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11th February 2008 |
Contact:Stelios
Stylianou 020 7562 3375 |
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Gippsland Ltd - Initiation
of coverage at 4.75p: Speculative buy with 22p target price |
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Gippsland is an ASX and AIM listed company
aiming to develop the 40 million tonne Abu Dabbab and 98 million tonne
Nuweibi tantalum-tin projects in Egypt. It also has an interesting
portfolio of gold, copper and nickel exploration targets in the same country.
The two prime assets are located in the Central Eastern Desert of
Egypt, adjacent to the western shore of the Read Sea near Marsa Abu Dabbab.
With a Bankable Feasibility Study on Abu Dabbab
completed in 2005 and updated last year, Gippsland is in a position to bring
this asset into production within the next two years. Mining is scheduled to
commence in the second quarter of 2010, processing 2 million tonnes (Mt) of
ore per annum at full capacity, producing an estimated 650,000 lb/year of
tantalum pentoxide (Ta2O5) and over 1,500 tonnes of tin over an initial
period of 13 years of an estimated 20-year mine life.
The value of Gippsland as an investment
proposition lies almost entirely in its leading project. Our discounted
cashflow (DCF) valuation of Abu Dabbab, assuming a 13-year mine-life - which
may prove an overly conservative premise - is $156.6 million or 21.5p on a
fully diluted basis net to Gippsland. Our model assumes a 10% discount
rate; a future US$30 million equity fundraising through the issue of 77
million ordinary shares and that the remainder of the project finance comes
from a mixture of senior and mezzanine debt. The metal prices used vary
along the 13-year mine life but assume that they are likely to increase
slightly in the early years of mining operations before subsequently falling
steadily. We expect the company to start producing final
products in two years time and that in 2010 the mine will produce 650,000 lb
tantalum pentoxide and 1,530 tonnes LME grade tin. The directors
believe that feldspar production is expected to start in 2012, but our model
assumes its commencement in 2013. We expect the joint venture to have a
free-cashflow of $15 million in 2013, increasing steadily to over $80 million
per annum. This would allow the joint venture to undertake further development
of the Nuweibi Tantalum asset and bring it on-stream in due course.
However at this stage since the development of the lower grade deposit
at Nuwebi is unlikely to start for at least seven years we attribute to it no
separate value although in the latter years of our model for Abu Dabbab we
assume that it is the source of material production. Gippsland's other prospects in Egypt and
Australia have some interest but at this stage we prefer not to attach any
value to any of them since they are early stage and because Gippsland is
almost certain to develop all of its management time and free cashflow to its
lead prospect. However, the development of Abu Dabbab will, by
generating free cashflow to exploit secondary interests - starting with Nuwebi
- prove the catalyst for realizing value across the company's portfolio.
Gippsland has net cash of 1.38 million which adds 0.5p per share to
our group valuation. At 4.75p we initiate our coverage of Gippsland
with a speculative
buy recommendation and a target price of 22p.
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Background |
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Gippsland was incorporated in April 1969 and
listed on the Australian Stock Exchange (ASX) in June 1974. During the
early years of its corporate life, Gippsland was involved in a number of
exploration projects in Australia but with no particular success. In
the 1990s the company explored a number of opportunities to develop large
scale high grade gold deposits in Kamchatka, in the Russian Far East through
a 50/50 joint venture company PacRim Gold Ltd. A combination of falling
gold prices and lack of investor interest in that part of the world, resulted
in the licences being sold back to the company's Russian JV partner.
Jack Telford, the company's current Executive Chairman, with 30 years
of senior management experience in technology and resource-based industries,
steered the company in a new direction. Prior to Gippsland acquiring its current
interests in Egypt its sole asset was the Queen Hill tin deposit in
Australia. This project is held in a joint venture with Western Metals,
which has a 60% stake in the property, and still looks to have some potential
but, until recently, the price of tin has not justified further exploration
even though there is an established resource of 7 Mt at 0.69% tin. We
understand that Western Metals is in the process of divesting its interest,
which is likely to be taken up by Columbus Metals Ltd. With the
increased demand and the higher price levels of tin, the Queen Hill tin
project looks to hold some promise. The directors of Gippsland believe
that Columbus Metals is interested in undertaking an extensive exploration
programme to take the project into a bankable feasibility study, at which
point Gippsland's free-carried interest will be reduced to 30%. This
prospect thus offers upside potential which is not reflected in our valuation
since it is not central to the Gippsland growth story.
