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Ironbark Zinc Ltd
Zin
c: D
evelo
per
IBG.asxSpeculative Buy
Share Price
Price Target (12 month) $0.189
Brief Business Description:
Hartleys Brief Investment Conclusion
Chairman & MD
Major Shareholders
Nyrstar Int 26.5%
L1 Capital 15.9%
Glencore Xstrata 11.4%
Company Address
Issued Capital 368.4m
- fully diluted (no conv. Notes)
Market Cap
- fully diluted
Cash (31 Mar 13a)# A$3.0m
Cash (31 Mar 13a) notes drawn A$53.0m
Debt (31 Mar 13a)# A$0.0m
EV
EV* assume notes drawn & convert -A$31.2m
EV/Resource Zn
EV/Reserve Zn
Prelim. (A$m) FY15e FY16e FY17e
Prod (kt Zn eq) 0.0 0.0 186.9
Op Cash Flw -10.4 -19.5 85.3
Norm NPAT -10.5 -44.1 105.5
CF/Share (cps) -0.5 -1.1 2.6
EPS (cps) -0.5 -1.1 2.6
P/E -9.4 -4.0 1.7
Zn Pb
Resources (Billion lb) 11.9 1.2
Reserves (Billion lb) 0.0 0.0
# we assume convertible notes are never drawn
Trent Barnett
Head of Research
Ph: +61 8 9268 3052
Hartleys has provided corporate advice within the past
12 months and continues to provide corporate advice
to Ironbark Zinc Limited, for which it has earned fees
and continues to earn fees. Analyst has a beneficial
interest in IBG. See back page for details.
384.4m
A$16.2m
A$16.9m
A$13.2m
A$0.0011/lb
-
31 May 2013
$0.044
Very large zinc development project in Greenland
Jonathan Downes (Managing Director)
Level 1, 350 Hay St
Subiaco, WA, 6008
Deposit is large and implies long mine life. Marginally
economic on consensus estimated zinc prices, very
economic at industry (the upper end of sell-side
consensus) forecasted prices.
Peter Bennetto (Non Executive Chairman)
IRONBARK ZINC LTD
The next zinc rocket Ironbark Zinc Limited (“Ironbark”, “IBG”, “Company”) is a zinc focussed
developer. The main asset is the Citronen project in Greenland, with a total
resource (M+I+Inf) of 132Mt @ 4.0% Zn and 0.4% Pb and a high grade
resource (M&I) of 52Mt @ 5.3% Zn and 0.5% Pb. It is located on the edge
of a fjord in northern Greenland and can be accessed by sea for three
months a year when the ice melts. The Company has recently released an
updated feasibility study. The capex has fallen slightly from US$502m to
US$484m but total costs are expected to be reasonably high. We assume
costs of US$0.84/lb Zn net of credits (CFR, including royalties and our
assumed smelter fees) – see Fig 5 on page 9.
The mine plan is for underground ore to be mined first (11 years), and then
progress to the lower grade open pits in years 11-14. The operation is
expected to have a mining rate of 3.3mtpa (2.2mtpa processing). Operating
costs are low at ~US$52/t ore, although the remote and isolated location
means that shipping and logistics costs are meaningful, adding an extra
~$10/t ore. There are additional smelter fees of ~12-25c/lb, with the fee
linked to the prevailing zinc price (adds 14c/lb or $13/t ore in our model).
Needs upper end zinc price assumptions to be viable We assume a ~14 year mine life and a 3.3mtpa mine operation (2.2mtpa
processing) beginning in late CY16 and payable zinc equivalent of >200k
tonnes pa for the first two years before declining to ~160ktpa with a
separate lead concentrate. We assume total cash costs of ~$80/t mined ore
(~$0.84/lb zinc eq in early years). We assume ~$500m of capex spent over
two years, funded ~70% debt. At current zinc prices (85c/lb), the project is
not financially viable (NPV12), in our view. Using our assumed zinc price
profile (which is similar to consensus and above spot prices) our NPV12 is
marginally positive. The Company pre-tax estimated NPV8 of US$609m is
based on life of mine zinc prices of ~US$1.37/lb (in-line with industry
estimates, but at the upper end of sell-side estimates). At US$1.37/lb, we
conservatively (we assume substantial dilution) value IBG at 28cps.
