Weatherly International: Is AIM's only copper producer getting the credit it deserves?

The face of mining has been changed irrevocably in the past three years with the financial crisis wiping out a significant number of the juniors.

However, the companies that survived have come through the experience tougher and altogether more focused.

Namibia-focused Weatherly International (LON:WTI) is a case in point. “Essentially the company is now much simpler,” says its chief executive Rod Webster. 

“It has a small amount of project debt and is fairly well cashed up to achieve the goals it has set itself and it’s on the way to establishing itself as a medium sized copper producer.”

Weatherly is AIM’s only real copper producer, but also boasts an exciting development project and plenty of blue-sky to keep the drill rigs turning and investors interested. 

Up 227 percent in the past year, the shares have been among the top performers of the junior market.

However, as we will see later there is a fairly compelling argument to suggest the current valuation still fails to reflect the company’s full potential.

Firstly, though, it is worth looking at the various moving parts that make up Weatherly.

The producing underground mines are the Otjihase and Matchless. 

They started life in the 1970s, were placed in care and maintenance during the economic financial crisis, and were finally re-opened last December.

Currently they are in the ramp-up phase and will eventually produce around 7,000 tonnes annually as part of a plan to transform Weatherly into a 20,000 tonne a year producer.

Each mine is slated as having a mine life of five to 20 years and it will depend on the long-term outlook for the copper price whether they carry on producing for the next two decades.

Otjihase currently has a reserve base of 3.2 million tonnes at 1.6 per cent copper and a small gold credit. The JORC resource is 11 million tonnes. 

The Matchless reserve, meanwhile, is 700,000 tonnes at 1.9 per cent copper. The cash cost of the mines should be below US$4,000 a tonne by end of the year. 

The excitement of late has centred on the Tschudi open pit in Northern Namibia after preliminary metallurgical tests confirmed the work carried out by Goldfields in the 1980s and 1990s.

This indicated the project is a suitable candidate for heap leaching. The result has an obvious knock-on effect of minimising the capital costs of Tschudi, which are put at a very manageable US$49 million.

The definitive feasibility study is expected to be published towards the end of the year, and ought to coincide with an announcement outlining how the Tschudi project will be bankrolled.

That said, it appears talks with potential financiers are well advanced. 

One bank is involved, Webster says, without revealing its identity.

The other interested party is thought to be the commodity trader Louis Dreyfus, which provided a US$7 million loan facility for the two central mines and has an agreement to acquire their output.

All things being equal, Tschudi ought to be up and running in 2013, bringing Weatherly closer to its 20,000 tonnes a year production target.

Elsewhere, there have been delays beyond the company’s control in processing the quality assurance and quality control samples for the Tsumeb copper tailings project, which have prevented Weatherly publishing a compliant reserve.

“Hopefully by the end of July we’ll have a reserve and resource for the tailings,” Webster reveals.

The shares rocketed from around 3 pence to 15 pence in the final quarter of last year as the market anticipated the move into production of Otjihase and Matchless.

But since the start of 2011, there has been a slow slide back towards 10 pence as the stock has drifted on little real volume along with the wider market for small-cap stocks.

The current share price gives Weatherly a market value of £55 million. 

The net present value of the two producing mines is £41 million, based on a very conservative copper price of US$7,000 a tonne (the current price is US$9,500).

So that means we get Tschudi, the company’s Tsumeb tailings project and the exploration upside all for the grand total of £14 million. 

And that does not take account of its 25 percent stake in China Africa Resources, which is expected to have a market value of around £12 million when it lists on AIM later this month.

House broker Ambrian reckons Weatherly’s shares are worth roughly double the current price. 

“Over time, once operating competency has been demonstrated at its existing operations, we believe the market will begin to price in a portion of the upside from the company’s development projects,” says Ambrian analyst Adam Kiley.

Of course another way to boost the stock’s valuation might be to list it on another exchange such as the TSX, where Weatherly might expect to receive a much higher stock market rating. 

While he is not ruling out such a move, it is unlikely Webster would press the button on a secondary listing without raising funds.

And with around US$15 million in the bank as at the start of the year, the Weatherly chief seems satisfied that he has the company’s cash position.

“A dual listing may not be a bad thing,” he adds. “But if you are doing a dual listing there has to be a reason why. You have to be raising money.

“Because at this point in time there is no need to raise money, it would just be a compliance listing. You have to question the point of not putting any shares out there and not creating liquidity.” 

Weatherly might even consider a Hong Kong listing after the tie-up with the East China Mineral Exploration & Development Bureau (ECE) to form China Africa Resources (CAR).

CAR’s main asset will be Weatherly’s Berg Aukas zinc deposit, and the UK firm will end up with around 35 per cent of the new company. 

Weatherly intends to “dividend back” stock to existing investors in order to bolster the free float and ensure that there is sufficient liquidity for the shares to trade properly when listed.

CAR, meanwhile, has the potential to be much bigger than a one play deal, Webster says.

“(Berg Aukas) could be quite a significant metal producer. It is small but high grade. We have few qualms about it being viable,” the Weatherly chief executive adds.

“We see that as just a start. We wouldn’t be getting into bed with someone like ECE if we didn’t think they had something significant to offer.

“They wouldn’t be getting into bed with a fledgling company like ours if they didn’t think it was going to get them somewhere large. That’s expectation on both sides.”

The blue sky exploration, meanwhile, is provided by the Tschudi syncline and Tsumeb West. 

“We are looking at half a dozen to a dozen deep diamond drill holes to test the potential of this pipe,” Webster says. 

“That will happen later this year. We will do it at the same time as we do the deep diamond drill at Berg Aukas (owned now by CAR).”

Forged in adversity, Weatherly has made great strides in the past year – and at some point the market will recognise this.