Premier African Minerals - Progressing RHA Tungsten

http://www.premierafricanminerals.com/


With many core metal prices continuing to slump and access to funding still tight, sentiment within the junior mining space remains dire, and many projects are struggling to progress pass their exploration phases. That is not true of Premier African Minerals' Tungsten Mine though, as the company looks set to start production in HI 2015; that's something of a surprise given the market cap of the company is just £4.53m. The key focus for any junior resource company at the moment is still funding. With a pathway to production outlined, are the economics of the RHA Tungsten project sufficient to drive worthwhile upside, and could Premier African Minerals be a diamond in the rough?

Technicals


As noted within the chart, the poor liquidity of Premier's shares means that the level of technical analysis that can be done is restricted. There big picture is that the shares remain in a downtrend until there is a higher-high put in place around 1.50p. That is far off the current price of 0.90p where there is immediate resistance at the 1p level, and minor resistance above that at 1.02p. The poor liquidity situation is the significant point though; although the mid-price is currently 0.90p, the ask price is circa 0.995p and the bid price is circa 0.87p, giving a substantial spread of approaching 15%. That unfortunately makes Premier highly risky from a liquidity perspective and would deter many investors.

The wide spread is a result of the tightly held shares, and the depressed share price is also partly down to various share sales. Nearly 41% of the total shares are owned by Coc'Roach Ltd/ZRH Nominees/CEO George Roach, and whilst he is very well aligned with shareholders (having even capitalised loans he provided), it is a double-edged sword in some ways. AgriMinco used to be a 10.1% shareholder before reducing their stake to an insignificant level (as a result of internal funding constraints), although there are several shareholders owning just over 3% of the total shares in issue. Alpha International Business also reduced their stake significantly; along with a previous equity swap deal and the negative sentiment associated with that, the share price has been relatively depressed.

Overall, the share price remains near the 1p inflection level. A return above 1.00p, close to potentially major fundamental news would be a notable positive, and, if 1.10p is surpassed, could signal a return to 1.50p and a break through the long-term pattern. News will ultimately be the deciding factor for price movement given the wide spread, and as seen in late 2013 and in April 2014, this can spark a rapid movement in the share price.

Operations

Premier listed in December 2012 at a market capitalisation of £6.71m, raising net proceeds of £1.3m. The bulk of the work since has been on developing their flagship asset known as RHA Tungsten; it's a project covering 1800 hectares situated in the Kamativi Tin belt, North-West Zimbabwe. The area is actually an old mine where mining activity has historically taken place, as far back as the 1930's when it was mostly developed with some of the infrastructure remaining in place today since it was never decommissioned. Along with most global tungsten deposits, Premier's mineral setting sees tungsten occurring in both Wolframite and Scheelite.

In terms of the metal itself, tungsten has high tensile strength, hardness and a high melting point - so with limited substitutability - it is an ideal metal for industrial uses including cutting tools and drill bits. It's a metal also deemed to be 'strategic' by economic powerhouses such as the US and China. The price of tungsten is actually based off APT - an intermediary product - which peaked at $470/mtu (equivalent) in 2011. The price has since slid back, and has weakened over the course of the year so far to a range of around $310/mtu to $325/mtu.

A big factor to consider at this point is that forecasts for tungsten are wide-ranging but largely bullish, with targets over the next three to five years being over $400/mtu; a move that would undoubtedly benefit all tungsten developers. For example, Roskill are forecasting a circa 2.5% rise per annum over the next few years, driven by demand from cemented carbides and chemicals, albeit prices are also dependent upon the scale of use within steel alloys; a factor that will undoubtedly be determined by growth in China However, as with all metal price forecasts, they are highly unpredictable and there are more significant price catalysts that are difficult to determine.

For example, just nine months ago many forecasts had not foreseen the drop towards $325/mtu, with many forecasting prices ending towards $400/mtu by the end of 2014, which now seems extremely unlikely. Those bullish forecasts are supposedly underpinned by the thought process that supply of tungsten is tight, with few major projects in development; Wolf Minerals' Hermerdon project in the UK being one of the few more notable names.

The bigger catalyst to which I referred was that China are potentially considering removing their export quotas on both tungsten and molybdenum for 2015. In the past, those two metals, along with many others such as silver have been subject to export quotas, therefore imposing restrictions on global supply outside of China, potentially supporting a high price amid a bear market in metals prices. The role of China is critical given that the USGS estimates they have circa 60% of the total known tungsten reserves, account for circa 60% of global demand and circa 80% of global supply. Should they choose to remove the export quotas (following a disagreement with the World Trade Organisation), there is potential for supply from within China to leak outside, thereby prompting a reduction in prices and damaging the upside case; that has been reflected by many tungsten explorers now adopting a lower average price assumption in economic studies.