Excellent exposure to long term zinc….
Zinc prices have historically been very volatile and are currently trading
below the mid-point of the ten year range (~US$0.30/lb to US$2.10/lb).
Over the next few years several large mines will be depleted and should
lead to a shortfall and lead to price increases. As the Citronen feasibility
study results suggests, the incentive price for new mines is high.
Consequently, we believe zinc prices will increase, and potentially be
stronger than consensus and perhaps even higher than the assumptions
used in the Company’s valuation. For example, at US$1.60/lb, our IBG
valuation is conservatively 40cps. If we value IBG as a series of out-of-the-
money AUD zinc calls (50% volatility), we derive a 19cps valuation.
Retain Speculative Buy recommendation. Using our base case zinc prices we derive a marginally positive NPV12.
Consequently, we view IBG as a high risk investment and speculation on
rising zinc prices or a takeover. There is substantial upside if one uses
credible, but higher than sell-side consensus, zinc price assumptions. We
have a 19cps twelve month price target, based on better zinc prices.
Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000
Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
May-13Feb-13Oct-12Jun-12
Volume - RHS
IBG Shareprice - LHS
Sector (S&P/ASX SMALL RESOURCES) - LHS
A$ M
Ironbark Zinc Ltd
Source: IRESS
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
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Ironbark Zinc Ltd Share Price
IBG $0.044 Speculative Buy
Key Market Information Directors Company Information
Share Price $0.044 Peter Bennetto (Non Executive Chairman) Level 1, 350 Hay St
Market Capitalisation - ordinary but assumes notes are converted A$0m Jonathan Downes (Managing Director) Subiaco, WA, 6008
Net Debt (cash), ex undrawn US$50m notes -$3m Adrian Byass (Executive Technical Director) Ph +61 8 6461 6350
Market Capitalisation - fully diluted A$17m Gregory Campbell (Executive Engineering Director) Fax +61 8 6210 1872
EV A$8m David Kelly (Non Executive Director)
Issued Capital 368.4m John McConnell (Non Executive Director) www.ironbarkgold.com.au
Chris James (Non Executive Director)
Options 16.1 Gary Comb (Non Executive Director)
Issued Capital (diluted for options but not convert. notes) 384.4m Top Shareholders Dil. For notes
Issued Capital (diluted inc. options and new capital) 3994.0m m sh. % m sh. %
1 Nyrstar Int 97.7 26.5% 97.7 #DIV/0!
12month price target $0.19 2 L1 Capital 58.5 15.9% 58.5 #DIV/0!
