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FitzGerald - By Barry FitzGerald
Plucky Panoramic plots return to Savannah
The rally in a broad sweep of commodity prices has not only benefitted the big end of town, where the likes of BHP Billiton and Rio Tinto have gone a long way in justifying their strong share price recoveries by posting big profit gains for the December half and 2016 calendar year respectively.
The junior end of the mining market too has been swept up in the share price euphoria in response to the realisation – even by the normally late-to-the-party institutional investors – that the worst of the commodity price slump that got going in 2011 has well and truly passed.
There is no better example of that out there than the plucky nickel stock Panoramic Resources (ASX:PAN). In January last year it was trading at all of 7.5c a share. It has since recovered to 38.5c for a market capitalisation of $163m. What’s more, the 413 per cent share price gain is despite Panoramic having closed its mainstay Savannah nickel operation in Western Australia’s East Kimberley region in May 2016.
And in November 2015, it took the equally painful decision to close its Lanfranchi nickel operation, south of Kambalda in WA.
The move to care and maintenance at the operations was a response to the desperately low nickel prices and a gutsy strategic call that there was no point burning off nickel reserves when prices were lousy. Much better to come back when nickel prices and the outlook for the stainless steel ingredient could more or less guarantee strong returns.
The resultant downtime has given Panoramic time to work up a plan to return Savannah to production in tandem with the development of the 2014 Savannah North discovery, while also spinning off its gold interests into the 51 per cent-owned Horizon Gold (ASX:HRN, trading at 36c).
And in the meantime, nickel has left behind last year’s average price of $US4.40 a pound to get to $5 a pound of late, with uncertainty around laterite nickel supplies from Indonesia and the Philippines, as well as strong global consumption, giving most analysts the confidence to forecast moves higher still to $US6-$US8 a pound over the longer term.
Having said that, nickel is the most volatile of metals. If the Philippines government follows through with its orders for the closure of mines accounting for as much as 10 per cent of supply, and Indonesia’s relaxation of bans on 20 per cent of supply falters, it will be a case of hold on to your hats.
Savannah doesn’t need extreme nickel prices (or extreme prices for its lesser amounts of copper and the currently sexy cobalt) to justify a return to production.
A feasibility study released a couple of weeks ago showed it would be a very attractive proposition at $US5 a pound, with extreme leverage to the upside. Plug in $US8 a pound nickel prices and the pre-tax net present value rockets to $440m from $60m at $US5 a pound nickel. The cost to restart would be no more than $30 million and it would be quick.
The go button is some way off from being pushed as Panoramic is optimising and finalising the sort of considerations that go into an implementation plan for mining restarts. Hartleys for one liked what it read in the feasibility study, increasing its share price target for Panoramic from 56c a share to 65c.
Blood reds stir Mustang
Mozambique has been good to ASX-listed resources companies in recent times. The southern African nation gave rise to the Balama graphite deposit which underpins the $820 million Syrah Resources (ASX:SYR), and South32’s Mozal aluminium smelter made its way back into profit in the December half.
To those two can be added Mustang Resources (ASX:MUS) which is creating a bit of a buzz after becoming the only ASX-listed ruby producer from its Montepuez project in Mozambique. After some initial teething problems, the project is ramping up to a targeted treatment rate of 525 tonnes-a-day of ruby-bearing gravels, with plans to eventually triple the daily rate.
But more than that was the recent news that first cash flow from the bulk sampling/exploration program at Montepuez is not far off, with Mustang sending off its first parcel of rubies and corundum (6,221 carats) to the US for assessment as to their value, and whether it is best to sell them in-the-rough in trade auctions or go down the value-add route of cutting and polishing for direct sales.
Included in the parcel are five special stones, including two rare 24-carat stones, the red colour of which is deep enough not to require heat treatment – something which has real snob value. They are now in the hands of the Queen of coloured gemstone cutter and polishers, California’s Meg Berry.
The “specials” stand to be a serious revenue booster to the overall value of the parcel given a top quality 5 carat stone (cutting yields for rough stones range from 30-60 per cent of the original weight) will cost you more than $US200,000, increasing exponentially as the stones get bigger.
That’s all very interesting but it is the very nature of alluvial operations that they are difficult to value, particularly as there is no firm fix on likely recovery rates and average values. But that has not stopped the market driving Mustang shares from 3.8c last August to 9.8c yesterday.
Alastair Murray at Baker Young Stockbrokers has just put out a tome on Mustang which includes an assessment of the group’s graphite project down the road from Syrah’s Balama.
“We view Mustang as a high risk, high reward resource play and on the basis the current ruby bulk sampling program yields the results we expect, we value Mustang at 16c a share, which is derived from a weighted discounted cash flow analysis of revenue derived from bulk sampling and its expected future ruby operations,” Murray said.
Former BHP Billiton chief executive Brian Gilbertson might want to grab a copy of the report. As written previously when this column was in a different locale, Gilbertson has been making a good fist of being to the world of coloured stones what De Beers is to the world of diamonds.
Through his private equity resources fund Pallinghurst, Gilbertson controls the $US315m London-listed Gemfields plc (GEM). It has established Mozambique as the world’s biggest supplier of rubies – with an emphasis on reliable and ethical supply – from its Montepuez operation.
Thanks to its established presence in Mozambique as a graphite explorer, Mustang was able to secure its positions over prospective ground in close proximity to GEM’s operations, spawned by the original discovery in 2009. Excitable types will tell you that GEM should take Mustang out, or at least bid it for its ruby ground.
No need for that just yet. Mustang has some work to do to confirm it has a viable long-term proposition on its hands. But as Baker Young’s current 16c a share valuation indicates, expectations are that it does are rising.
Talking about Syrah
Interesting that Syrah has worked its way back over $3 a share (after falling from $6.66 a share in June last year) ahead of a planned late March update on where Balama’s output will be going and more importantly, the outcome of discussions on the previously alluded to “new and value-enhancing options” on its downstream battery anode material (BAM) strategy.
Ahead of the March update, there has been growing speculation on the BAM options, with the chatter best described as Chinese whispers in that the gossipers reckon Syrah is actually in deep discussion with China’s leading anode producer and that any deal will be more than a simple Balama graphite offtake deal.
By that they mean it will be a joint venture on an expanded Balama and/or a joint venture on Syrah’s BAM manufacturing ambitions in the US. Time will tell on all that. And given we’re talking Chinese whispers here, it’s best to wait for what is said in March.
What is known is that Balama is a highly strategic piece of the global battery power and storage revolution.
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