Jack Telford's stated aim on taking charge of
Gippsland was to focus the company on potentially world-scale projects which
have been overlooked by major resources company's assets that have been
explored intensively in the past and have the potential to go into production
quickly and profitably. The joint venture agreement with the Egyptian
Government allows Gippsland two exploitation licences covering an area of 20
square kilometres, which includes the Abu Dabbab and Nuweibi projects.
The projects operate essentially in a Free Trade Zone, which means
there are no taxes, royalty or duty payable. In addition, there are no
import/export licences plus fuel provision is at a low cost (forecast cost
for diesel US$0.13 per litre). The Egyptian authorities gain from the
project via its 50% interest, but this takes place only after Gippsland
recovers all its capital expenditures and accrued interest. The nearby
98 million tonne Nuweibi deposit provides an opportunity for the company to
extend the life of the mine and increase the rate of production. The
company estimates that both deposits have a combined in-situ tantalum and tin
value of approximately $2.9 billion based on current market metal prices.
Gippsland and its partner have a 30-year licence tenure over the
20-kilometre Abu Dabbab tenement with an option to extend for another 30-year
term.
Off-take Agreement with HC Starck GmbH The Company's trading on the Deutsche Brse
was a logical result of Gippsland signing a 10-year offtake agreement in
November 2007 with the well-known German major HC Starck GmbH, a deal which
attracted significant German investor interest. The off-take agreement
contracts Gippsland's 50% owned subsidiary Tantalum Egypt JSC (the other 50%
is owned by the Egyptian Government) to supply 6 million lb of tantalum
pentoxide (Ta2O5) over 10 years from its Abu Dabbab project in Egypt.
Over the 10 year period, annual delivery is expected to be 600,000 lb
of Ta2O5. HC Starck, an international group headquartered in Goslar,
Germany, is the world's largest consumer of tantalum concentrates and
supplier of tantalum products. It is estimated that HC Starck and Canada's
Cabot control around 70% of the tantalum concentrate market between them.
With more than 3,400 employees and 13 production sites around the
world, HC Starck generates group annual sales in the region of ?1 billion.
The presence of HC Starck as a stakeholder in
the project puts Abu Dabbab on the map since it reflects the confidence of
the German major in the ability of Gippsland to deliver the set supply over
the period of 10 years. There exists an option for Starck to expand the
agreement and to extend the agreement after the initial contract has expired. Feldspar Agreement The Market for Tantalum and Tin Tantalum is a high point melting metal and has
aerospace, oilfield, industrial, electronic, medical and defence use
applications. Tantalum is mostly consumed in the production of
electronic capacitors for use in cellphones, laptop computers, still and video
cameras, auto electronics and sophisticated high-performance electronic
devices. Due to its extremely high melting point (2,996 deg C) and its
extreme resistance to corrosion it is an essential component in the
manufacture of many performance alloys such as the manufacture of jet engine
turbine blades. It is becoming the metal of preference for medical
implants due to its high level of biocompatibility.
The major producers of tantalum mineral
concentrates are Australia, Brazil and Canada. The world's leading
tantalum mine is Wodgina in Australia which has annual production capacity of
1.3 lb Ta2O5, followed by smaller mines in Brazil (Pitinga and Mibra), China
(Yichun and Nanping), Ethiopia (Kenticha) and Canada (Tanco) with annual
production capacity ranges of 200,000-100,000 lb Ta2O5 each.
Greenbushes Mine, the other big tantalum mine in Australia has ceased
operations in 2004 due to low grades and higher extraction and processing
costs. Historically, the metal has not been traded on
a recognized trading exchange like other metals, and generally the price for
tantalum products is established by negotiation between buyer and seller,
product specifications, volume and processing requirements. The current spot
price for tantalum minerals ranges from $40-$47 per lb Tantalum pentoxide, depending
on the features and specifications outline above. Tantalum (Ta) occurs in association with
Niobium (Nb) in varying ratios. A typical ratio found in other tantalum
projects is 1 Ta :10 Nb. In contrast, Gippsland's Abu Dabbab asset has
a more attractive ratio of 2 Ta : 1 Nb, which makes the asset a much more
attractive for the company in terms of its project economic value and
negotiating power with buyers. While tantalum has substitutes, they are
less effective than the original and the price of the metal has, in recent
years, soared to levels not seen since the 1980s. This is down to a
combination of the industry's accumulation of large tantalum material
inventories which depressed the price for many years but are now close to
exhaustion at the same time as the market has seen heavy purchases of
tantalum materials for National Defence stockpiles and the renegotiation of
long-term tantalum supply contracts between major producers and processors.
