Outlook 17 May 2012
Price Market Cap
Ormonde Mining Year End
Share price graph
Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items.
Investment summary: Filling the right spot Ormonde’s flagship Barruecopardo tungsten project is slated for first production in 2013 and is forecast to become one of the largest suppliers of tungsten to the market outside of China. The recently released feasibility study confirms that the project is viable having low capital intensity and a competitive cash cost position. While the company is yet to complete the permitting, funding and off-take for Barruecopardo, we stick to our un-risked valuation of £0.24 per share and expect
Share details Code Listing Sector Shares in issue
ORM AIM/IEX Metals and mining 371m
Price 52 week
the stock to re-rate as the company’s risk profile gradually improves.
Barruecopardo: Bridging the supply gap Ormonde is fast tracking its flagship brownfield Barruecopardo tungsten project based in the Salamanca province in western Spain. The project is forecast to start production in H213 delivering up to 257,000mtu pa of WO3 contained in high-grade tungsten concentrate to the undersupplied world market. This would represent some 10-15% of non-Chinese mine production. The project has a low capital intensity of US$245 per mtu of capacity and operating costs on par with international peers making it an attractive opportunity to capitalise on the market tightness. With the ammonium paratungstate (APT) price remaining at the elevated levels and China
Balance Sheet as at 30 June 2011 Debt/Equity (%) NAV per share (c) Net cash (€m)
N/A 5.4 3.9
Business Ormonde Mining (ORM) is an AIM and ESM listed mineral development and exploration company with properties in western Spain. It is advancing a low-cost tungsten operation at Barruecopardo slated for first production in 2013.
experiencing a structural shortage of tungsten concentrates, Ormonde should be able to fully reap the benefits of falling availability of the strategic metal.
Valuation: £0.24/share un-risked SOTP
Ormonde’s un-risked NAV valuation of £90.1m (£0.24/share) is predominantly driven
by the company’s flagship Barruecopardo tungsten project. Our analysis suggests
that the current market valuation roughly implies the project’s effective discount rate
of c 30% (alternatively, US$250/mtu APT price at 10% discount rate). While we believe that some investor caution is still justified, the implied discount rate appears excessive. We expect the company’s value to crystallise as it successfully completes the permitting process as well as the fund-raising and off-take. We understand from the company that the project’s funding is likely to come in the form of JV and/or offtake financing or through debt with an equity component.
Revenues by geography UK Europe N/A
Analysts Andrey Litvin Charles Gibson
+44 (0)20 3077 5755 +44 (0)20 3077 5724
Ormonde Mining is a research client of Edison Investment Research Limited
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Investment summary: Filling the right spot Valuation: £0.24 per share un-risked SOTP We value Ormonde on a sum of the parts (SOTP) basis, with the Barruecopardo project’s NPV being the main driver of the company’s overall valuation. Our un-risked Barruecopardo NPV10 is £78.1m, which translates into the overall company’s equity value of £90.1m (£0.24/share). This implies a 170% premium to the current market price. We expect an improved valuation for Ormonde to crystallise as it successfully completes the permitting process, off-take and more importantly funding. We understand that the latter is likely to come in the form of JV/off-take financing or through debt with an equity component. Our sensitivity analysis shows that the Barruecopardo project’s NPV10 has enough headroom with a breakeven APT price of c 240/mtu versus the year-to-date average of US$435. We also note that Ormonde currently trades at 0.4x P/NAV. This compares to 0.2x P/NPV for Wolf Minerals (which is developing the greenfield opencast Hemerdon tungsten project in the UK), which has completed BFS, secured off-take and part of the financing, and 0.4x P/NAV for Woulfe Mining, which has recently signed an off-take and financing deal with IMC and released the BFS for its Sangdong tungsten project.
Barruecopardo: Bridging the supply gap Ormonde is fast tracking its brownfield Barruecopardo tungsten project based in the Salamanca province in western Spain. The project is forecast to start production in H213 delivering up to 257,000mtu of WO3 (tungsten trioxide) per annum to the undersupplied global market. This would represent some 10-15% of non-Chinese tungsten production. The project is estimated to have a relatively low capital intensity of US$245 per mtu of saleable concentrate and operating costs in line with its peers, making it an attractive opportunity to capitalise on the market tightness. With the APT price remaining at the elevated levels and China experiencing a structural shortage of tungsten concentrates, Ormonde should benefit from the falling availability of the strategic metal.