3 Glencore Xstrata 42.0 11.4% 42.0 #DIV/0!
P&L Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 4 Reserves & Resources Mt Zn % Pb %
Net Revenue A$m 0.0 0.0 0.0 0.0 460.0 5 Citronen - High Grade M+I 52 5.3% 0.5%
Total Costs A$m -1.9 -2.0 -2.1 -2.2 -283.5 6 Citronen - High Grade Inf 19 4.7% 0.4%
EBITDA A$m -1.9 -2.0 -2.1 -2.2 176.5 7 Citronen - High Grade Total 71 5.1% 0.5%
- margin - - - - 38% 8 Citronen - High Grade Reserve -
Depreciation/Amort A$m 0.0 0.0 0.0 -24.6 -35.9 9 Citronen - Global M+I 94 4.2% 0.4%
EBIT A$m -2.0 -2.0 -2.2 -26.8 140.6 Citronen - Global Inf 38 3.8% 0.4%
Net Interest A$m 0.0 0.0 -8.3 -17.3 -17.9 10 Citronen - Global Total 132 4.1% 0.4%
Pre-Tax Profit A$m -1.9 -2.0 -10.5 -44.1 122.7 Citronen - Global Reserve -
Tax Expense A$m 0.0 0.0 0.0 0.0 -17.3 Production Summary Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17
Normalised NPAT A$m -1.9 -2.0 -10.5 -44.1 105.5 Unbeneficiated Mill Throughput Mt 0.00 0.00 0.00 0.00 3.28
Abnormal Items A$m 0.0 0.0 0.0 0.0 0.0 Processed Mill Throughput Mt 0.00 0.00 0.00 0.00 2.20
Reported Profit A$m -1.9 -2.0 -10.5 -44.1 105.5 Mined grade Zn % 0.0% 0.0% 0.0% 7.1%
Minority A$m 0.0 0.0 0.0 0.0 0.0 Produced Zn kt 0.0 0.0 0.0 0.0 209.3
Profit Attrib A$m -1.9 -2.0 -10.5 -44.1 105.5 Payable Zn kt 0.0 0.0 0.0 0.0 177.9
Payable Zn Equiv kt 0.0 0.0 0.0 0.0 186.9
Balance Sheet Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 M&I High Grade Resource Conversion % 89.3% 89.3% 89.3% 89.3% 90.2%
Cash A$m 1.7 4.2 300.5 12.6 30.6 Mine Life yr 13.25 13.25 13.25 13.25 13.25
Other Current Assets A$m 0.2 0.2 0.2 0.2 56.9 Assumed Reserve Mt 46.0 46.0 46.0 46.0 43.5
Total Current Assets A$m 1.8 4.4 300.7 12.8 87.4 Assumed Reserve - Zn grade % 5.2% 5.2% 5.2% 5.2% 5.1%
Property, Plant & Equip. A$m -1.0 -1.0 154.2 397.6 428.8 Assumed Reserve - Pb grade % 0.5% 0.5% 0.5% 0.5% 0.5%
Exploration A$m 90.8 91.2 91.6 92.0 92.4 Capex - - 155.2- 268.0- 67.0-
Investments/other A$m 1.2 1.2 1.2 1.2 1.2 Costs Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17
Tot Non-Curr. Assets A$m 91.0 91.4 247.0 490.8 522.4 Cost per milled tonne $A/t - - - - 78.3
Total Assets A$m 92.9 95.8 547.7 503.6 609.8 EBITDA / tonne milled ore $A/t nm nm nm nm 53.7
Total cost per milled tonne 86.3
Short Term Borrowings A$m - - - - - Total Cash Costs $A/lb Zn eq 0.69
Other A$m 0.1 0.1 0.1 0.1 0.8 C1: Operating Cash Cost = (a) $A/lb Zn eq nm nm nm nm 0.62
Total Curr. Liabilities A$m 0.1 0.1 0.1 0.1 0.8 (a) + Royalty = (b) $A/lb Zn eq nm nm nm nm 0.68
Long Term Borrowings A$m - - 300.0 300.0 300.0 C2: (a) + depreciation & amortisation = (c) $A/lb Zn eq - - - - 0.71
Other A$m - - - - - (a) + actual cash for development = (d) $A/lb Zn eq - - - - 0.79
Total Non-Curr. Liabil. A$m - - 300.0 300.0 300.0 C3: (c) + Royalty $A/lb Zn eq - - - - 0.77
Total Liabilities A$m 0.1 0.1 300.1 300.1 300.8 (d) + Royalty $A/lb Zn eq - - - - 0.85
Net Assets A$m 92.8 95.8 247.6 203.5 309.0
Net Debt A$m -1.7 -4.2 -0.5 287.4 269.4 Price Assumptions Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17
AUDUSD A$/US$ 1.03 1.04 1.02 1.02 1.01
Cashflow Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 Zinc US$/lb 0.91 0.98 1.03 1.10 1.12
Operating Cashflow A$m -2.0 -2.0 -2.1 -2.2 120.5 Lead US$/lb 1.02 1.08 1.10 1.13 1.11
Income Tax Paid A$m 0.0 0.0 0.0 0.0 -17.3 Hedging Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17
Interest & Other A$m 0.0 0.0 -8.3 -17.3 -17.9 none
Operating Activities A$m -2.0 -2.0 -10.4 -19.5 85.3 Sensitivity Analysis
Valuation FY17 NPAT
Property, Plant & Equip. A$m 0.0 0.0 -155.2 -268.0 -67.0 Base Case 0.05 105.5
Exploration and Devel. A$m -1.5 -0.4 -0.4 -0.4 -0.4 Spot Prices 0.01 (-77.6%) 47.9 (-54.6%)
Other A$m 1.0 0.0 0.0 0.0 0.0 Spot USD/AUD 0.97, Zinc $0.85/lb,Lead $0.99/lb.