We believe that prices will continue to increase steadily thanks in
part to the decline of the Greenbushes mine but, more critically, to
increasing demand from emerging markets lead by the BRIC nations (Brazil,
Russia, India and China). Similarly the balance between the supply
of and demand for tin is driven largely by growth in the Asian electronics
markets and the rapid increase in demand for lead-free solder in key markets.
Tin is currently priced at around $7.4/lb. The price of tin has
been on an upward surge since the turn of this century from the $4,000/t
level in 2001 to current levels of around $16,500/t. The use of tin in
solder has increased in recent years and demand for tin has increased
dramatically due to legislative changes in Europe, China and Japan - where
solders containing 63% tin are being replaced by solders containing 95% tin. |
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Asset
Review - Operations |
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Abu Dabbab & Nuweibi Gippsland's objective is to build a world class
mine at Abu Dabbab with initial production of 650,000 lb/yr Ta2O5 plus 1,530
tpa of tin by 2011, with an eventual ramp-up of production to 1 Million lb/yr
Ta2O5 plus 2,350 tpa tin. Mining operations are expected to commence in
the second quarter of 2010. These figures are consistent with the 2005
Bankable Feasibility Study undertaken by Lycopodium Engineering Ltd, which
determined that the project is capable of becoming a major tantalum supplier,
including the development of a significant feldspar operation (with the
potential to produce in excess of 1.5 Mtpa).
The study confirmed a low cost open pit mining
operation, a scheduled mill feed rate of 2 Mtpa, with gross sales revenue
expected to exceed $500 million over an initial period of 13 years of an
estimated 20 year life-mine. With an estimated net free cash flow of
$127 million over the initial 13 year period, the company will be in a strong
position to finance an expansion to mining operations by bringing the nearby
98 Mt Nuweibi mine on stream. In conjunction with the Bankable
Feasibility Study, an Environmental Impact Assessment (EIA) was completed in
compliance with World Bank Standards and was approved in October 2005 by the
Egyptian Environmental Affairs Agency. The capital cost and working capital
requirements of Abu Dabbab are estimated to be in the region of $125 million.
Gippsland is already in advanced negotiations with financial
institutions to finance the project with its negotiating position
strengthened following the 10-year take-off agreement with HC Starck.
We understand that the company is targeting a highly attractive 20%
Equity and 80% Debt split fundraising - this ratio forms the basis of our
valuation for Abu Dabbab. Past Exploration, Resources and Proposed Mining
Operations Tin-tungsten mineralization at Abu Dabbab was
first recognised in the 1940s but the property was not systematically
explored until the early 1970s, when a Soviet-Egypt team undertook a detailed
exploration programme, providing useful data for future operators. In
the early 1990s, Abu Dabbab was further explored by a joint venture between
the Egyptian Government and Geominera Italiana. The exploration
programme involved three adits, one crosscut, a number of trenches, surface
and bulk sampling, metallurgical tests and drilling results over 28 diamond
drill holes. This work proved useful to Gippsland when it took over the
project in 2002, as it engaged in an extensive exploration programme to
verify past results, collecting bulk samples and conduct additional
metallurgical test work.
The host rock in Abu Dabbab is a rare-metal
granite called apogranite, which is quite distinct from the country rock and
is represented by three separate ore bodies (see the pink area in the diagram
below). The tantalum-niobium-tin mineralization (Ta-Nb-Sn) of the
deposit is represented by disseminated cassiterite and niobio-tantalite. According
to the company, the apogranite mass is elongated in the east and west
direction with a maximum length of approximately 400 metres, while in the
northwest there is a narrow off-shoot presence of about 150 metres in depth.
In addition, the body extends about 130 metres from the adits and drilling
has intercepted it at a depth of 350 metres below the adits.