Risks: Permitting, off-take and financing While the biggest NPV sensitivity is the performance of APT prices, we see the major risk for the project as being execution delays, as the company is yet to complete the permitting process, raise financing and sign an off-take agreement. While we believe that both funding and off-take should not be a big issue as Barruecopardo’s economics look robust and tungsten market fundamentals remain strong, we note that delays in permitting and therefore project commissioning are possible.
Tungsten market: Tight supply-demand balance to hold We believe that tungsten pricing should be well supported in the medium to long run as supply remains constrained in light of China curtailing its presence on the international end-product market and its local concentrate shortage. If this trend continues and China’s tungsten consumption keeps growing at a modest 5-10% pa against the backdrop of a slowing economy, the prevailing market tightness is unlikely to be significantly challenged by the anticipated increase in new mine supply coming in 2012-15. Based on the known and relatively advanced non-China tungsten projects, we estimate an increase in production of up to 1.5m saleable mtu. This would represent c 20% of the current global annual consumption. That said, we see a high risk of project and execution delays.
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Company description: Tungsten, copper and gold Ireland-based Ormonde Mining is an AIM and ESM listed company focused on the development and exploration of mineral assets in Spain. It is currently advancing its brownfield Barruecopardo tungsten project, which is slated for first production in H213, becoming one the largest European independent suppliers of the strategic metal. In addition, Ormonde has a JV agreement to explore a large copper sulphide deposit with Antofagasta, which can earn up to 75% interest in the project by spending US$7.0m on exploration and funding a feasibility study. The third project is a JV with Aurum Mining to explore Ormonde’s gold-only properties in western Spain. The company also holds a number of gold-tungsten licenses in the region. Exhibit 1: Location of Ormonde Mining projects
Source: Ormonde Mining
Barruecopardo: Advancing the tungsten project The Barruecopardo tungsten project is scheduled to be commissioned in 2013 delivering up to 257,000mtu of WO3 per annum from 1.1Mt of ore grading 0.30% WO3. The mine life of the open pit operation is defined at nine years. However, the project’s resource base of 27.4Mt (7.1mtu at 0.26% WO3) supports a longer life of mine, which can be extended underground subject to further economic assessment. The definitive feasibility study, which only considered the open pit portion of the resource (with an underground operation to be investigated post production), envisages a minimum plant recovery of 78% involving a relatively simple gravity and floatation process to yield a high grade saleable tungsten concentrate containing 75% WO3 (versus the industry standard of 65%). The project’s capital cost is estimated at €48.5m and the average unit operating cash cost is seen at €100/t. We note the Barruecopardo project’s low capital intensity, owing in part to its open pit nature and established infrastructure, as well as opex on par with the known international nonChinese tungsten peers. The project targets the undersupplied European market and is well positioned to become one of the largest tungsten suppliers to European consumers.
A long history of mining The Salamanca province of the Castilla y Leon region in western Spain has been an area of substantial historic tungsten production and Barruecopardo was, until the early 1980s, the largest tungsten mine in Spain, producing a high-quality tungsten concentrate from open-pit mining. From the 1960s until 1982 the mining focused on developing the small open pit workings into a larger,
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800m long by 100m wide, mechanised open pit operation, which was accessed via a ramp and mined down to a maximum depth of 80m. All material was then crushed in pit, transported to surface by a conveyor and processed through a gravity plant.