Investment Activities A$m -0.5 -0.4 -155.6 -268.4 -67.4 AUDUSD +/--10% 0.04 / 0.05 (-5.8% / 5.3%) 96.5 / 116.4 (-8.5% / 10.4%)
Zinc +/--10% 0.12 / 0.01 (150.4% / -85.5%) 127.8 / 83.1 (21.2% / -21.2%)
Borrowings A$m 0.0 0.0 300.0 0.0 0.0 Lead +/--10% 0.05 / 0.04 (16.0% / -21.4%) 106.7 / 104.3 (1.1% / -1.1%)
Equity or "tbc capital" A$m 0.0 5.0 162.4 0.0 0.0 Production +/--10% 0.12 / 0.01 (161.3% / -84.5%) 129.9 / 81.0 (23.2% / -23.2%)
Dividends Paid A$m 0.0 0.0 0.0 0.0 0.0 Operating Costs +/--10% 0.01 / 0.11 (-88.7% / 141.6%) 89.4 / 121.5 (-15.3% / 15.3%)
Financing Activities A$m 0.0 5.0 462.4 0.0 0.0 Unpaid Capital (excluding convertible notes which are assumed to be never used)
Year Expires No. (m) $m Avg price % ord
Net Cashflow A$m -2.5 2.6 296.3 -287.9 18.0 30-Jun-13 0.0 0.0 0.00 0%
30-Jun-14 9.6 4.2 0.44 3%
Shares Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 30-Jun-15 0.5 0.2 0.45 0%
Ordinary Shares - End m 368.4 502.9 3988.0 3988.0 3989.0 30-Jun-16 0.0 0.0 0.00 0%
Ordinary Shares - W'ted m 368.4 435.7 2245.5 3988.0 3988.5 30-Jun-17 1.0 0.1 0.10 0%
Diluted Shares - W'ted m 384.4 446.9 2251.7 3994.0 3994.0 30-Jun-18 5.0 1.5 0.30 1%
TOTAL 16.1 6.1 0.38 4%
Ratio Analysis Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 Valuation $m $/shr
Cashflow Per Share A$ cps -0.5 -0.5 -0.5 -0.5 2.1 100% Citronen (pre-tax NAV at disc. rate of 12%) 192 0.05
Cashflow Multiple x -8.1 -9.5 -9.5 -9.0 2.1 Other Assets/Exploration 30 0.01
Earnings Per Share A$ cps -0.5 -0.5 -0.5 -1.1 2.6 Forwards 0 0.00
Price to Earnings Ratio x -8.4 -9.4 -9.4 -4.0 1.7 Corporate Overheads -13 0.00
Dividends Per Share AUD - - - - - Net Cash (Debt) 3 0.00
Dividend Yield % 0.0% 0.0% 0.0% 0.0% 0.0% Convertible notes (assumed converted to equity) 0 0.00
Net Debt / Net Debt + Equity% -2% -5% 0% 59% 47% Tax (NPV future liability) -30 -0.01
Interest Cover X 146.0 151.0 na na 7.9 Options & Other Equity 5 0.00
Return on Equity % na na na na 34% Total 187 0.05
Analyst: Trent Barnett
+61 8 9268 3052
"tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained.