Back to RHA. As commented, the mine has previously been used meaning that there are certain elements that are immediately de-risked. In terms of the entire project, Premier has a 49% stake and is the operator, with the other 51% being owned by the indigenous population. With the operating environment being Zimbabwe (which is hardly Canada), this joint development closely aligns both parties and should theoretically mean that operations are smoother than had Premier been an independent party; after all, Premier has local backing. That said, a material discount should still be applied for the 'Zimbabwe' operating environment as there is always scope for unforeseen events to occur, even if the progress to date has been encouraging. For purely reference, another small cap producing in Zimbabwe, Caledonia Mining (LSE:CMCL) is a good fit.

The work since the admission to trading in 2012 has revolved mainly around exploratory drilling and works associated with the formation of economic studies. Studies have also been updated to improve the economics and added to the resource base drawn upon, and I'll cover that in greater depth within the financials section.

With production likely to start in H1 2015, the appropriate method for valuation can shift from a purely in-situ £/unit resource multiple, to the more sophisticated method of using an economic assessment and adjusting accordingly. The main selling point of RHA is its low CAPEX, which will become clearer later. That said, the RHA project has an excellent OPEX/CAPEX ratio, and although the project does not have global in-situ scale, the grades are high.

Aside from RHA, Premier has a number of other much smaller assets including:
     -  Zulu Lithium & Tantalum (Zimbabwe); the "next in line" project with pegmatite and lithium grades of up to 1.2% Li2O
     -  Globe Graphite (Zimbabwe)
     -  Tinde Fluorspar (Zimbabwe)
     -  Katete Rare Earth Minerals (Zimbabwe); "Under strategic review"
     -  A number of exploration assets in Togo
     -  2 million assets in private company Circum Minerals; this was acquired as part of a complex transaction when Premier sold its option stake in the Danakil potash project to Circum. The Danakil project is located in Ethiopia and is now 100% owned by Circum. The resource amounts to 1.9 billion tonnes with 356MT of KCl (Potassium Chloride)

Clearly that is a large number of projects for a company of Premier's size, although the commitments on these smaller projects are low. They can therefore be classed as backburner options where, should cash constraints be relaxed, Premier can choose to progress the most prospective based on the price of the element amongst other factors.

There are a couple of potentially substantial catalysts that Premier likely has lined up, and these will relate to RHA tungsten. Before the mine is put into production the company has been progressing work on the ground with operational milestones including the de-watering of the old mine, and locating water sources. CEO George Roach recently commented, "Premier is making significant progress in bringing the RHA mine back into production. Each step further de-risks this project and assists in reaching final financing decisions. Premier remains in intensive negotiations that are expected in the near term to enable final decisions on off-take and/or marketing contracts and the preferred structure to fund the estimated US$4.1 million required prior to commencement of production."

The catalysts are twofold. Firstly, the company will be looking to secure an off-take agreement for the tungsten products, and this has the potential to provide certainty for investors regarding there being a market for the produced resource. This has the potential to propel the share price significantly higher given that it's one of the few major outstanding hurdles for the company to overcome. Other companies in the sector have had little problem in doing with Ormonde Mining (LSE:ORM) securing commodities trading major, Noble Group as their offtake partner for their Barruecopardo project in Spain, in April this year.

The second major catalyst is the provision of funding for the project, which is likely to be mostly (if not all) in the form of debt, with the company already noting that there are potential debt providers who have "indicated a willingness to invest in Zimbabwe." Admittedly, it's not easy to secure funding in the current commodity environment, so it's the economics of the project that are the deciding factor, and in Premier's case, the economics are robust. If funding is secured on non-dilutive terms, then again, this could propel the share price higher.

Financials

The valuation of junior miners is what is crucial; a miner can have a good story, but unless the valuation stacks up and shows attractive upside, then it is irrelevant. For Premier, it makes sense to assess each project in turn, starting with the smallest. To jump to the point, the projects in Togo and the lithium/tantalum, graphite, fluorspar, rare earth projects in Zimbabwe are too early stage for me to attribute any real value to. Therefore, I have attributed a value of £nil to these assets, whilst noting that there is scope for material valuation uplifts in the event of exploratory work.

The second point to value are the 2m Circum shares that Premier holds; since Circum is a private company, there is no real transparent valuation that an investor can give, especially since we are not aware of the total share capital of Circum hence are unable to generate a per share valuation for the potash project. Helpfully there are numerous figures that we can use. Notably, upon closure of the Danakil deal (touched upon earlier), the stake was valued at $1.4m. Premier claims that, as a result of subsequent equity deals, the value of those shares rose to $1.8m, and then $2.0m was noted most recently. Of course, whether there is an active market for those shares is another matter, so it makes sense to be cautious by taking the mid-figure of $1.8m and assigning a 25% discount to reflect any share sale risks. Therefore, a sensible GBP valuation is £0.86m.