Capital and operating costs The project’s average unit cash operating cost is estimated at €100/mtu (US$130/mtu). While the project has a relatively low strip ratio of 6.3:1, the waste mining appears to be the major cost item bringing the total mining cost (both waste and ore) to 80% of the overall unit cash cost estimate. The detailed opex breakdown is shown in the table below. Exhibit 2: Barruecopardo unit operating cost estimate Ore mining Waste mining Processing G&A Tota l, pe r ton n e of ore Tota l, pe r mtu
€/ton n e 4.1 14.5 3.5 1.3 23 .3 9 9 .6
U S $ /ton n e 5.3 18 .8 4.6 1.7 3 0.3 129 .5
Source: Company data, Edison Investment Research
The project’s capital cost is seen at €48.5m and includes a 10% (€4.4m) contingency. Based on our estimates, the Barruecopardo project has a payback period of less than three years. The detailed breakdown of the project’s initial capital outlay is as follows: Exhibit 3: Barruecopardo capital cost estimate Mining Processing plant, associated infrastructure, EPCM Water management system Owners costs Contingency Tota l c a pita l c os t Tota l c a pita l c os t pe r mtu of c a pa c ity
€m 3.9 26.8 8 .2 5.2 4.4 48 .5 18 8 .4
US $m 5.1 34.8 10.7 6.8 5.7 6 3 .1 244.9
Source: Company data, Edison Investment Research
The project’s unit cash operating cost appears to be broadly in line with an industry average for non-Chinese pre-production projects and places Barruecopardo slightly below the average for its international peer group. We estimate that the company’s ex-Chinese pre-production peers (excluding Malaga and North American Tungsten) have an average operating cash cost (before the by-product credits) of about US$135 per mtu of saleable tungsten product (see Exhibit 4). In turn, the project’s capital intensity of US$245/mtu compares favourably to similar-scale international operations. The main reason for this is the open pit nature of Barruecopardo and its established infrastructure, which we understand requires only a moderate upgrade. We note that the majority of the comparable size projects are underground and greenfield with an estimated capital cost per saleable mtu of capacity ranging from US$350/mtu to as much as US$770/mtu. For the open pit projects, we would mention Wolf’s Hemerdon and Thor Mining’s Molyhil greenfield developments with an estimated capital intensity of US$483/mtu and US$350/mtu respectively. In general, it is worth noting that some of the announced projects have not yet been brought through the FS stage and therefore have lower quality cost and capex estimates compared to Ormonde.
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Exhibit 4: Tungsten projects’ capital intensity (left) and unit cash cost comparison, US$/mtu Note: Northern Dancer and Sangdong capex includes APT plants; unit costs before by-products. Largo (Northern Dancer)
Hazelwood (Cookes Creek)
King Island Scheelite Malaga Inc
NA Tungsten (Mactung)
King Island Schelite
Thor Mining (Molyhil)
Vital Metals (Watershed)
NA Tungsten Mactung 0
20 40 60 80 100 120 140 160 180
Source: Company data, Edison Investment Research
Metallurgy and processing The metallurgical testworks were carried out by Wardell Armstrong International (WAI) and showed that crushing the ore feed to minus 5mm is sufficient to achieve effective liberation of tungsten for gravity pre-concentration. According to WAI, further processing by flotation to remove any sulphides should produce final tungsten concentrate containing 75% WO3 compared to the industry standard of 65%. Analysis of the results indicates that a processing plant recovery of at least 78% can be expected when treating a plant feed of 0.30% WO3. In practice, the tungsten recovery will vary to produce appropriate concentrate specifications to suit the off-take agreements. Based on WAI’s metallurgical testworks and the economics of various process plant capacities, a subsidiary of Jacob Engineering Group has designed a plant with an annual throughput capacity of 1.1mt of ore to produce an average 227,000mtu in saleable WO3 concentrate over the nine-year open-pit operation. Importantly, the proposed processing plant is similar to that operated at the old Barruecopardo mine, which produced a premium quality concentrate sold to European off-takers.
Resources, reserves and geology As part of the feasibility study, the company released a JORC-compliant mineral resource estimate prepared by CSA Global. Following the completion of the infill drilling and based on the total 77 holes (15,241 metres), Ormonde Mining reported the overall mineral resource estimate of 27.4Mt with measured and indicated categories accounting for 65% of total, and inferred making up for the balance. At an average grade of 0.26%, the mineral resource yields 7.1m mtu of contained WO3. This represents a substantial increase on the earlier reported resource data.