Sources: IRESS, Company Information, Hartleys Research
31 May 2013
Ordinary
Last Updated: 09/05/2013
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
Page 3 of 12
BUSINESS OVERVIEW IBG is a zinc focussed developer/explorer. The main asset is the world class
Citronen project in Greenland.
CITRONEN ZINC, GREENLAND The Citronen Project (Citronen) is located adjacent to the Citronen Fjord in the
National Park of North and East Greenland. It is approximately 2,000 km north-
northeast from Greenland’s capital, Nuuk and 940 km from Qaanaaq – the nearest
Greenlandic settlement.
Fig. 1: Project location
Source: IBG
IBG is a zinc focussed
developer/explorer.
The main project is
the world c lass
Citronen project in
Greenland.
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Hartleys Limited Ironbark Zinc Ltd 31 May 2013
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Fig. 2: Project location
Source: http://www.geus.dk/publications/review-greenland-96/gsb176p44-49.pdf
Platinova A/S discovered the large zinc and lead mineralisation at Citronen Fjord in
1993. Platinova worked on the project for five years with intensive drilling (32,839m
between 1993 and 1997) and environmental studies were also conducted. The
project was mothballed in the late 1990’s due to depressed base metal prices at the
time.
IBG purchased the Citronen zinc project in March 2007 when the project had a
resource of 17mt @ 7.8% Zinc and 0.9% lead. The purchase price was $6M cash
and 8M shares in Ironbark, plus 16M options in Ironbark with an exercise price of
$0.30 and maturity date of 1 February 2010 (since expired unexercised). Separately
a 2.5% Net Smelter Royalty (NSR) is payable to Platinova.
The Citronen deposit is hosted in the Ordovician Franklinian Basin that extends
across northern Greenland and into north-eastern Canada and is described as
Sedimentary-Exhalative (SEDEX) type deposit.
The deposit consists of five major sulphide mounds, forming three orebodies - the
Discovery (open pit), Beach (underground) and Esrum (underground). The
mineralisation at Citronen starts from surface, is flat lying and is currently open in all
directions.
Platinova A/S
discovered the large
zinc and lead
mineralisat ion at
Citronen Fjord in
1993. Platinova
worked on the project
for f ive years with
intensive dri l l ing
(32,839m between
1993 and 1997) and
environmental studies
were conducted. The
project was
mothballed in the late
1990’s due to
depressed base metal
pr ices.
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Hartleys Limited Ironbark Zinc Ltd 31 May 2013
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Fig. 3: Citronen Deposit looking East (sulphide horizons in red)
Source: IBG
IBG completed a PFS for Citronen in early 2009 and recently released a DFS for the
project (April 2013). The current development plan envisages the process plant
being constructed on three barges and towed to site where they will be positioned
and joined together on the eastern margin of the Citronen Fjord. The site
infrastructure and mine development will be constructed concurrently. The mine plan
is to mine underground first (3.3mtpa beneficiated to be processed at 1.8mtpa), and
the low grade open pits will be mined near the end of planned mine’s life.
The fjord is only free of ice for three months of the year and so it is anticipated the
Company will stockpile concentrate through winter months. The DFS assumes a 45
day per year shipping window from mid-July to early September. The company
expects to receive payments for concentrate at the time of production discounted by
time value to delivery.
IBG completed a PFS
in ear ly 2009 and is
current ly undertaking
a feasib i l i ty study.
The current
development plan
envisages the process
plant being
constructed on three
barges and towed to
site where they wil l be
posi t ioned and joined
together on the
eastern margin of the
Citronen Fjord.
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Hartleys Limited Ironbark Zinc Ltd 31 May 2013
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Fig. 1: Citronen Deposit looking East (sulphide horizons in red)
Source: IBG
Fig. 2: Latest Citronen Resource
Source: IBG feasibility study 2013
The global resource is
132Mt @ 4.5% Zn +
Pb.