Mining of ore is expected to involve tantalum
and tin extraction processes based on gravity separation techniques through
open pit mining. The low cost operation underpins the economics of this
project as confirmed by the Bankable Feasibility Study. The project has
good exposure to the ore mineralization with a project open pit strip ratio
of 1.1 waste : 1.0 ore. The project benefits from good infrastructure,
with the proposed plant site adjacent to the mine. The plant site which
is secured by Ministerial Decree, provides for an area of 14 square
kilometres and will include the plant site, a tailings pond, and a mining
village. This is in close proximity (around 10 kilometres) to the Mine,
served by an open haul road. The Inferred Resource remains open at depth and
to the east, raising the prospect of proving and upgrading an increased
reserve base with more drilling and further development. An attractive
feature of the Abu Dabbab mineral deposit is that more than half of the
resource falls within the reserve category. The company's current
drilling programme is targeting a 20 Mt upgrade from resources into reserves.
Nuweibi Tantalum Project
Gold and Nickel-Copper Prospects Gippsland holds exploration rights to nine
tenements of 16 square kilometres each in the Wadi Allaqi region, located to
the southeast of Aswan, in the south-western part of the Eastern desert of
Egypt. Eight of these contain historical gold workings with the ninth
containing a copper-nickel deposit (Abu Swayel). The gold
mineralization in the prospects occurs within quartz veins and veinlets and
so far the Seiga prospect looks the most promising following the definition
of a JORC-compliant resource in December 2006. The 2007 drilling campaign intersected
mineralization over a continuous zone of over 500 metres and a discontinuous
mineralization zone of 900 metres. Mineralisation remains open along
strike and at depth and best result showed a wide intersection of 48 metres
at 1.60 g/t Au in one of the drill-holes including 8 metres at 7.75 g/t Au.
The Inferred resources at the Seiga main zone incorporate the results
of 25 RC drill holes and is currently set at 1.1 Mt at 2.3 g/t (uncut) and
2.0 g/t (10 g/t cut) to a maximum depth of 150m. This year, the company
is targeting a 500,000 oz gold resource from a number of drill targets, with
the prospect of increasing this in the coming years to a potential resource
of 2 Moz gold.
In addition, the Abu Swayel nickel-copper
prospect holds some promise for the company following a programme of thirteen
RC drill-holes totalling 776 metres. The RC drilling programme was
completed in November 2007 and tested ancient working with a transient
electromagnetic (TEM) conductor drilled around that time. Best results
came from drilling along strike the ancient workings, intersecting 18 metres
at 0.96% Cu and 0.57% Ni including 4 metres at 2.73% Cu and 1.33% Ni. Strengths: The
company controls the two prime assets - the 40 Mt Abu Dabbab and the nearby
98 Mt Nuweibi Tantalum deposits - via an equal joint venture with the
Egyptian Government. The strengths of the joint venture are well
documented, namely the presence of the Egyptian Government as a 50% owner and
stakeholder in the two projects in a Free Trade zone provides surety of
tenure, an excellent and attractive fiscal and royalty environment to operate
a mine, plus the fact that the Egyptian Government gains from the 50%
interest only after the costs of the project's capital expenditure and
accrued interests have been reclaimed Another important strength of the Abu Dabbab
project, from which the company derives most of its value, is the presence of
off-take agreements for tantalum. This provides set prices for the
tantalum with guaranteed revenues protected from market fluctuations.
In addition, the tantalum off-take agreement provides for escalation
costs and a guaranteed annual off-take of 600,000 lb Ta2O5 produced.