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Exhibit 5: Barruecopardo resource estimate, JORC compliant Note: 1mtu=10kg; cut-off >4m at 0.06%WO3
C la s s if ic a tion
Tonne s ( m)
Measured Indicated Inferred Tota l
Gra de ( WO 3 % )
C onta ine d WO 3 , mmtu
Source: Company data
An open pit optimisation of the available mineral resource has identified an open pit mineable material, classified as a proven and probable mining reserve, of 8.7mt with an average grade of 0.30% WO3 (2.6mtu of contained WO3). This mining reserve was scheduled over a nine-year mine life at an average stripping ratio of waste to ore 6.3:1. It is worth noting that the open pit contains a further 0.8Mt of inferred resource at 0.22% WO3 grade, totalling 184,000mtus, which following grade control may be processed during the life of the open pit, potentially extending the open pit life by one year. The new pit design comprises extensions to the historic main pit excavations to the north and south and at depth. The mineral resource below the open pit will be further evaluated for subsequent exploitation by underground mining following production commencing, as the completed DFS only covers the open pittable resource. Exhibit 6: Barruecopardo mining reserve estimate, JORC compliant Note: Derived from the measured and indicated resource allowing for 5% mining losses and 5% dilution. Ton n e s ( m)
Gra de ( W O3 % )
C on ta in e d W O3 , mmtu
C la s s if ic a tion
Source: Company data
The Barruecopardo deposit is contained within a major granite-hosted, sheeted vein system with a known length in excess of 1,600m, striking north-north-east and dipping steeply to the east. Tungsten mineralisation occurs dominantly in narrow quartz veins, usually less than 10cm in thickness, as coarse grained scheelite, with minor to trace wolframite and minor quantities of sulphides. The zones of more intense veining can be up to 40m wide. Ormonde, which is the first company to systematically drill at Barruecopardo, has identified steeply-dipping mineralised zones open in all directions, with known mineralisation continuing to a depth of 250m, below which no further drilling has taken place to date.
Permitting: The last piece of the puzzle The company is about to embark on the final stage of the permitting process that was triggered by the completion of the feasibility study (FS). In January 2011, Ormonde submitted the application for the mining concession accompanied by the relevant documentation required for the initial stage of project permitting. We understand that under Spanish law the Barruecopardo project has to be reviewed and approved by the local authorities of junta de Castilla y Leon represented by the provincial delegations of the ministries of innovation, science and companies (industry), environment as well as the water authority and potentially the department of culture and heritage. In its FS release (February 2012), Ormonde mentioned that following the responses from the
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provincial government the company expects to present the final permitting documentation within the next three months. This, in turn, should initiate the final stage of the permitting process. Given the relatively low transparency of this process and other companies’ evidence, our best case is that the required permits will be granted within the next six to nine months. We believe that the successfully completed permitting should allow the company to finalise funding and off-take and advance the project to production. Having said that, based on our discussions with the management, we understand that the conditional funding/off-take is likely to occur before the final permit is granted.
La Zarza project and gold exploration assets Ormonde holds a 100% interest in the La Zarza copper project (subject to staged payments to the local Spanish company Nueva Tharsis) located in the Iberian Pyrite Belt mining district in southwest Spain. In October 2009, the company entered into a JV agreement with Antofagasta, according to which the latter can earn a 50% interest in the project by spending US$7.0m on exploration and evaluation activities. Following the earn-in, Antofagasta can increase its stake to 75% by completing a feasibility study. To date, the JV partners provided an updated preliminary resource estimate for the project suggesting the overall tonnage of 61Mt at 0.8% Cu (0.5Mt), 0.9 g/t Au (1,765oz), 0.6% Pb, 2.0% Zn and 5.7g/t Ag grades. In August 2011, the US$1.3m work programme, fully funded by Antofagasta, commenced to undertake VTEM and gravity surveys and following analysis of the results has been followed up by a 3,000m+ drilling programme on targets identified. Results from this drilling program are expected during Q212. In addition, Ormonde has a 100% interest in a number of tenements in the Salamanca and Zamora provinces that can potentially contain a significant gold resource. According to the report prepared by CSA Global, Ormonde’s Salamanca permit area incorporates all the major features of classic intrusion related gold systems. Such systems host a considerable number of large scale, lowergrade gold deposits in various parts of the world, including Mokrsko in the Czech Republic (>3.2Moz), Dublin Gulch, Yukon (3.9Moz) and Fort Knox, Alaska (3.8Moz). Ormonde’s gold holdings are divided into pure gold and gold-tungsten prospects. In March 2011, the company entered into a JV agreement with Aurum Mining, whereby Aurum can earn a 60% interest in the two permits in the Zamora province and a 54% interest in the two permits in the Salamanca province. Encouraging results have been reported from the El Facho gold structure in the Zamore Province, where the JV has drilled eleven holes for a total of 2,545m. Initial results reported mineralised intervals of 12m grading at 3.4g/t Au. In March 2012, the company reported follow-up results with drill hole ORMP-15 returning an interval of 49m grading at 1.16g/t Au, hole ORMP-14 having 10m at 0.56g/t Au including 1m at 11.35g/t Au. Eleven of 12 holes drilled at El Facho, for which assay results are available, have returned mineralisation greater than 1g/t Au over multiple intervals. The JV partners plan to develop an initial mineral resource estimate once all assay results have been received from the remaining six holes of the current programme.