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Hartleys Limited Ironbark Zinc Ltd 31 May 2013
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MAJOR SHAREHOLDERS There are three substantial shareholders. Two are industry participants, Nystar
(26.5%), Glencore Xstrata (11.4%) and the other is an investment fund called “L1
Capital” (15.9%).
Glencore came onto the register in July 2007 with 12.5m shares via a primary
placement at $0.50. It increased the stake to ~42m shares at $0.71 in March 2008.
In late 2011 IBG issued a convertible note to IBG for $50m convertible at $0.42 and
$0.50. Glencore was also granted an off-take.
Nyrstar came onto the register in September 2009 also via a primary placement for
52.8m shares at $0.125. Nyrstar was also granted a life of mine off-take agreement
for 35% of the production from the Citronen deposit and a non-dilutive pre-emptive
right that would allow Nyrstar to participate on a pro-rata basis in any future capital
raisings in order to maintain its relative shareholding. Six months later (March
2010), Nyrstar took a second primary placement of ~42.3m shares at $0.35.
Fig. 3: Shareholders
Top Shareholders Ordinary Dil. For notes
m sh. %
m sh. %
Nyrstar Int
97.7 26.5%
97.7 20.4%
L1 Capital
58.5 15.9%
58.5 12.2%
Xstrata
42.0 11.4%
153.4 32.0%
Source: IBG
OPTIONS, CONVERTIBLES AND UNPAID CAPITAL
Options There are 15m options at various strikes and maturities (and all out-of-the-money).
Fig. 4: Options
Expiry Exercise Price number of shares Unpaid capital
16-Nov-13 $0.45 9,050,000 4.07
16-Nov-13 $0.35 500,000 0.18
20-Jan-15 $0.45 500,000 0.23
31-Dec-17 $0.30 5,000,000 1.50
18-Dec-16 $0.10 1,000,000 0.10
Total $0.38 16,050,000 6.1
Source: IBG
Glencore Xstrata convertible note In October 2011, IBG entered into an agreement with Glencore for US$50m of
convertible note funding in exchange for off-take at the Citronen project (up to 55%
and best endeavours for 100%) plus 100% off-take of all future IBG projects (if off-
take is not available on future projects than a 1% revenue royalty instead).
The US$50m facility is in two tranches:
There are three
substant ia l
shareholders. Two
are industry
part icipants, Nystar
(26.5%), Xstrata
(11.4%) and the other
is an investment fund
cal led “L1 Capita l”
(15.9%).
.
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
Page 8 of 12
Tranche 1: US$30m may be converted into IBG shares at the election of
either Glencore Xstrata or Ironbark at A$0.42 per share; and triggers
Glencore Xstrata’s right to increase from 35% to 55% of off-take of Citronen.
Tranche 2: US$20m may be converted into Ironbark shares at the election of
Glencore Xstrata at A$0.50 per share;
Interest will accrue at an annualised rate of 5% + LIBOR (London Interbank Offered
Rate, currently approximately ~0.85% for a 1 year term). Rights of conversion and
redemption commence 18 months after date of issue, and the term of any notes is 4
years following the date of issue.
We assume the notes are never used.
Nyrstar non-dilute Nyrstar is a substantial shareholder with 98m shares. It has an non-dilute option
which means that it has the option to top up any equity raising by IBG with additional
funds at the same terms as such an equity raising may be offered such that Nyrstar
does not have its percentage of the ordinary shares outstanding reduced. If the
Glencore convertible note is converted into equity this is a trigger for the non-dilute.
Additional, shares issued for an acquisition also can trigger the non-dilute.
NFC MOU “China Non Ferrous Industry’s Foreign Engineering and Construction Co. Ltd” (NFC)
is listed on the Shenzen Stock Exchange and is based in Beijing. It is mainly an
engineering design and construction company but also operates a wide array of
mines and processing plants around the world including zinc mines and a zinc
smelter.
In September 2011 IBG signed an MOU with NFC which establishes a framework for
formal agreements for NFC to engineer, design, procure, supply, construct, test and
commission the Citronen project on a full turnkey basis and for NFC to facilitate
funding of development costs from major banks in China. Citronen’s Feasibility
Study with all the supporting studies is being presented to NFC for the purposes of
preparing the EPC and financing work. NFC is expected to be in a position to begin
delivering the results from their work towards the end of 2013.
