Valuation of Rex, page-14

High hope for copper stocks
THE AUSTRALIAN AUGUST 12, 2014 12:00AM
Barry Fitzgerald
Resources Editor
Sydney
COPPER has been putting in one of the more curious price performances of late. Despite supply of the metal recently going into surplus, the price has been holding up nicely around the $US3.20 a pound mark.
That is up on the June half average of $US3.12 a pound and comes as the market gets ready to absorb the planned resumption of copper concentrate supplies from Freeport’s mine in Indonesia, one of the world’s biggest producers of the stuff.

That points to the expectation that while the market is currently in surplus, it is not going to stay that way. This means copper prices need to stay well above the average cost of production to encourage the new supply needed to meet the electricification demands of the world’s most populous nations, India and China.
It is the so-called incentive pricing needed to offset the capital strike for big mineral projects of any kind, and in the case of copper, the seemingly relentless decline in average ore grades.

Throw in the standard difficulties in getting new mines up — Rio Tinto’s planned underground expansion of the Oyu Tolgoi operation in Mongolia is a an example — and it is easy to see why the reversion to an under-supplied situation come 2016-17 is the common call, keeping copper at elevated prices.

Rex Minerals (RXM)
DESPITE the relatively buoyant copper price, Rex Minerals has been beaten up something shocking in recent days.
The attack on the share price — it has fallen from more than 40c to 24c during trade yesterday — was in response to last week’s bombshell that its chief executive of close to two years, Mark Parry, was moving on.
The well-regarded Parry had been working on getting Rex’s proposed $US850m Hillside copper project on South Australia’s Yorke Peninsula to the starting stalls.
But in recognition that juniors just can’t access that sort of money in the current climate, Rex has decided to have a rethink on the best way to get in to production, prompting Parry’s call to move on.
The rethink makes a lot of sense, and it has got to be wondered if the sell-off in Rex has been overdone.
BHP Billiton won plaudits for its August 2012 decision to call time on its $US30 billion big-bang expansion plan for Olympic Dam, also in South Australia, and it is now searching for lower-cost and self-funding phased expansion options.
That Rex is now searching for a lower upfront capital cost development from a smaller start-up open cut to its own big bang development should be welcomed.
At its current knockdown market capitalisation of $55m there is little value being ascribed to Hillside, particularly as Rex is holding about $21m in cash and it has already spent some $160m on advancing Hillside to being one of the biggest copper development opportunities in the country.
And back to the copper price, it is worth noting that the current Australian dollar price for the red metal is about $3.50 a pound — the same figure used by Rex in its prefeasibility study work two years ago. So there has been no deterioration in the underlying commodity, just the ability to raise the big licks of capital Rex originally envisaged.
Rex could do worse than take a fresh look at a stage one option that would treat some 7 million tonnes a year, rather than the 15 million tonnes a year in the big bang approach.
The deposit has good grades and shallow copper, and it could look to a more selective mining method to lift the overall grade/reduce tonnages in the staged approach.
The big bang approach also included a big lick of capital for co-production of magnetite, which could be dropped off the plans in a phased development.
All in all, there are a bunch of reasons that when Rex comes back with its plan, it is going to be a lot more palatable — and digestible.