RB Milestone Group analyses Gunson Resources, worth double the current valuation

New York research firm, RB Milestone Group has conducted an analysis of Gunson Resources (ASX:GUN), finding the Perth-based explorer's assets and projects are worth approximately $0.15 per share, more than double the current share price.

The valuation is based on strong growth prospects in the global zircon market, with demand expected to outpace supply.

ASX Code: GUN
Market Cap: A$11.79m
Total Issue: 173.46m
52 week High/Low: $0.17/$0.06
Price (AUD): 0.07
Target Price (AUD): 0.15

Gunson Resources is an Australia based junior mineral resource company with a focus on the mineral sands (zircon & titanium dioxide mineral products), copper and nickel markets.

Gunson‘s lead projects are the Coburn Zircon Project (Coburn), for which a Definitive Feasibility Study (DFS) has been completed in January 2010, and the Mount Gunson Copper Project (Mount Gunson), for which the company is progressing a Bankable Feasibility Study (BFS), due for completion in late March 2011.

Gunson‘s lead project, Coburn, which is focused on mineral sands namely Zircon (66% ZrO2); Ilmenite (61% TiO2); Rutile (95% TiO2); and Leucoxene (90% TiO2) is located in Western Australia and contains proved (53 Mt) and probable (255Mt) reserves of 308Mt @ 1.2% heavy minerals.

The company announced results of a DFS for the project in January 2010, and is ready to commence plant construction. The construction period is 85 weeks.

Gunson has appointed RFC Corporate Finance Limited (RFC) to assist in securing funding and product offtake partners for the development of the project and is seeking to attract a project partner by the end of 2010.

With an expected annual production of 146ktpa heavy minerals, it would account for about 3% of global zircon production. According to TZMI, the highly concentrated global zircon market is expected to face a supply deficit from 2012 onwards due to growing demand, especially from China, which would lead to a sharp rise in zircon prices.

The company has made a substantial investment in exploration activities at several projects in Australia but is currently incurring losses both at the net income and EBITDA levels.

Investment Arguments

Strong portfolio of mining assets in Australia:

The company has a strong portfolio of mineral assets with focus on heavy mineral sands (primarily zircon), copper-gold and nickel, which are in different stages of exploration and located in the mining friendly states of Western, Northern and South Australia.

Coburn is at an advanced stage:

A DFS was recently completed on the project at the end of 2009 revealing that Coburn has the potential to support a high volume, low cost, long life mining operation producing quality mineral products.

Approximately 67% of the revenue from the proposed mine is expected to come from zircon, for which TZMI, a leading global mineral sands marketing consultancy, forecasts a significant supply shortfall commencing in 2012.

Several companies with the financial resources to invest in Coburn are currently reviewing the investment opportunity.

Strong revenue and cash flow expected from Coburn:

The DFS on Coburn shows a mine life of 23.5 years, with further potential to increase these reserves. Financial returns on a pre-tax, ungeared basis include an operating cash surplus of A$37 million per annum, NPV of A$163 million at an 8% discount rate and an IRR of 16.8%.

Current zircon prices are approximately US$150 per ton above the estimates used in the DFS financial model.

Mount Gunson project at BFS stage:

Mount Gunson‘s Pre-Feasibility Study (PFS) on the most shallow of the 2 resources, the MG14 deposit, showed positive results, with the 1.1 million ton deposit averaging 1.7% copper over a 2 year production period.

Metallurgical test work on samples from the 100% owned MG 14 and Windabout deposits continued in the second quarter of 2010 and is scheduled for completion at the end of August.

Strong future forecasts for the mineral assets:

Leading global mineral sands marketing consultancy TZMI reported that the investment climate and market fundamentals have become increasingly buoyant in the sector in recent months.

More favorable market conditions and price increases over the next few years are expected to provide an investment environment that supports the advancement of new projects, in turn benefiting the company.

With just under 55% of zircon use occurring in ceramics, primarily in tiles, the dramatic growth in Chinese construction will significantly increase demand for zircon.

Demand surpassing supply for copper and zircon:

As per Goldman Sachs - JBWere Investment research, with resurgent demand in China and gradual improvements in other emerging markets, the highly concentrated zircon market is expected to face a supply deficit by late 2010. As well, the global copper market is expected to see supply constraint from 2011.

Strong price rise is expected for zircon, amid supply constraint:

According to TZMI, the price of zircon is expected to rise significantly from 2012 onwards amid demand rise and supply constraint.

Lack of upcoming Greenfield mineral sands mine developments:

The number of new Greenfield development projects, particularly for zircon, has decreased in recent years with no new mines currently under construction. A dearth of promising new regions for zircon exploration and production is causing a fall in the number of new projects.

With rising demand and a lack of adequate supply, the future prospects for the company look bright.

Joint venture with key players:

Gunson is exploring its 1,300 square km Mount Gunson Copper Project with a major farm-in partner able to fund deep drilling for deposits similar to the Olympic Dam mine, located 100 km to the north.

In 2000, the company entered into a joint venture with Billiton Exploration for exploration at Mount Gunson in which Billiton Exploration agreed to subscribe for 2,500,000 shares at an issue price of 20 cents per share (A$0.5 million) and on pre-defined terms and conditions. Shortly after Billiton merged with BHP.

BHP Billiton withdrew in 2003 with no residual interest and in mid 2006 Gunson subsequently partnered with Noranda Pacific Pty Limited (Noranda), now a subsidiary of Xstrata Copper. Noranda has spent A$4 million at Mount Gunson to date and has the right to earn a 75% interest by spending another A$6 million by mid 2013.

Australia - a politically stable/mining friendly nation:

Australia is one of the most politically stable and mining friendly nations in the world. This reduces the risk of exploration delay for the company‘s key mining projects in the country.

Strong exploration team and experienced management:

The company has a strong exploration and development team with sound technical know-how. Gunson‘s management team has extensive experience in the global mining industry.