The MOU encompasses a 70% debt funding proposal through Chinese banks and
provides NFC with a right to buy a 20% direct interest in the Citronen Project at the
time of decision to mine. The purchase price would be decided by an “independent
valuation”.
OFF TAKE Assuming the Glencore Xstrata convertible note facility is drawn down, Glencore
Xstrata has first right of refusal effectively for 100% offtake of all IBG base metal
projects (current and future) where available and a 1% revenue royalty if offtake is
not available.
The exception is Citronen where Glencore Xstrata has a current off-take agreement
for 35% which will increase to 55% if the convertible note is drawn. Nyrstar has a life
of mine off-take agreement for 35% of the production from the Citronen deposit.
This leaves 10%-30% unallocated.
The NFC MOU allows for “NFC entering into an offtake agreement for the
concentrate products of the Project or a portion thereof”.
In October 2011, IBG
entered into an
agreement with
Glencore for US$50m
of convert ib le note
funding in exchange
for of f - take at the
Citronen project (up to
55%) plus 100% off -
take of a l l future IBG
projects ( i f off - take is
not avai lable on future
projects than a 1%
revenue royal ty
instead).
Nyrstar is a
substant ia l
shareholder with 98m
shares. I t has an non-
dilute option which
means that i t has the
option to top up any
equity ra is ing by IBG
with addit ional funds
at the same terms as
such an equity raising
may be of fered such
that Nyrstar does not
have its percentage of
the ordinary shares
outstanding reduced.
.
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
Page 9 of 12
VALUATION We assume a 53Mtpa mining inventory at 4.9% zinc and 0.5% lead. We assume a
~15 year mine life and ~95% conversion of the high grade resource.
We assume a 3.3mtpa mine operation beginning in late CY16. We assume payable
zinc equivalent of >200k tonnes (~400kt concentrate) for the first two years before
declining to ~120-160ktpa.
We assume costs of ~$80/t mined ore which equates to ~$0.80/lb zinc in early years
rising to $1.00/lb in later years.
We assume ~$500m of capex spent over two years,
funded ~70% debt and ~30% new equity at current prices. We assume the debt is
funded at 6% (it could be lower). We use a 12% discount rate.
We assume the convertible notes ($50m) are never drawn.
Fig. 5: Hartleys Cost Assumptions
Source: Hartleys
PRICE TARGET Our price target is a blended valuation based on a scenario of different of commodity
price and discount rate assumptions and capital raising prices.
Fig. 6: Price Target Methodology
Source: Hartleys
Underground only Open Pit
Total US$/t ore US$/t Zn eq Total US$/t ore US$/t Zn eq Total US$/t ore US$/t Zn eq
Mine life 11 3 14
Ore 36.1 9.9 46.0
grade Zn 5.8% 3.1% 5.2%
grade Pb 0.5% 0.6% 0.5%
Payable Zn Mlb 3,522 500 4,022
Payable Pb Mlb 197 65 261
Payable Zn eq Mlb* 3,705 560 4,264
Mining 975 27.0 0.26 69 7.0 0.12 1,044 22.7 0.24
Processing 508 14.1 0.14 165 16.8 0.29 673 14.6 0.16
Overheads (inc corporate) 566 15.7 0.15 107 10.9 0.19 673 14.6 0.16
Logistics 361 10.0 0.10 99 10.0 0.18 460 10.0 0.11
Royalties 191 5.3 0.05 31 3.1 0.05 222 4.8 0.05
Smelter fees 521 14.4 0.14 76 7.7 0.14 597 13.0 0.14
Operating Costs 2,049 56.7 0.55 341 34.7 0.61 2,391 52.0 0.56
+ logistics 2,410 66.7 0.65 440 44.7 0.79 2,850 62.0 0.67
+ royalties 2,602 72.0 0.70 470 47.8 0.84 3,072 66.8 0.72
+ smelting 3,123 86.5 0.84 546 55.5 0.98 3,669 79.8 0.86
TOTAL CASH COSTS 3,123 86.5 0.84 546 55.5 0.98 3,669 79.8 0.86
* assume Zn / Pb price ratio of 108%
Price Target Methodology Weighting Spot 12 mth out
17% $0.047 $0.046
NPV at spot commodity and fx prices 30% $0.010 $0.015
NPV using spot fx, but zinc prices a US$1.37/lb 17% $0.28 $0.30
NPV using spot fx, but zinc prices a US$1.60/lb 17% $0.40 $0.44
AUD zinc price calls (1.9Mt over 12yrs, avg strike @A$0.86/lb) 17% $0.19 $0.19
