What the Brokers say

WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe

Aus-American Mining Ltd (ASX: AIW)

New project and new direction

AIW has been given a new lease of life through an option to purchase a highly prospective volcanogenic massive sulphide (VMS) copper-gold-silver project in Arizona, USA.

New managing director Richard Holmes was instrumental in bringing the project into the company and will drive the company forward on this flagship asset whilst simultaneously divesting non-core assets to streamline the company.

AIW are currently undertaking their maiden drilling program on the project and so far have a very high success rate in intersecting both low grade halo and high grade massive sulphide core with grades up to 11 per cent copper, providing support for the exploration thesis.

We believe this is the start of a major change in the company and expect to see positive results from the maiden program leading to a maiden resource estimate later in the year.

Key Points
AIW are clearing the decks with respect to their diverse project portfolio, which until this point, has been dominated by USA based uranium assets augmented by an eclectic mix of Rare Earth Elements, speciality metals and gold. A new Managing Director and a new acquisition of a brown-fields, (mined on the early 1900 s) VMS style copper-gold-silver project sets the stage for a new direction.

In August 2012, AIW entered into an option to purchase agreement on two VMS (volcanogenic massive sulphide) copper-gold-silver projects in Yavapai County, Arizona. The option agreement was finalised in September 2012 and consists of a low up-front option entry payment with $2 million in payments over 3 years to get 100 per cent of the project.

AIW acquired an extensive data package on the two projects in October 2012. The package consisted of 83 drill holes (75 underground, 8 regional), geochemical, geophysical and geological data. The data package also included the original underground mine plans, underground sampling information and operational reports. This data has been used to help plan drilling and gain an early understanding of the geology and mineralisation.

AIW has set an exploration target at between 15 million and 20 million tonnes at a copper grade of between 0.6 per cent and 0.8 per cent and gold and silver credits of between 0.2 grams per tonne to 0.4 grams per tonne, and 15 to 30g/t respectively. This is based on the concept of lower grade open pittable resources. The higher grade massive sulphide lenses are seen as an upside case on the model.

So far seven holes from a 5,000m, 30-hole RC drilling program have had results returned, six of which have hit mineralised intervals, the best so far being 17m at 4.5 per cent copper equivalent in a down-dip, massive sulphide lens. The exploration model appears to be robust on the results published at this stage.

We believe there will be several catalysts in 2013, which will drive share price appreciation.

We will see the completion of the maiden program by April 2013 with follow up drilling leading to a maiden resource estimate. New anomalous areas have already been discovered leading to further potential and open ground pegged now gives AIW a 5 kilometre strike of prospective geology. AIW has a current market capitalisation of just $7.3 million.

Recommendation: Speculative Buy

Bannerman Resources Limited (ASX: BMN)

Ready, set, go! (just waiting for uranium prices to rise)

Bannerman Resource Ltd has a large (500 million tonnes) uranium deposit in Namibia called Etango.

The deposit is low grade (approx. 200 parts per million (ppm)) but has been extensively drilled and last year BMN completed a robust Definitive Feasibility Study (DFS) (reserve 280 million tonnes at 194ppm for 119 million pounds).

The management team is solid; with both the managing director and general manager qualified engineers and each with involvement at the nearby Rio Tinto Rossing uranium mine.

The DFS determined a 20 million tonnes per annum heap leach operation (recoveries approx. 87 per cent) and a sixteen year mine life.

Cash costs were estimated in the DFS to be US$45.70 per pound (closer to $40/lb in the early years).

Our model assumes LOM total cash costs of approx. $53/lb. However, capex is large. The DFS estimated capex of US$870 million (including owner operated mining fleet).

Time to production could fill market supply gaps

The uranium procurement procedures for nuclear utilities have long time horizons. Although there is a spot market, most traded uranium is via off-take because of product specifications, lead time to convert U308 into fuel, risks around securing supply (geopolitical and environmental) and costs if supply is disrupted.

This means utilities ensure they have multiple years of inventory visibility. Because of the immense forward planning, if a shortage of uranium eventuates, it is unlikely to be in the spot market. But, there is a very strong desire to secure outer year supply.

As an indication of this dynamic, Paladin Energy (ASX: PDN) recently needed to raise cash to repay convertible notes. PDN negotiated a $200 million pre-payment from EdF (a French utility) for delivery of approx. 14Mlb between 2019-2024 (with a cap & floor prices).

The fact that EdF pre-paid a significant proportion of the current implied contract value (approx. $650 million) six years ahead of delivery, to a partially distressed seller, indicates the importance utilities place on securing outer year supply.

The Etango project is well advanced with most of the work required to enter construction already complete. The lead time from decision-to-mine (which in theory could be made soon) to production is around 2.5 years and significantly ahead of other listed developers. This means that BMN could easily deliver uranium into the supply window that utilities focus on (3-5 years into the future) and hence is strategically attractive (the estimated lead time for typical mines is greater than 6 years).

Bannerman trades on an EV/resource lb of 12cents, diluted for capex it is approx. $4.70/lb.

Early to production + low grade + long mine life = U308 leverage

The DFS (24 May 2012) estimated a pre-tax NPV8 of $238 million and post-tax of $68.7 million (based on $75/lb U3O8).

We use a higher discount rate and therefore have a lower valuation.

The real upside for shareholders of BMN is based on rising U3O8 prices, particularly as the advanced stage of Etango means it can enter construction quickly. Using a long run price of $85/lb, we have a BMN valuation of approx. 100 cents per share.

Bannerman’s all-time high share price was $4.14 in 2007. Despite dilution since then, under very aggressive (but plausible) long term price assumptions (approx. $130/lb), a recovery to those levels is possible.

We initiate with a $0.18 price target with the speculative aspect emphasising U3O8 price risk.

Recommendation: Speculative Buy

Disclaimer: The above
is intended as a guide only. The Roadhouse accepts no responsibility for
investments made from this advice, successful or otherwise.