COMPANIES
ASX:BSE LON:BSE | A$0.295 | US$172m | Buy | TP : A$0.49
36% Increase in M&I Resource Tonnage at Kwale South Dune
Base Resources has released an updated Mineral Resource Statement for the Kwale South Dune that incorporates the extensional and infill drilling previously outlined in announcements between March and May 2017. Total Resource tonnage increased 29%, with an overall increase in Contained Heavy Minerals of 13% from the addition of a large volume of material at a grade below the previous average. As the mining licence has yet to be extended to include all of the South Dune area, management has not yet updated the Reserve. In the coming months Base will perform an economic analysis to form the basis of its application to the Kenyan Ministry of Mines either to amend the existing mining licence or receive a new one.
COMMENT: The Resource update shows a significant increase in tonnage and HM contained, albeit at a lower grade. Based on our estimates, the upcoming Reserve update will extend the life of mine and provide a material economic benefit. We believe that 1.0-1.5 years of additional mine life may be added, providing an additional 5-10% of value above our current target price.
We are maintaining our Buy recommendation and A$0.49 target price, but note the additional value that the pending Reserve is likely to provide. For details on the company’s latest financial results, please see Base Resources — FY17 Financial Report, 29 August 2017.
The South Dune Measured category grew due to tonnage additions and resource upgrades — The drilling campaign in 2017 included both extension and infill drilling on South Dune. As a result, the Measured Resource tonnage increased 89%, while Indicated and Inferred Resource tonnage decreased due to upgrading by 20% and 96%, respectively. Overall grades declined from 3.5% to 3.0%, which we believe to be attributable to the new material added. The net addition to the total resource implies that the new material added has a grade of 1.6%.
We believe that the coming Reserve increase is likely to extend the life-of-mine — Grades have fallen across all Resource categories, with Measured & Indicated decreasing 0.5%. However, the increase in tonnage (+36% for M&I) has more than offset the decreased grade and resulted in a higher HM contained (+19% for M&I). This has resulted in additional material that will extend the life-of-mine if converted to Reserves. Assuming that M&I tonnage and HM contained get converted to Proven and Probable Reserves on a similar ratio as in the Resource Statement of 30 June 2016, we believe the life-of-mine may be extended by 1.0-1.5 years. We estimate that the economic impact will be positive.
Mafisini deposit has the potential to extend the mine life — Mafisini is interpreted to be a continuation of mineralisation at the South Dune, separated by a narrow, alluvial lowland. Mineralised intervals occur over a contiguous 1,240m of strike and up to 480m in width. Notable results for Mafisini include the previously reported Line 13 cross-section showing 10.5m at 4.4% HM and 12m at 4.2% HM, both from surface, compared with a grade of 3.8% HM on the South Dune reserve. Other drill hole grades appear to be broadly in line with the South Dune.
NE Sector shows longer-term potential, but has been suspended pending the resolution of access issues — Only four drill holes with mineralised intercepts were reported for the NE Sector, so the story is still developing. The company intersected a surface zone where 2 of 3 drill holes were low-grade and narrow, as well as a deeper mineralised zone sitting ~20m below surface with higher grades. Base has yet to complete most of the proposed drilling; this has been put on hold due to community issues. The company believes these arose as a result of political posturing associated with the 2017 general election in Kenya. Base intends to re-engage with the community after the election to obtain informed consent and access the target drill sites.
Target price — We are maintaining our Buy rating and target price of A$0.49. However, we estimate that the coming update to reserves may provide a 5-10% uplift from an extended mine life. Furthermore, we note that Mafisini offers additional resource potential.