In the news: Hummingbird Resources, Base Resources & Weatherly International
METALS & MINING EQUITIES
Hummingbird Resources*† (LON:HUM) — Maiden Reserves at Yanfolila and Project Update — The West African gold exploration and development company has announced a maiden reserve for its Yanfolila Project in Mali. The reserve within the Komana East and Komana West pits was 6.8Mt grading 3.03 g/t, containing 666,000oz of gold. This represents a 20% increase over the gold contained in the in-pit mineral resources modelled in the optimisation study of March 2015.
The company also announced that it is to develop the project with a throughput of 1.24Mtpa, 24% greater than the 1.0Mtpa plant proposed in the optimisation study. Project economics were being updated and will be released in January 2016.
RFC Ambrian Comment: We consider this announcement to be very positive, with a 24% increase in the scale of the plant and a 20% increase in the gold contained in the maiden reserve compared to the material assumed to be mined in the optimisation study. We note the potential for additional defined code-compliant resources to be added to reserves in due course. We await the updated capex and operating cost guidance that is expected to be published in January before undertaking a revision of our valuation. We also note that the company and Taurus Funds Management continue to undertake due diligence on the project with a view to providing project debt for its development and we await further information on this.
We will provide a more detailed commentary on the announcement in a separate report.
Base Resources*† (LON:BSE) — Documentation for Debt Facility Rescheduling — The mineral sands producer operating in Kenya has now executed the rescheduling of the Kwale Project debt facility, its key milestone prior to the year end, reprofiling repayments to fit better with projected cashflows in the current commodity price environment. With US$14m of the outstanding US$204m paid down on execution, the entirety of the remaining US$190m project debt is now repayable over 4.5 years, as laid out in the table below.
The base rate has been maintained at 180-day US dollar LIBOR for the relevant period plus a 6.30% margin across all tranches (inclusive of political risk insurance), which is effectively equivalent to the 6.33% margin prior to rescheduling. An additional margin of 0.25% continues to apply until the earlier of the outstanding loan being paid down to US$170m or the finalising of the applicable lender security package. According to the current repayment schedule, the outstanding loan should be reduced to US$170m by December 2015.
The facility has an amendment fee of US$2.85m, being 1.5% of the US$190m rescheduled debt facility. In addition to repaying the initial US$14m sum, Base has funded the debt service account with US$17.6m, which is sufficient to cover the US$9.5m principal repayment and debt service costs for the next six months. This compares with the company’s cash position of US$58.4m as of end-September.
As part of the refinancing, outstanding regulatory and compliance elements of ‘project completion’ have also been removed. We understand these to have included receipt of government licences, and demonstration that certain operating ratios would be maintained throughout the project life. All operational requirements of project completion had been met as of June 2015, as assessed by a series of 90-day physical and economic tests, and the final date for project completion had been set at the earlier of 31 December 2015 or the execution of the Kwale Project debt refinancing.
RFC Ambrian Comment: According to the prior schedule, the majority of the debt facility had been repayable over a 2.5-year term, rather than a 4.5-year term. Hence, over 80% (US$169.2m) of the remaining US$204m debt would have been repayable over the first 2.5 years to June 2018. Under the terms of the rescheduling, US$14m has been repaid on execution, leaving US$190m outstanding, of which US$83.6m is repayable by June 2018.
The lower repayment run rate over the upcoming two years reflects continuing near-term pressure on mineral sands pricing, with ilmenite having fallen to a low of around US$75/t FOB, while the premium rutile price has remained better supported at around US$800/t. With the refinancing in place, the company should therefore be able to upstream cash from the project to the corporate level, subject to a 50% cash sweep, freeing up funds to explore business development opportunities. We reiterate our Buy recommendation, with a target price of A$0.25.
Weatherly International*† (LON:WTI)— Tschudi Reserve and Cost Guidance Updated — The AIM-quoted, Namibian copper producer has published an updated resource and reserve statement for the Tschudi copper operation, as of 30 June 2015.
• Measured, Indicated and Inferred resources were 52Mt grading 0.81% Cu, containing 422,000t of copper, of which 262,000t were contained in the Measured and Indicated categories.
o The resource statement was based on a Total of 572 holes (67,068m), an increase of 142 holes (8,963m) since the last statement in 2012.
o Adjustments to the resource included the reclassification of 0.6Mt of clay-rich, leached cap as waste and the adjustment for depletion of 1.5Mt produced during the year, for an overall decrease of 0.9Mt (from 53.0Mt to 52.1Mt).
• JORC classified reserves were estimated to be 25.3Mt grading 0.85% Cu, containing 214,000t, of which 207,000t Cu was attributable to Weatherly’s 96.5% interest in the operation.
o Reserves were based on a copper price of US$5,950/t (US$2.70/lb) compared with the previous resource of US$7,500/t (US$3.40/lb). Current and previous reserves were both based on a calculated cut-off grade of 0.3% Cu.
o The overall reserve tonnage increased by 11% to 25.3Mt and the grade decreased by approximately 10% from 0.95% Cu to 0.85% Cu. The decrease in the grade was attributed to the change in the geo-statistical methodology of the resource estimation applied to the main mineralised zone from Inverse Distance Squared to Ordinary Kriging and also to the application of more conservative dilution assumptions than previously applied.
o Overall the reserve represents an increase of 6,350t of contained copper after accounting for depletion since the commencement of operations of 8,000t.
The company also updated cost guidance.
• LOM C1 operating costs were expected to reduce by 9% to US$3,865/t (US$1.75/lb) Cu cathode.
o The waste-to-ore ratio was reported to have decreased from 7.5 to 6.5 following pit optimisation work. Costs also benefited from a weaker local currency, lower diesel fuel prices and improved optimised pit designs.
• Guidance for C1 costs for the current financial year (to June 2016) was in the range of US$4,250-4,350/t (US$1.93-1.97/lb).
• Guidance for C1 cash costs in FY17 was approximately US$4,100/t (US$1.86/lb).
The company indicated that it was considering an expansion of the operation’s nameplate production capacity by 18% from 17,000tpa to 20,000tpa for very modest upfront capex of US$1.2m. If implemented, the company reported that C1 costs could be expected to fall by a further 2% to US$3,785/lb. Total operating cost savings as a result of the expansion could be expected to Total US$10.6m over the life of the operation.
RFC Ambrian Comment: We consider this announcement to be positive given the 6,000t increase in modelled reserves and also the 9% reduction in LoM operating costs. The prospect of a low-cost, 18% expansion in output to 20,000tpa is also likely to add to the value of the operation.
However, we continue to believe that the impact of the recent falls in the copper price on the company’s finances and its ability to repay the outstanding project debt on the current schedule continue to overshadow improvements at the operating level.
The outstanding Tschudi Project debt is US$80m, which was provided by Orion Mine Finance. On 25 November the company announced that it had agreed with Orion to defer the first instalment of the repayment on the loam, which was repayable quarterly over 4.5 years, starting in December 2015. The announcement also stated that discussions around the detail of the amended arrangements had commenced. We estimate that the first four quarterly repayments were US$2.2m, before ramping up to US$4.7m from the remainder of the period. The company also drew US$4m of an associated project overrun facility in mid-September 2015, which is repayable in September 2016.
Pending the outcome of the discussions between the company and Orion, our recommendation remains under review.