This significantly reduces the risk of the project. The tantalum offtake contract largely protects
the project from market risk as the tantalum offtake price is subject to
escalation as production costs increase. Additionally, under the
agreement, the offtake price is adjusted to reflect changes in the tantalum
spot price. Abu Dabbab is very attractive in the sense of
its location, geology and the fact that it has undergone substantial
exploration in the past and has the potential to go into production quickly
and profitably. The bankable feasibility was based upon a somewhat
arbitrary 13-year mine life however the Abu Dabbab project alone is expected
to have a mine life of 20 years. The nearby 98 million tonne Nuweibi
deposit appears certain to extend this mine life. It is noteworthy that the Abu Dabbab
Environmental and Social Impact Assessment (ESIA) have been completed in
accordance with World Bank standards. One reason for this is the fact
that the International Finance Corporation (IFC), the commercial arm of the
World Bank is a major Gippsland shareholder holding approximately 9% of the
Company. Weaknesses: The risks
faced by the company are project specific. The costs of constructing
and commissioning the Abu Dabbab mine as well as the operating costs run the
risk of escalating over time. We do however consider these risks as
being on the downside given the open pit mining model and the relatively
simple gravity plant proposed for mining operations. The well-developed
infrastructure plan is expected to provide strong support to the Abu Dabbab
mining operations and project free trade zone provides further comfort in
terms of costs to the company. In addition, commodity prices can fluctuate
over time, but at least the company is protected to over the tantalum
produced over a certain period of time. Opportunities: The
presence of the HC Starck as a buyer of the Abu Dabbab tantalum products over
a 10-year period, allows Gippsland to engage in negotiating attractive
financing agreements with interested financial institutions over development
and building a mine at Abu Dabbab. This raises the prospect of the mine
being constructed and commissioned on time using an economic cost model that
suits Gippsland and its partner. Threats: The
threats to the project going forward relate to technical, construction and
mine commissioning aspects of the Abu Dabbab. While financing risk may
be an issue it is our understanding that major banks owned by the German
government have expressed firm interest in providing the debt component of
the $125 million Capex. An 80% debt to 20% equity split is expected, which
will be put forward to the company's shareholders for approval in due time. Although the presence of the Egyptian
Government as a stakeholder should ensure political support, Western mining
companies such as Centamin have, in the past, suffered some disruption in
this region. Moreover the Middle East is a volatile region and there
must therefore be some element of political risk however it understood that
the German banks will provide political risk insurance. The clear strategy is to bring Abu Dabbab into
production as soon as possible and to use the cashflow it generates to
accelerate work on a range of secondary projects. It appears that the
cost and management time needed to advance the Queen Hill prospect in
Australia will be born by joint venture partners and we would not be
surprised to see value realised at Queen Hill to create additional resource
for the Egyptian projects. In the medium term the company plans to raise
around $30 million of equity and around $95 million of debt to build the
plant and commence mine construction during 2008 and 2009. Managing the
construction and the engineering procurement phase is already underway,
whilst the company is in an advanced stage of negotiating the project's debt
finance facility with German banks. This will lead to the commencement of site
works and related infrastructure in the second quarter of 2008, followed by
the arrival and the installation of the mills. We are led to believe
that the company has engaged a well known engineering company to oversee the
engineering related construction phase during the period. The
commissioning of the mine is expected to take place in the first quarter of
2010 leading to commencement of mining operations in the second quarter of
that year. A ramp-up of mining operations is planned to see the
construction of the feldspar pilot plant in 2011 with feldspar production set
to commence in the first quarter of 2012 when dedicated port facilities will
also become available. |
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Management |
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Robert John (Jack) Telford, Executive Chairman
and Managing Director, aged 61. With more
than 30 years of senior management experience in technology and resource-based
industries, Telford is well placed to lead the development of Gippsland's
projects in Egypt. His resource credentials include 17 years direct
involvement with international companies, both private and public, at the
Chief Executive Officer level. His experience has also included
technology-based companies involved in complex inorganic and organic chemical
manufacture. He has been involved in the pharmaceutical industry having
been a past chairman and a major shareholder of the company Inovax Limited. John Morrison Chisholm, Executive Director aged
59. Dr Chisholm is a geologist with
wide experience in exploration geology and exploration management having
worked as lecturer at the University of Western Australia and Curtin
University prior to working for various international mining companies.
