information presented and the notes listed atthe bottom of the table. Note specifically that MLX is a producer and as aresult the market will value it’s resources more highly as reflected in thecomparison metrics.

The primary and over-ridingpoint that should be made is the following:

When the spreadsheet for the Uraniumsector was undertaken earlier this year, the average U spot price was roughlyhalf the assumed price for the feasibility studies. Now that the spreadsheetfor the tin sector has been completed, it is clear that the situation in thetin sector is the reverse. That is to say, the tin feasibility studies havebeen completed at assumed prices which are roughly half the current tin spotprice.

If the current tin spot price wereutilised in any of the feasibility studies listed in the comparison table, theadditional price per tonne is likely to go directly to the bottom line via anadditional margin effect. It is not clear that the market has appreciated theshift in the underlying price fundamental.

The tin sector seems to have notcaptured the market’s attention in the way that Uranium has, or indeed in theway other metals which will be integral to the new clean/high-tech economyhave. It may be that the market currently thinks that tin is simply not “sexy”.However, a stabilisation of higher prices as a result of continued high demandmeans that tin is likely to be eventually noticed. This situation should beperceived as an opportunity.

StellaResources (SRZ):

In this environment, it is thoughtall tin projects have significant up-side potential, but following completionof the ASX tin comparable table the identified potential Disallowed is StellarResources (SRZ) for the following reasons:

1)Valuation

The current low EV of $14.88m at$0.024/share when compared to the already sizeable resource seems a clearmis-valuation by the market. Whilst the feasibility study is only at thescoping study stage, the assumptions are conservative with an assumed tin priceof US$20,000/tonne and a discount rate of 10% utilised, rather than thestandard 8%. The in-ground resource is already above $2.8b at current prices.Whilst tin mining has been described as difficult, and not all the $2.8bresource will convert to reserve status, the discrepancy between current EV andresource potential value is very significant.

2)Exploration upside

There is resource upside potentialfor the Heemskirk project with assays from the 2021 exploration programcurrently being received. Whilst the initial hole returned in early Novemberwas poorly perceived by the market, the remaining holes in the program appearto be very promising. Positive results will act as catalysts for SPappreciation. Considering the existing resource, the recent over-reaction tothe assays of one drill hole must be perceived as a buying opportunity. Thedrilling program and the reaction to the initial results are discussed in a recent Proactive Interview which you can find online.

3)Grade

The tin grade of the Stella ResourcesHeemskirk project is the highest in Australia and is touted as the secondhighest globally. The Severn prospect might be considered to be deeper thanideal however at high grade underground operations are economic. The Queen Hillprospect is significantly closer to the surface as shown in the cross sectionbelow.

1.

Source: Heemskirk Tin Scoping Studydated 01/10/19

The advantages of high-grade depositsare obvious, however tin extraction is complicated by some features unique tothe material. 1. Firstly, according to experts, tinfound in cassiterite (a hard crystalline material comprised of tin and oxygen),is the only economic form of tin in the natural world. Fortunately, at theHeemskirk project, the tin is indeed contained in cassiterite. 2. Secondly, tin is prone to ‘sliming’during the production process and as a result the coarseness of tin grain isimportant. Low tin grain is a risk to all tin projects. It is reported that tinbelow 20 microns in grain cannot really be extracted. Otherwise tin recoveriesare only going to be in the 10-30% range. Whilst the tin at the Heemskirkproject has been described as ‘fine’, this has been accounted for in thescoping study via the lowest projected recovery rate of all tin projectfeasibility studies. It should be noted that the Heemskirk project scopingstudy still does predict recovery at 69.4% which is not too distant from thehighest projected recovery at Metal X’s Renison project at 76% recovery.Additionally, the tin deposits in NW Tasmania which include MLX, VMS, ELT andANW projects (they are all located close to each other) are all often referredto as ‘fine’ grain. As a result, at this stage it appears that the tin recoverydisadvantage of the Heemskirk tin material is likely to be minimal but it isworth consideration.

4)Production

Once any final investment is made,the construction period is estimated at only a relatively short 6 months withconcentrate sales commencing 3 months thereafter. The original scoping studywas completed prior to Covid in 2019, however at that point there was a clearpath to production laid out with what appears to be minimal exorbitantmanagement wastage on excessive salaries or the like. Some investors onhotcopper are not happy with the delays and timeframes have obviously beenpushed out, however SRZ now appears to be back on track. The original timeframes and pre-development costing are shown below:

Source: Heemskirk Tin Scoping Studydated 01/10/19

According to the International TinAssociation, it also appears that there is a fast start mining option whichwould selectively mine higher grades of tin across the four main deposits atHeemskirk and reduce the investment required to initiate mining.

5)Gold

In addition to the primary tin focus,SRZ has assembled a very sizable exploration license portfolio in North-easternTasmania which covers many numerous gold and tin occurrences as shown below.With $5m cash on hand, exploration activities such as defining targets arefully funded for the foreseeable future.

Source: Stellar minerals InvestorPresentation dated 01/10/19

6)Management

Stellar Resources is an explorer andas such, it is good to see that the board is primarily made up of geologistsand geophysicists with strong experience - including Thomas Whiting who hasover 40 years experience in minerals exploration including the role of formerVice President of Exploration at BHP Billiton.

Interviews with management gives theimpression that they are not shady at all, rather you could describe theTechnical Director Gary Fietz as a very enthusiatic boffin. Funds are not beingwasted on excessive salaries and it also somewhat reassuring that NED sharerights have been issued in lieu of fees (albeit at a low level).Management are not resting on theirlaurels. The resource at Heemskirt is already sizable and yet management arenot drilling 'directors holes' in the middle of the resource, but activelytrying to create shareholder value by drilling in locations which aims toexpand the resource. These are the actions which are eventually rewarded.

Management are also not 'projecthuggers'. They are not focused on one single project but are rather looking for(and investing in) the next opportunity via their NE Tasmania gold assets whichwill follow the current focus on tin at Heemskirt. With the management of somejunior explorers, 'project hugging' is all about retaining funds for jobpreservation rather than working harder for their investors via theidentification of new project. The 'project hugging' practice is clearly notthe case with Stellar Resources management.

Top 29 Shareholders currently hold44.25% of SOI as per below:

7)Technicals

Source: Tradingview


Source: aiStock

Despite the recent retracement to$0.024/share, the SP is still in up-trend and sits at recent support. TheaiStock diagram indicates that there has been very little stock traded below0.024/share over the last three months. Rather, the majority of trading volumehas occurred in the $0.024 to $0.035 range.

Conclusion

Given all the above, It is the opinion of the author that there is inherent deep value Stellar Resources and that combined with the expected continued resilience of thetin price, the potential of Stellar Resources will soon be recognised by the market.

All IMO, as always DYOR and please don't take this as financial advice.