NPV using spot fx, but zinc prices a US$1.60/lb, no equity dilution 1% $1.39 $1.56
Risk weighted composite $0.18
12 Months Price Target $0.19
Shareprice - Last $0.044
12 mth total return (% to 12mth target + dividend) 330%
NPV base case, assuming significant equity dilution
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
Page 10 of 12
CONCLUSION Using our base case zinc prices we derive a marginally positive NPV12.
Consequently, we view IBG as a high risk investment and speculation on rising zinc
prices or a takeover. There is substantial upside if one uses credible, but higher
than sell-side consensus, zinc price assumptions (ie if one uses the prices expected
by many industry sources rather than those expected by equity markets). We have
a 19cps twelve month price target, based on better zinc prices.
Fig. 7: Companies with high exposure to zinc prices are very volatile, but have an ability to
“rocket” from the bottom of a zinc cycle
Source: Hartleys, IRESS
Hartleys Limited Ironbark Zinc Ltd 31 May 2013
Page 11 of 12
Fig. 8: Zinc Price assumptions
Source: Hartleys, Bloomberg
Fig. 9: Key assumptions and risks for valuation Assumption Risk of not realising
assumption Downside risk to
valuation if assumption is
incorrect
Comment
Fifteen year mine life Low Upside The current high grade resource implies a mine life of >15years.
Zinc price rises
Moderate Upside Our zinc price assumptions imply prices rise over coming years.
Large proportion of capex is funded with debt
Moderate to high Not meaningful The long mine life should support debt funding
Limited value for exploration and other projects
Moderate Upside The other assets may have exploration success
Conclusion Using our base case zinc prices, we do not derive a positive NPV for Citronen’s development. Consequently, we view IBG as a high risk investment and speculation on rising zinc prices.
Source: Hartleys
0.00
0.50
1.00
1.50
2.00
2.50
3.00Hartleys Assumption for Valuations
Zinc (US$)
US$/lb
0.00
0.50
1.00
1.50
2.00
2.50
3.00Hartleys Assumption for Valuations
Zinc (A$)
A$/lb
Page 12 of 12
HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052
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Buy Share price appreciation anticipated.
Accumulate Share price appreciation anticipated but the risk/reward is
not as attractive as a “Buy”. Alternatively, for the share
price to rise it may be contingent on the outcome of an
uncertain or distant event. Analyst will often indicate a
price level at which it may become a “Buy”.
Neutral Take no action. Upside & downside risk/reward is evenly
balanced.
Reduce /
Take profits
It is anticipated to be unlikely that there will be gains over
the investment time horizon but there is a possibility of
some price weakness over that period.
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No Rating No recommendation.
Speculative
Buy
Share price could be volatile. While it is anticipated that,
on a risk/reward basis, an investment is attractive, there
is at least one identifiable risk that has a meaningful
possibility of occurring, which, if it did occur, could lead to
significant share price reduction. Consequently, the
investment is considered high risk.
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Disclaimer/Disclosure
The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold
shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those
securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising
from any advice mentioned in publications to clients.
Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Ironbark Zinc Limited, for which
it has earned fees and continues to earn fees.
Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting
your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs.
Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued.
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