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 MARKET REPORTS |
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Analyst report - shares
Stock of the week – Metallica Minerals
February 18, 2008
Tim Morris, wise-owl.com analyst
Stock: Metallica Minerals
Recommendation: Speculative buy
Code: MLM
Market Cap: $56m
A bubble in nickel prices earlier last year saw the metal reach highs of over US$24/lb in April, before halving in value by August.
Now just over US$12/lb, the price of nickel seems to have stabilised, creating some interesting opportunities to invest in promising, yet speculative junior resource companies, whose share prices are beginning to regain consciousness after being slammed along with nickel price.
The nickel price has fallen from its peak last year, but remains historically high. See chart below.
Source: wise-owl.com, Bloomberg.
Emerging nickel producer, Metallica Minerals fits this bill, but also brings a swag of early stage projects targeting a broad range of commodities including bauxite, coal, scandium and uranium. However, with a market cap of over $50m the company needs more than exploration ground for its share price to move higher in the near term. Thankfully, its Queensland nickel projects are in the more advanced feasibility stages with near term production in sight.
The Lucky Break project, located 140km west of Townsville is the most advanced. Development has commenced and first production has been flagged for late 2008. Metallica has a 60% interest in the project; however its joint venture partner Metals Finance Corporation (MFC) will outlay all development costs as part of its earn-in agreement. Metallica is free carried and will receive a share of the operating surplus once the project is in operation. This share will initially be 15% until MFC has recouped its capital investment of around $20m, however thereafter it will revert to 60%.
Although the mine life is very short at 4-5 years based on a resource of 8,195t contained nickel, Lucky Break is set to provide short term cash flows and valuable operating expertise as Metallica shores up its flagship Nornico Nickel project.
The Nornico project is also located in northern Queensland, between Cairns and Townsville. While forecast production is further away, around 2010, the project is much larger, with a 10,000 tonne per annum operation targeted over a 10-15 year mine life. The project is currently the subject of a funding feasibility study due for completion in June, however an initial scoping study completed in 2006 suggested that Nornico would be commercially robust at nickel prices of $5/lb, more than half their current level.
The study estimated that the project would require capital costs of $278m and annual operating costs of $71m, but generate potential revenues of $120m, which is more than double Metallica’s current market cap.
Broad cost pressures across the industry mean there is a good chance of cost estimates rising in the current funding feasibility study. However, in the project’s favour is the strong increase in the resource base to almost 250,000 tonnes of nickel from the 160,000 tonne assumption used in the initial scoping study. With another resource upgrade expected this month, the company is aiming to increase the projects mine life beyond 20 years.
Aside from these in ground assets Metallica had $7.8m cash on hand at the end of 2007 and holds an 8.5% stake in ASX listed Cockatoo Coal (COK) following the divestment of some coal tenements. These 25million shares are worth $17.5m with COK shares trading around 70c. Along with the potential cash flows from Lucky Break it would appear that Metallica is well positioned to advance the Nornico project towards production.
Given its north Queensland location, development should be supported by proximity to existing infrastructure, electricity, water, and key markets in Asia. Downward movements in the nickel price pose a risk as do project delays.
Minor delays in the completion date of the Nornico feasibility study from March to June, along with poor market conditions have seen the stock pull back from levels around 70c to 50c since the start of the year.
A strong pipeline of news flow in the months ahead have the potential to trigger a re rating, however prolonging weak sentiment across the small cap sector does pose a risk, in which case patience is required.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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