In 1984 he joined Western United Mining Services Pty Ltd during which
time as managing director he managed a large group of geoscientists and was
involved in the discovery of the Transvaal and Bounty gold mines. Dr Chisholm
has over 25 years experience in the mineral industry including the evaluation
of exploration data, mineral resources and ore reserves. John Stuart Ferguson Dunlop, Non-Executive
Director, aged 58. Ferguson Dunlop is a certified Mine Manager
with approximately 35 years of international surface and underground mining
experience in a variety of base metal, industrial and precious metal
production and management situations. As an experienced mining engineer, he
has been involved in the design, construction and on-going operation of a
number of major resource projects throughout the world. He has operated
his own mining consulting firm based in Perth since 1992 and was previously a
senior executive with BHP's (now BHP Billiton) Minerals Division, before
becoming General Manager Operations for Aztec Mining Co Ltd until its
takeover by Normandy Mining Ltd. Jon Starink, Executive Director, aged 58. London-based
Starink is a qualified Engineer, Scientist and Industrial Chemist, with 30
years experience in the mining industry in the role of both executive and
non-executive director. His extensive practical and operational
experience includes engineering design and project management; mining
exploration management; science and engineering research & development
and process innovation & development. He served for ten years in
senior technical and engineering roles with the Sons of Gwalia Ltd
Greenbushes tantalum-tin project where he was directly responsible for
process development, project design and construction management for the tin
smelter and tantalum extraction projects John Damian Kenny, Non-Executive Director aged
38. Kenny is a lawyer with a
specialised interest in venture capital, initial public offerings and mergers
and acquisitions. He has extensive experience in public equity
fundraisings and the pricing of equity, debt and derivative securities. |
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Significant
Shareholdings |
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Gippsland share capital consists of 293.2
million ordinary shares, 25 million unquoted options expiring on 26/05/12
with an exercise price of A$0.13.5 and 4 million unquoted broker options
expiring on 15 December 2011 with an exercise price of UK7p.
Those holding more than 3% of the current issued share capital
are:
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Resent
Results, Balance Sheet and Cashflow |
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The company most recent results are for the
year ended 30th June 2007 with a consolidated group loss of A$4.19 million
compared to A$1.98 million in 2006. The basic and diluted loss per
share amounted to A$1.77 per share compared to a A$1.98 loss per share in
2006. During the year, the company engaged in exploration and
development of mineral resources at the Abu Dabbab tin/tantalum project.
In addition, the company continued an active exploration strategy
within the Wadi Allaqi region of Egypt for gold and base metals. The financial position of the company
reflected the continued exploration and development activity at its prime
assets. As a result, Gippsland's net asset base decreased during the
year by A$1.38 million to A$2.4 million largely due an intensified
exploration programme (A$1.78 million), project development costs (A$0.78
million) and administration costs (A$1.77 million). The increased
development and exploration expenditure was partly offset by the raising of
A$2.75 million during the financial year. The fundraising was completed
in May 1st 2007, through the issue of 26,666,666 ordinary shares at A$0.109
each, raising A$2.895 million before expenses. |
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Valuation,
Forecasts and Conclusion |
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Gippsland derives most of its value from the
two prime assets in Egypt, the 50% owned 40 Mt Abu Dabbab and the nearby 98
Mt Nuweibi Tantalum deposits. Our DCF model for the Abu Dabbab 13-year
mine-life asset indicates a Net Present Value at 10% discount rate of
US$156.6 million or 21.5p per share on a fully diluted basis net to
Gippsland. Our modelling assumptions include a future US$30 million equity
fundraising and that the rest of the US$125 million capital expenditure
requirement will be raised through a mixture of senior and mezzanine debt.
We assume that metal prices are likely to increase slightly in the
early years of mining operations before they start to fall gradually from
2015 onwards. The average prices used are US$50/lb tantalum pentoxide,
US$16,000/t tin and ?38/t feldspar. We expect the company to start producing
final products during 2010 of 450,000 lb tantalum pentoxide and 750 tonnes
tin, followed by an increased production rate in 2011 of 650,000 lb Ta2O5 and
1,530 tonnes tin. We assume that Feldspar production will start in 2013
but the company believes that it will start in 2012. We expect the joint
venture to have a free-cashflow of $15 million in 2013, increasing steadily
to over $80 million per annum. This would allow the joint venture to
undertake further development of the Nuweibi Tantalum asset and bring it
on-stream in due course. The other prospects in Egypt and Australia are
attractive but at this time we prefer not to attach any value to any of them,
reflecting the importance of the Abu Dabbab asset going to production to Gippsland
and its partner. The Abu Dabbab in our view should prove a catalyst for
the company in realizing value across the company's portfolio of secondary
assets. The company has no immediate term funding issues at an
operational level and a strong and experienced management team and hence, at
4.75p, we initiate our coverage of Gippsland with a speculative buy
recommendation and a target price of 22p. |
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