In terms of the cash on the balance sheet, Premier has over $1m of cash with a further $1m due on January 15th as a result of the Danakil stake sale. Although that may initially seem very high relative to the market capitalisation, administrative expenses during the first half of the year totalled $1.52m, so it is also wise to assume no material cash balance in calculations. That is supported by the $4.1m cash shortfall touted by CEO Roach.

Taking these together with the market capitalisation £5.01m at an ask price of 0.995p, a sensible enterprise value to use is £4.15m. That figure suggests that the RHA tungsten project is worth £4.15m; do the economics shown in the PEA back that figure up?

There are actually two different scenarios that have been set out in economic assessments. The first, known as the "Low Capital Implementation Strategy" looks at the favoured method whereby there is initial open pit mining (constrained for 18 months) that funds the setup of an underground operations; hence the name, low capital. I won't dwell on the open pit side of the equation too much as the Net Present Value [NPV] (at a 10% discount rate) is only $15.8m on a 100% basis, despite a very high Internal Rate of Return [IRR] of 286%. In general, a pre-tax IRR over 30% is preferable, with a 20% post-tax IRR widely considered to be a 'hurdle rate' as to whether or not progress a project. The exceptionally high IRR is testament to the low CAPEX requirements, meaning that payback is very quick; however, the NPV in this case is uninspiring and the real value is in the underground mining phase.

NB: PREM has costs repaid before profit split
The headline numbers for the project are shown to the right and, in combination with the low OPEX, the project is highly attractive from a purely economic point of view. The updated economic assessment saw a material lengthening of the life of mine plus a material increase in the: WO3 produced, Net Cash Flows, NPV and IRR. Indeed, the previous NPV (5%) stood at just $99.3m on a 100% ownership basis, so just ~$48.7m net to Premier. That has now jumped to $89.7m, which is far superior, especially given the rise in the pre-tax IRR from 378% beforehand. Yet again this number is substantially above typical sector IRRs and that is down to the very modest $12.8m of initial CAPEX required (versus net cash flows of $270.5m). That gives the project a real chance of success regarding an attractive funding outcome, even with the Zimbabwe factor. The 5% discount rate is fair.

A notable change with the latest PEA is that the pricing assumption has been revised down from around $320/mtu to $288.6/mtu as a result of tungsten price weakness. Whilst it is still impressive to achieve the rises in each metric despite using a lower pricing assumption, it's absolutely vital to 'pressure test' the project at a variety of different $/mtu levels to check how the NPV is impacted. The IRR is sufficiently high to assume that it will remain as a highly attractive figure.
Below are the results of a re-modelling of the PEA for various (more pessimistic) $/mtu figures, to safeguard against any fall in the tungsten price.


The assumption that the above figures are based off, is that the CAPEX and cost of sales remain constant through any change in the tungsten price (which is fair at this stage). Three different scenarios are shown: for $200/mtu, $230/mtu and $250/mtu. These represent price decline cases of 30.7%, 20.3% and 13.4% respectively. What can be seen is that the project economics remain robust, even down at the $200/mtu level, and that is particularly encouraging. Indeed, even at the $200/mtu pricing assumption, the pre-tax NPV net to Premier (at 5%) is £28.6m. Post-tax numbers can obviously be calculated from this, but as a rule of thumb, a company is usually attractive should it trade at less than 30% of its pre-tax NPV before it enters production; the method of valuation changes once in full-scale production. That would correspond to an enterprise value of £8.58m against the current adjusted enterprise value calculated earlier of £4.15m.

Those targeted market capitalisation figures rise to £11.46m, £13.41m and £17.13m respectively at each of the subsequent concentrate sale prices and suggest share price targets (with the current number of shares in issue) of 1.70p, 2.28p, 2.67p and 3.40p respectively. Those are obviously levels far higher than the current share price, which suggests that Premier is particularly lowly valued, even with a 'Zimbabwe discount' applied. The reality is that in the current mining environment, the top estimates are likely to prove very difficult to achieve unless the market has a swing in sentiment towards junior miners. At each of those modelled prices, the IRR remained strong, with an IRR of circa 193% at the $230/mtu level. Each of these modelled scenarios factors in a valuation for RHA considerably above the enterprise value of £4.15m attributed by the market, although they could be watered down by between 20% and 30% to account for the country risks.

