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In the news: Mineral Deposits/Eramet, Base Resources & Cardinal Resources

Published: 11:19 27 Apr 2018 BST

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FROM THE BROKING DESK

Mineral Deposits RECEIVES BID FROM ERAMET

Eramet (ERA FP) has announced a bid for Mineral Deposits Limited (MDL AU). The all cash, off-market offer was set at A$1.46/share, equivalent to a 33% premium to the one-month VWAP, valuing MDL’s equity at A$291m on a fully-diluted basis. There are limited conditions attached to the offer, which is funded from Eramet’s cash.

Eramet is MDL’s 50:50 partner in the TiZir JV, which owns the Grand Côte minerals sands operations in Senegal and the Tyssedal TiO2 slag smelter in Norway. Eramet has stated that the deal will allow it to consolidate the JV fully, and that it will provide MDL shareholders with certainty of value at an attractive price. Eramet has acquired 13.3% of MDL from key institutional shareholders as part of the offer. MDL has responded to the unsolicited offer by recommending that shareholders take no action until it makes further comment.

The offer supports the positive outlook for product pricing. Last year saw a significant improvement in pricing across mineral sands products, both in the pigment-driven TiO2 sector and the tile glaze-dominated zircon sector. This has been driven by continued moderate growth in demand along with supply side issues; for TiO2, lower Chinese feedstock production, and supply restraint in the case of zircon. The offer for MDL by its partner reflects a desire to consolidate the operation, and also a more positive view of the value of — and therefore the outlook for — the business (and the sector) compared to that of the market.

We believe that there are some possible synergies that Eramet may be able to extract if successful. These include the fact that its ‘deeper pockets’ mean that it is more likely to be able to adapt production at the operations to suit supply than the JV. Not only would it potentially be able to consider and support a reduction of supply in a weak market, but it would also allow funding for any expansion of the operations (which have an expected life of 33 years). Another potential consequence would be the reduced visibility on the outlook for what is a significant mineral sands operation as it disappears into a larger diversified group.

We estimate that the offer puts an Enterprise Value of US$794m on the TiZir JV and a trailing EV/EBITDA of 13x. With a deal value of A$291m/US$220m and US$13m in cash and no debt at MDL’s corporate level, the deal puts MDL’s 50% stake in TiZir at US$207m, or US$414m for 100% of the equity value of TiZir. We believe the appropriate net debt adjustment to derive the see-through EV of TiZir is US$380m. This is the sum of TiZir’s cash (US$48m), external debt (US$371m) and the amount by which shareholder loans owing to Eramet exceed those payable to MDL (US$57m). In 2017, on external revenues of US$225m, TiZir’s EBITDA was US$62m for a trailing deal EV/EBITDA of 13x. Although TiZir generated significant amounts of cash in 2017, this was eaten up by large finance costs (US$53m), an increase in working capital (US$34m) and some ongoing investments (US$11m), for cash outflows before finance of US$6m.

MDL’s share price has performed very strongly since mid-2016, when it was trading at less than A$0.20. This reflects not only a significant improvement in the mineral sands market, but also operating improvements. The impact of this has been compounded by operational gearing and the financial leverage within TiZir.

Offer points to the value within the sector, and of Base Resources* in particular. We believe that the offer supports our positive outlook for the sector, which we reviewed in our piece Mineral Sands — Shifting Up A Gear, October 2017. We would also highlight Base Resources (BSE AU A$0.25 | BUY TP A$0.62), where our most recent report can be viewed here. The company was also recently involved in some corporate activity, having bought the long-life, high-grade, ilmenite-rich Toliara Sands Project in Madagascar in early 2018. The conclusion of the Eramet deal would leave Base as one of the few remaining significant mineral sands producers. Moreover, it has the distinct advantage of now having asset diversification and a potential long-life operation through Toliara, in addition to the near-term prospects of increasing mine life at Kwale in Kenya through the recently-begun exploration drilling.


CARDINAL RESOURCES††† (CDV AU A$0.48 | BUY TP A$0.93) — NAMDINI PFS REMAINS ON TRACK FOR DELIVERY IN 1H18

 

Cardinal Resources has announced its Activities Report for the March quarter. It reviewed the activity during the period, which included the publication in February of a positive PEA into the development of a 4.1Moz open-pit bulk mining operation, combined with a flotation regrind and CIL processing route, at its Namdini Project in Ghana. A number of scenarios were considered in the study, with the larger options delivering the highest returns. We expect that the completion of the PFS, which remains on track for publication before the end of June, will significantly de-risk the project through increasing the level of confidence in the operating and capital cost parameters associated with its development. The company had A$13.3m in cash at the end of March 2018, after cash outflows before finance of A$5.4m during the period. Please see our 37-page initiation piece: Cardinal Resources — The Bigger the Better, 22 March 2018

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