KGL Resources Ltd (ASX:KGL), which is developing the Jervois Copper Project in the Northern Territory, has previously flown under the radar with investors, according to Ord Minnett, and presents a straightforward investment prospect for 2022.
The broker has placed a Speculative Buy recommendation on its stocks, with a target price of around A$0.80 per share. Shares today are trading at $0.635.
A simple copper story
Jervois is a brownfield development project 275 kilometres northeast of Alice Springs that promises rich exploration potential.
Ord Minnett says it hosts a 23 mega tonne resource and boasts high copper grades of 2.0% – including the Rockface underground, with 3.3% copper – and simple metallurgy, producing a copper concentrate with cameo appearances from silver and gold.
Mine content has been extensively tested over the years, with multiple composite samples from drill core. The orebody is 95% sulphides and 5% oxides, which simplifies the complexity and cost of operations.
All primary deposits are open at depth, and DHEM provides good indicators of further extensions.
Valuation
Ord Minnett opened coverage with a Speculative Buy recommendation, targeting A$0.80 per share, stating: “Our valuation is based on a sum of these parts – discounted cash flow with 8% weighted average cost of capital, US$3 per-pound copper price and AUD of $0.70.”
“KGL has cash of $18 million, no debt and 392 million shares on issue,” Ord Minnett said. “Key risks include funding, delays, low free float (around 55%), delays, project execution, costs and valuation.”
But it added: “Upcoming catalysts include resource updates at Rockface and Bellbird, a definitive feasibility study (expected in mid-2022), offtake agreement and ongoing exploration.”
“The project is unique and under-explored, and we see considerable upside for both grade and mine life," the report said. “Historically, KGL appears to have escaped investor attention. We expect the stock to re-rate during 2022 as exploration news trickles in and the new executive team progresses toward FID.”
To generate around $100 million a year
Ord Minette estimates a net smelter return (NSR) ore value at A$160 per tonne at an all-in cost of A$100 per tonne, implying a high margin of 38% compared to peers at around 25%, modelling a conservative development scenario that assumes construction starts in 2023 at an initial cost of A$330 millon.
Once it is ramped up to its annual 1.6 mega-tonne capacity by 2026, it is expected that copper in concentrate will average around 30 kilo-tonnes per annum over an initial 10-year life.
Attractive aspects
All key approvals and permits to commence mining are in place, including an environmental impact statement, mining management plan, Native Title land use agreement with the Central Land Council and water licences.
Along with the permits, Ord Minnett cited the ‘Tier 1 location’ of the project as a promising sign for investors. According to the Frazer Institute's annual Mining Survey, Australia consistently ranks as the world's premier mining investment location.
The Northern Territory, in particular, ranks in the top 20 jurisdictions across three categories: Investment Attractiveness, Policy Perception, Best Practice.
Project economics
The project economics are robust, generating $100 million in cash annually, with an internal rate of return (IRR) of 20% and a post-tax net present value (NPV) of A$240 million or A$0.61 per share.
“We see several opportunities to enhance the economics, including selling concentrate to Mt Isa, bringing forward high-grade underground, adding mine life and building a lead/zinc circuit," the report said.