There are a number of comparators within the UK market and overseas that can be compared to Premier relatively loosely. Ormonde Mining operates in Spain, which is far more preferable, and has the 100% owned Barruecopardo project as its main focus. It has 71,214 contained tonnes of WO3 so is larger than RHA, but has worse economics as a result of the higher CAPEX spend. Indeed, at $250/mtu, the project has a NPV of just 28m EUR, a pre-tax IRR of just 19.9% [8% discount] and a 3.9 year payback. The project is far more robust at $350/mtu with a NPV of 120m EURR and a pre-tax IRR of 52% plus an attractive 2 year payback period. W Resources has a tailings project and mine known as La Parilla, but is not directly comparable in terms of economic studies. That said, it purchased an inferred 39,882t in 2013 for £2.14m, reflecting the substantial disparity between the value of an exploration project and a project with worked economics.

Towards the lower end of the scale, £3.2m capitalised mining minnow Thor Mining's DFS on Molyhil (Australia) gave a 21 month payback, although it only carried an after-tax NPV of £15.13m and an IRR of 24% at pricing assumption of $354/mtu. In addition, the upfront CAPEX required exceeds £35m, so actually exceeds the NPV. ASX listed Vital Metals operates the 70% owned Watershed project in Australia and released a definitive feasibility study in 2014. This showed a pre-tax NPV of £96m and an IRR of 28% (8% discount), but on a pricing assumption of $455/mtu, which is particularly high. In addition, there is a high initial CAPEX requirement of over £90m. That is reflected in the market cap being just £3.77m with minimal cash, but means that Premier stacks up favourably.

RHA Tungsten Excessively Discounted?

Both on an absolute and a relative basis it would appear that Premier's flagship RHA project is being excessively discounted by the market. The economics are extremely robust and should allow for a satisfactory outcome to both the offtake agreement negotiations and the negotiations regarding the optimal method of funding the project. Although debt is likely to be the preferred route, a small amount of equity raised at a sensible price (north of 1.00p) could alleviate the 'elephant in the room' that is the stock liquidity. That said, the scale of the discount does seem to already more than factor in the spread, which is often double digits and should management deliver on the final outstanding issues. Attributing a value of £nil to the other projects is sensible, and despite this the valuation appears undemanding, even in light of the woeful sector sentiment. However, the spread of nearly 15% (even though in periods of few trades) means that I will refrain from putting the shares in the site portfolio as that could deter upside. As a high risk play, if the company executes the last stages of its plan without material dilution, the downside appears limited relative to the upside. No Rating.

10 comments:

  1. Brilliant. Thanks. The spread might narrow is the share price spikes

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  2. Great review. Thanks for taking the time to write this and I hav enow subscribed. Happy December
    FF

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  3. Hi El1te :0). Any chance to look at vec? Seems a shrewd company when you look at junk miners which most of them are, but I will never invest in a miner through personal choice :0). Here is a BBC link on the background http://www.bbc.co.uk/news/world-africa-14113249

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  4. excellent write up, very informative. A couple of points. Open pit mine with pre tax cash flow of $18.3 million over 18 months with $4.8 mill start up sounds exceptional to me, but you have stated uninspiring. $12.8 million needs to be used to pay for phase 2 mine (underground) but that still leaves a decent amount for 18 months and that $18.3 million is after the $4.8 mill loan has been repaid. also i couldnt see mentioned Prem get all their costs back before any split and thats about $7-9 million already. So at a guess in the first 18 months they will get whats left over after paying phase 2 mine. excellent write up anyway thanks. IVLT

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    1. also any chance you could extend the table and work out how much if the MTU goes up $300, $350,$400. $400 will make your eyes water haha

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    2. From a purely NPV standpoint, the open pit mine is not really enough to warrant significant upside. After all, that $15.8m NPV at an exchange rate of circa 0.64 and the 0.49 PREM share means that it falls (net to PREM) to just short of £5m, which is around the market cap and doesn't fit the sub 30% pre-tax NPV criteria that is useful. The underground scenario is consequently far more attractive and is where the real value lies. It's unwise to base valuations off that initial open pit cash flow since it will be re-invested as you note

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    3. thanks. one other small point prem do own 49% but george confirmed the split is 50/50. only 1% but still a lot on those figures. if prem get all their costs back before any profit split that will be more in cash than our current market cap then the profit split afterwards. thanks anyway

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    4. As follows:
      $300/mtu -> NPV = ~$195m
      $350/mtu -> NPV = ~$247m
      $400/mtu -> NPV = ~$298m

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    5. Great Article Elite.
      Good to know that there is exceptional upside here if all goes to plan with funding and finance. Just a quick question. When RHA is producing from the underground large mine, how would you value this then? You have surely got to be looking at NAV probably minus 10%-15%
      Also, George is currently channel sampling in view to upgrade the resource. What is in the PEA may only be a fifth of the total resource- but we await further news on this.
      Cheers.
      Eyeguy

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    6. Once into full production, it would make sense to base it off profitability in the early years, and a multiple of that based on peers. Although that will largely be determined by the level of exploration spending elsewhere, so difficult to forecast in advance.

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