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Australian Mines assigned ‘spec buy’ recommendation in initial Argonaut research

The company has the opportunity to be a globally significant supplier of nickel and cobalt sulphates through its pipeline of projects: Argonaut Securities.

Limonite zone at Greenvale open pit
Powerline open pit at Greenvale with the yellow zone being main limonite mineralisation

Australian Mines Limited (ASX:AUZ) has had Argonaut Securities initiate research coverage with a resulting ‘spec buy’ recommendation placed on the battery metals explorer and developer.

In its inaugural research report, Argonaut said the company had the opportunity to be a globally significant supplier of nickel and cobalt sulphates through its pipeline of projects.

READ: Australian Mines boosted by $12 million investment from US fund

“Although the Sconi BFS is yet to be released, we regard the project as the most advanced of its kind in Australia,” Argonaut stated.

“Sconi has a substantial resource able to support +35 years of operations.

“While upfront CapEx is substantial, the project should generate high margins once ramped up to steady state production,” the report said.

 

Australian Mines’ primary focus is the Sconi Nickel-Cobalt-Scandium Project in Queensland, which it is developing.

Sconi, so named as an acronym of scandium, cobalt and nickel, is an oxide limonite deposit with mineralisation from surface and is adjacent to the town of Greenvale.

The deposit has a resource of 89 million tonnes at 0.58% nickel and 0.06% cobalt and is subject to a bankable feasibility study (BFS), which is due for release this quarter.

READ: Australian Mines to acquire cobalt nickel scandium project

It also holds the Flemington project in NSW, which overlaps the intrusive complex hosting Clean TeQ Holdings Limited’s (CLQ) Sunrise project, and Thackaringa project in South Australia.

Following are extracts from the Argonaut report:

View | Positive

Development ready: Three deposits which make up the Sconi project, namely the previously mined Greenvale, Lucknow and Kokomo, are all on granted MLs.

Greenvale was historically mined as nickel feed for the Yabulu refinery in Townsville. The project has grid power to site and a sealed road for 250 kilometres to the port city of Townsville.

Aerial view of historic shallow open pits at Greenvale now flooded.

The imminent BFS will likely outline a 2.0-2.4 million tonnes per annum plant with two autoclaves to treat limonite ore, producing 15,000 tonnes per annum of nickel and 3,000 tonnes of cobalt in sulphate.

Pending successful financing, the two-year construction phase will commence from H1 2019, with first production in 2021.

Development capex is estimated at about US$750 million before contingencies and operating costs are forecast at less than US$1.00/pound nickel.

Strategic Partnership: In February 2018, AUZ signed a binding offtake agreement with Korean battery manufacturer SK Innovation for 100% of nickel and cobalt sulphate from Sconi.

SK will take up to 60,000 tonnes/annum NiSO4 and 12,000 tonnes CoSO4 for an initial 7-year period with a 6-year extension option.

SK also agreed to collaborate with AUZ for the development of battery-grade materials by validating output from the company’s demonstration plant in Perth.

In addition, SK has an option to acquire 19.9% of AUZ at 12 cents/share ($80 million) within three months of BFS completion.

Pipeline of projects: Flemington is highly analogous to Sconi with an initial resource of 2.7 million tonnes at 0.10% cobalt and 403ppm scandium, covering just 1% of the prospective underlying geology.

The 100%-owned Thackaringa project abuts Cobalt Blue Holdings Ltd’s Pyrite Hill and Big Hill cobalt deposits and has a significant cobalt in soil anomaly.

Investment thesis

Long life high margin project: Sconi has a substantial resource able to support +35 years of operations. While upfront capex is substantial, the project should generate high margins once ramped up to steady state production.

Sconi most developed project of its kind in Australia: Argonaut believes Sconi is the most advanced nickel-cobalt project in Australia given its granted ML, binding offtake agreement and imminent BFS.

We also believe the more generic flow sheet, relative to CLQ’s Sunrise project, will result in lower upfront capex and subsequently lower financing risk.

Battery market appeal: AUZ has proved an ability to produce battery-grade nickel and cobalt sulphate products from its demonstration plant located in Perth.

The project has potential to produce up to 3% of global cobalt supply, and its location in Queensland makes it a low sovereign risk alternative to the African (DRC) dominated supply.

Strategic partnership: The company has formed a strategic partnership with SK Innovation, a significant player in the electric vehicle battery market, and is part of SK Global, the 57th largest company globally.

The partnership encompasses 100% of nickel and cobalt offtake with an option for a cornerstone equity investment.

READ: Australian Mines drill results extend nickel cobalt resource potential

Extensive exploration upside: While Sconi already has sufficient resources for a +30-year project, there is significant upside from both resource expansion, particularly at Lucknow and Kokomo, as well as definition of higher grade starter pits. A 50,000-metre drilling program is underway.

Proposed resource extension drilling at the Sconi deposits.

Pipeline of projects: AUZ has a pipeline of Australia cobalt/nickel projects beyond Sconi providing potential to be a globally significant battery mineral producer in a low sovereign risk jurisdiction.

Advanced nickel-cobalt laterite project

We see Clean TeQ Holdings (CLQ) Sunrise project as the nearest nickel-cobalt-scandium analogue, however other cobalt projects on the ASX include Ardea Resource (ARL) Goongarrie project, Barra Resources (BAR)/Conico Ltd (CNJ) 50:50 Mt Thirsty project and Cobalt Blue’s (COB) Thackaringa.

On a comparative basis, Sconi benefits from a granted mining lease, secured offtake, low strip ratios and low capital intensity compared to other HPAL projects.

Long-life high-margin project

An initial pre-feasibility study (PFS) for the Sconi project was completed by Metallica Minerals Limited (ASX:MLM) and released in further detail by AUZ in March 2017.

The study outlines a +20-year project processing 750,000 tonnes/annum with about 90% metal recoveries producing about 5,500 tonnes/annum nickel and about 750 tonnes/annum cobalt, plus scandium.

Upcoming BFS

AUZ is due to release its bankable feasibility study (BFS) in September 2018. The release date was delayed by around three months after sterilisation drilling encountered mineralisation under the proposed site for processing infrastructure, necessitating a change of location.

We expect the study will define a 2.0-2.4 million tonnes/annum plant with two autoclaves, producing 15,000 tonnes/annum nickel in sulphate and 3,000 tonnes/annum cobalt in sulphate (+ scandium oxide) from around 0.80% and 0.11% respective nickel and cobalt feed grades and 90-93% recoveries.

The Thackaringa project near Broken Hill.

Quick facts: Australian Mines Ltd

Price: 0.0165 AUD

ASX:AUZ
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