UK based mineral resources company African Eagle released its results for calendar 2007 on May 6th and there were no surprises in the numbers or the statement – the investment case remains highly attractive.  The company is focused on the development of gold and copper deposits in the three Eastern African countries of Tanzania, Zambia and Mozambique.  The Mkushi copper mine in Zambia and the Miyabi gold project in Tanzania are the most advanced projects with the former working towards a full feasibility study and the latter already having proven up a 500,000 ounce resource.  Complementing these two headline projects are a number of earlier stage developments – critically, all bar one of African’s major projects are now  operated under joint ventures with larger partners which drastically reduces the cash cost to African of adding value through drilling and so significantly de-risks this investment. This is a company with large stakes in two projects which are clearly commercials and boast JORC compliant resources (Mkushi and Miyabi) which is valued on an ex-cash basis, at just £11.2 million. For a fully funded concern such a valuation is far too low.

 

The Mkushi copper prospect is located in the centre of Zambia and is operated through a joint venture agreement (49%) with Australian miner CGA Mining Limited.  The joint venture provides for CGA taking responsibility for directing and funding the feasibility study in the central ‘core zone’ by the fourth quarter of 2008, while African Eagle coordinates the pro-rata funded areas outside this ‘core zone’.  Confirmation of the feasibility study’s progress has prompted the company to submit a full mining licence application and provides optimism that production can commence by 2010.  An historical copper mining area, African Eagle began a drilling programme at the site in 2005 with a JORC compliant inferred resource of 80,000 tonnes of copper estimated.  CGA’s current drilling program is currently being analysed by independent resource consultant Snowden with JORC and NI43-101 estimates are due for completion by the middle of this year.

Other Zambian operations include the Mokambo and Eagle Eye copper projects, the Ndola copper and zinc project and the Lunga gold and copper project.  Mokambo is a 50% owned venture in the north of the country where the company is currently conducting a phase 1 exploration programme based on past exploration having found encouraging resource estimates.  The wholly owned Sasare Eagle Eye project has seen the first drilling phase completed and a JORC compliant copper resource of 1.4Mt at 1.2% copper established.  Further surveys to refine the identity of the mineral belt and the involvement of an external partner are planned for 2008 and we believe that African Eagle continues discussions with a number of potential farm-in partners. Ndola is the subject of an earn-in agreement with Phelps Dodge Mining Zambia which provided a cash injection to the company of £2.3 million in exchange for African shares and the rights to up to 70% of the Ndola project.  Mineralised targets of 40Mt of 0.8% copper and 3Mt of 3.5% combined lead and zinc have been identified with responsibility and the cost of a bankable feasibility study resting with Phelps.  Lunga is fully owned by African Eagle and is currently subject to ground spectrometer surveys and airborne / gravity surveys aimed at investigating the uranium anomalies and defining the copper-gold drilling targets respectively.

The Miyabi project in Tanzania has a 71% indicated JORC compliant resource of 12.4Mt at a grade of 1.3 g/t for a gold resource of 520,000 ounces.  Currently African Eagle owns 90% of eleven of the fourteen project licences, and 100% of the remaining three, while Randgold Resources Ltd holds an option to earn up to 65% of the total project.  Randgold is due to undertake further drilling in the near future to test both regional and conceptual targets.

The remaining Tanzanian projects are the Rupa and Igurubi gold, Dutwa gold, nickel and PGM (Platinum Group Metals – ruthenium, rhodium, palladium, osmium, iridium and platinum) and Zanzui nickel and PGM projects.  The Rupa project comprises three gold licences, two of which are 90% owned and the other 100% owned, with infill soil sampling and detailed ground and mapping work planned for this year leading to an initial drill programme.  Igurubi is a gold project comprising two licences whereby Africa is due to earn a 75% interest by June 2008.  The recent drilling programme, currently ongoing, has occurred at 56 holes and revealed gold sample intersection grades of 14.21g/t, 7.33g/t and 7.03g/t.  The Dutwa gold project is 90% owned and with the potential to gain the remaining 10%, African has planned an infill drilling program and the acquisition of adjacent licences, while nickel, platinum and chrome have also been found in small quantities.

The establishment of a uranium division in the middle of 2007 spanning all three target countries, is chartered with the goal of investigating different ways of developing the 7 separate asset holdings so as to gain maximum benefit from each of the early stage exploration projects.  Nuclear power is growing in popularity around the world and with demand for uranium expected to steadily increase, the creation of its own uranium division acknowledges this growth area at an organisational level.

Financially African Eagle reported a post tax loss of £1.1 million, down from £1.3 million in 2006.  The corresponding loss per share stood at 0.7p down from 1.0p per share, while net cash at the period end rose from £2.5 million in December 2006 to £7.1 million at December 31st 2007.  Net assets rose to £17.6 million from £10.0 million on the back of a listing on the alternative Johannesburg Stock Exchange (AltX) raising £6.3 million, and a further share issue on AIM raising £1.1 million.

African Eagle has a stated partnership policy which although dilutes ultimate control of its projects, expedites their progress and allows the company to hold a larger portfolio of assets.  The company’s strong cash position gives it a buffer against the current financial woes afflicting global markets while also allowing it to look to benefit from the inevitable struggle other resource companies will experience through acquisitions and/or joint ventures.  African Eagle, although currently operationally confined to three African countries, is constantly on the lookout for opportunities in other Southern African Development Communities (SADC), particularly if on the ground skills/knowledge, a current trait of the company, can be acquired at the same time.

The finalisation of the bankable feasibility study at Mkushi will be a great milestone for African Eagle and represents a very tangible measure of progress.  The development of a resources statement for Mokambo, and optimism for positive drilling results at Igurubi, Ndola and Rupa are other goals for this year.  The company is also looking at the possibility of a Zambian Stock Exchange listing to further broaden the shareholder base and widen the potential capital raising net.  With TWP Finance, a subsidiary of South African engineering firm TWP Holdings, increasing its stake in the company to 5%, African Eagle is already generating interest in its broad portfolio of assets.   We maintain our sum of the parts derived target price of 35p and at 8.625p per share our recommendation remains buy.

Forecast Table Year to 31st December Sales (£ Million) Pre-tax Profits (Million of pounds) Basic Earnings per share (pence) 2006A 0 (1.37) (1.0) 2007A 0 (1.37) (0.7) 2008E 0 (3.0) (1.44) 2009E 0 (4.0) (1.89)