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TAWANA RESOURCES NL
Initiation of coverage following a visit to the company’s South African interests. Code TAW Price Ords A$0.67 Shares in Issue 37.8m ords* Market Cap A$25.3m* Listed ASX * Also 15.5m options at A$0.50 expiring 30 June 2003.
Market cap. fully diluted A$33.3m. See also under Financial on page 4.
Introduction W.H. Ireland already covers two attractively priced junior diamond producers, Kimberley and Firestone and in view of our opinion that the sector has rarely looked more attractively priced we are now initiating coverage of a number of junior diamond explorers/developers which we believe complement the above two producers. We commence this coverage with Tawana Resources which in our opinion we believe will shortly move from being an explorer and into the developer category.
Tawana is very undervalued.
It is within two to three years of production at its major Daniel Alluvials Project, a JV with BHP Billiton, about six kms from De Beers' large Finsch diamond mine in South Africa. Tawana has two other interesting diamond projects in South Africa (Kareevlei Wes and Perdevlei) and two in Australia (Timber Creek and Flinders Island).
A rough valuation of Tawana's interest in the in situ diamond reserves at Daniel Alluvials is of the order of US$800m, while access and infrastructure are both excellent.
A quick NPV suggests a net value of Tawana's interest in Daniel Alluvials alone of around US$140m (A$220m). This compares with a market cap of A$33.3m including the June options. The smaller Kareevlei Wes and Perdevlei projects are also progressing well. The shares merit a strong buy, and have now become considerably less speculative than many other junior explorers. 24 June 2003The Daniel Alluvials Project (DAP) (Tawana 30% rising to 40%)
W. H. Ireland Limited, 11 St James's Square, Manchester M2 6WH. Telephone: (+44) 161 832 2174/6644Member of the London Stock Exchange and Authorised and regulated by the Financial Services Authority. A wholly owned subsidiary of W.H. Ireland Group plcThis is a regulated publication under the rules of the Financial Services Authority and contains investment advice of both a general and specificnature. It is suitable for institutional and mining experts only. It has been prepared with all reasonable care and is not knowingly misleading inwhole or in part. The information herein is obtained from sources which we consider to be reliable but its accuracy and completeness cannot beguaranteed. The opinions and conclusions given herein are those of WH Ireland Ltd. and are subject to change without notice. Clients are advisedthat WH Ireland Ltd. and/or its directors and employees may have already acted upon the recommendations contained herein or made use of allinformation on which they are based. WH Ireland is or may be providing, or has or may have provided within the previous 12 months, significantadvice or investment services in relation to some of the investments concerned or related investments. Recommendations may or may not besuitable for individual clients and some securities carry a greater risk than others. Clients are advised to contact their investment advisor as to thesuitability of each recommendation for their own circumstances before taking any action. No responsibility is taken for any losses, including, withoutlimitation, any consequential loss, which may be incurred by clients acting upon such recommendations. The value of securities and the incomefrom them may fluctuate. It should be remembered that past performance is not necessarily a guide to future performance. For our mutualprotection, telephone calls may be recorded and such recordings may be used in the event of a dispute. James Picton Tel: (44-20) 7229 5266 or (44-20) 7397 3146 [email protected] John Molyneux Tel: (44-20) 7397 3065 [email protected] Laurie Beevers Tel: (44-161) 819 8724 [email protected] -------------------------------------------------------------------------------- Page 2 - 2 - Tawana has a 30% interest in the DAP (BHP Billiton 70%) which we believe it will increase to 40% byundertaking a 500 tonne bulk sampling programme in July. Tawana operates the project. Tawana has discovered a buried gravel channel at the DAP, about 6 kms from De Beers' Finsch diamondmine-approximately 130 kms north-west of Kimberley in South Africa. The channel was located by BHPB'sFalcon gravity method and suggests a possible length of up to 9 kms and a width of up to 2 kms-a hugearea. This has subsequently been proved by the drilling of 33 holes. Falcon saved Tawana about threeyears work and money. Certain general points can be made. · The DAP's close proximity to Finsch indicates a high probability of diamonds: the Finsch area isapproximately 135m years old and erosion is believed to have removed as much as 1,400 metres fromthe surface-precipitating some 2bn tonnes or US$48bn of diamonds in total into the surrounding area.Those that have fed into the Daniel channel are likely to be trapped in the old gravels in a river system.· There is a large gravel resource based both on the Falcon gravity anomaly and the subsequent drilling.· The setting in a potholed, irregular dolomite environment is similar to other diamond fields in SouthAfrica. · The terrain is wide and flat, and access is easy. In March drilling started at two of the six areas within the Daniel Project area, and this is expected tocontinue through the year. Bulk sampling will commence once the appropriate permits are obtained. Rough valuation of the DAP A useful guide is the way in which the Bow River alluvials field tapped into the Argyle mine in Australia.Argyle's grade was around 400 cpht with an initial average carat value of US$10. Bow River, 26 kmsdownstream from Argyle, produced 30 cpht at an average carat value of US$30 over seven years (yielding7m carats in total). So Bow River's grade was well below Argyle's but the average carat value was three times higher. Giventhat the DAP is considerably closer to the Finsch mine (6 kms) than Bow River was to Argyle (26 kms), it isreasonable to assume a somewhat higher grade relationship between the DAP and Finsch (50 cpht). Wehave assumed 5 cpht for the DAP and used an average carat value of US$150-somewhat below Finsch'srecent figure. From this and a reserve of 280m tonnes, a grade of 5cpht gives 14m carats at US$150 per carat or US$2bnof diamonds in situ (of which US$800m would be attributable to Tawana). That is a huge reserve of alluvialsand would give a 20 year life. Yield per tonne should be US$7 and working costs around US$2.50 pertonne. That gives a gross margin of profit for the DAP as a whole of over US$1bn-of which Tawana's likely40% share would be worth US$400m on a gross basis. A rough NPV on that gives a value of someUS$140m for Tawana's net share. Interestingly, studies have shown that producing diamond mines withlives of around 20 years or more tend to be rated in the market at 8% of in situ reserves. Taking Tawana'slikely attributable share of reserves (US$800m) on an 8% market rating basis gives an order of magnitudevalue of over US$60m (A$90m)-lower than our rough NPV (US$140m or A$220m) but still three timescurrent market value. -------------------------------------------------------------------------------- Page 3 - 3 - Whatever the case, it seems very clear that Tawana is very undervalued on the basis of the Daniel AlluvialsProject alone. To be sure, there is still some way to go but the terrain is flat and hospitable, theinfrastructure good and the project could be in production within two to three years. So a current market value of Tawana of around A$31m does seem totally at odds with our NPV valuation of thecompany's interest in the DAP of some A$220m. The DAP is in itself a "company maker". Kareevlei Wes (Tawana 100%) Kareevlei Wes is in the same area as the Daniel Alluvials Project-more exactly about 100 kms north-west of the town of Kimberley. The project consists of a total of five kimberlites. At least 250,000 carats can beinferred from the size of the KV2 kimberlite alone, and previous operations. Tawana's own drilling of theKV2 (twenty five holes) and KV3 kimberlites has been completed. The KV2 kimberlite has already yieldedseven diamonds weighing a total of 1.72 carats. These are early and encouraging results. KV2 has beenconfirmed as a 1 hectare kimberlite and three hundred tonnes have been recovered for diamond sampling.The objective here is to establish the indicated grade and diamond value, and to consider the possibility ofmining KV2 in conjunction with the K1 kimberlite at Perdevlei 25 kms to the south (see below). There arefive kimberlites in total at Kareevlei Wes. Perdevlei (Tawana 100%) Perdevlei is very close to Kareevlei Wes. The Perdevlei K1 kimberlite pipe is being finalised as to grade andcarat values, but two years ago Tawana drilled 36 holes to 150 metres indicating 300,000 carats grading18.7 cpht and with average carat values close to US$100. A cut off grade of 10 cpht would be about break-even. Based on the earlier work inferred reserves would be worth about US$30m. Tawana's further work (underground bulk sampling) has yielded an indicated grade of 15-20 cpht at K1 (similar to the earlier work and well above cut off grade). K1 (1.7 hectares) is the larger of the twokimberlites at Perdevlei and the smaller K2 awaits evaluation. As indicated above, a mining study atPerdevlei will likely take into account the results of the bulk sampling of the Kareevlei Wes KV2 kimberlite. Timber Creek (Tawana's interest variable) Timber Creek could well turn into a "baby" Argyle. Many diamonds have been discovered (12,000 thus far)and the grade could be about 100 cpht, though management is in no way confirming this yet (Argyle's wasaround 400 cpht). The prospect is in the Northern Territory, Australia. Recovery difficulties have been overcome and work is progressing to establish an indicated grade and toproduce a sufficiently large parcel of diamonds (2,000 carats) to assign reliable average carat values. So far660 carats have been found at an average size of 5.5 points (100 points equals 1 carat). De Beers retains the right to buy back an interest in the project through a 70% right for the payment of three times Tawana's exploration cost. Also, Tawana has an agreement with BHP Minerals over an "area of influence" (AOI) covering almost18,000 sq kms around the Timber Creek project. Tawana will receive a royalty from the production of any mineral deposit discovered by BHP Minerals within the AOI-and it also has the right of first refusal over any deposit which BHP Minerals does not elect to develop. -------------------------------------------------------------------------------- Page 4 Flinders Island (Tawana 80% with option to acquire 100%)At Flinders Island in South Australia (not visited) a drilling programme costing about A$200,000 began inMay to test recently identified kimberlite targets. Geochemical testing, together with previous explorationresults, have shown discrete kimberlite targets. De Beers maintains a watching brief over the project and, in the event that Tawana discovers a commercialdeposit. In the event of this occurring we are of the opinion that De Beers will want to be involved in itsdevelopment. Financial Tawana is cum a free option entitlement. All shareholders registered on 22 July 2003 will receive one freeoption for every two ords. This option is exercisable at A$0.75 payable before 30 November 2005. They will be listed on the ASX alongside existing ords. So the capital structure from the end of July, assuming fullconversion of the options, will be: 50m ords 25m A$0.75 options expiry 30/11/2005. The company has about A$7.5m in cash and no debt.
Conclusion · The Daniel Alluvials Project (DAP) in South Africa is alone worth, on our rough NPV and other calculations, some A$220m, or A$5.80 per Tawana share pre the end June share options, and A$4.30 per share assuming the full exercise of the options at A$0.50. This compares with therecent market price for Tawana of A$0.61. The project could be developed within two to threeyears. · Kareevlei Wes and Perdevlei, close by to the DAP, are smaller projects but will also likely bedeveloped. Their combined value is more speculative but the two probably have inferredreserves of at least US$50m (A$75m), worth a further A$6m (A$0.25 per share post the end Juneoptions) using rough market valuation techniques.· Timber Creek in the Northern Territory of Australia also looks like a promising small venture,while Flinders Island in South Australia could prove to be a promising long term wild card. · Thus the three South African projects are estimated to be worth some A$4.55 per share post thefull exercise of the end June options, while the two Australian prospects add speculative attraction. ·