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Strong management team Ormonde has an experienced management team with a proven track record of exploration and most importantly development and operation of large mining projects. The key management is as follows: Kerr Anderson, MD. A geologist by profession, Mr Anderson has worked in the mining and exploration industry in Europe for over 20 years, including gold and base-metal projects in Spain. Prior to joining Ormonde, he was exploration manager with Navan Mining. Steve Nicol, COO. Mr Nicol is a mining engineer with some 25 years’ experience in mining industry, initially in operations and subsequently in mine evaluation and development projects. He has held production supervisory roles in various mining projects in Australia and Europe, culminating in a two-year period as MD of an Italy-based gold mining and exploration operation. Mike Donoghue, Executive Chairman. A mining engineer by profession, Mr Donoghue has wide experience in the evaluation, funding, development and operation of mines in Europe, Africa, South-East Asia, Australia and the Americas. His executive management experience includes an eight-year period as general manager – operations for Delta Gold NL, Australia.
Tungsten market: Tightness may well persist Despite the recent weakness, the tungsten APT price remains at the elevated level, which is 65% above the average price seen in 2005-10 and almost fourfold exceeds the average price achieved in 2000-05. This structural increase in price underpins the tightness of the global supply-demand balance for tungsten, which is now considered a strategic mineral due to the unique chemical characteristics and relatively poor regional availability. China, which accounts for some 80% of the global supply and 40% of demand, has been consistently increasing its export restrictions on tungsten by reducing export quotas and boosting duties. It also limited the extraction of ore reducing the availability of tungsten concentrate. Overall, it is estimated that China’s tungsten demand was growing by as much as 9% pa over the last decade compared to just 2% growth in the developed countries. While China’s economic growth is slowing, its tungsten demand is likely to keep growing at a 5-10% rate per year as both industrialisation and urbanisation continues. We therefore believe that tungsten pricing should be well supported in the medium to long term as supply remains constrained in light of China curtailing its presence on the international market. If this trend continues, the prevailing market shortage is unlikely to be significantly challenged by the anticipated increase in new mine supply coming on stream in 2012-15. Based on the known and relatively advanced non-China tungsten projects, we estimate an increase in production of up to 1.5m mtu of WO3 and APT, which would represent some 20% of the global annual consumption. That said, as is always the case in mining, there is a high execution risk as some of the announced projects have not yet been through the feasibility study stage and/or secured financing.
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Exhibit 7: Tungsten APT spot price performance, US$/mtu 500 400 300 200 100 0 Sep-11
Valuation: £0.24 un-risked SOTP per share We value Ormonde on a SOTP basis with the Barruecopardo project’s NPV being the main driver of the company’s valuation. Our un-risked Barruecopardo NPV is based on a 10% discount rate, which implies a £84.2m enterprise value for the project and translates into the company’s overall equity value of £90.1m (£0.24/share). This yields a 170% upside to the current market price of £0.09 per share. All in all, we expect an improved valuation for Ormonde to crystallise as it successfully completes the permitting process, fund-raising and off-take. We value the La Zarza project at €7.5m, which reflects an estimated current book value of the asset (€6.5 as of December 2010 plus €1.0m in initiated development programme and assuming no write-downs). We note that this estimate implies an EV/Resource of only US$15/t of contained copper (based on the non-JORC 0.5Mt resource estimate) compared to the average multiple of US$74/t for the relevant peer group (Nevada Copper, EMED, Weatherly International and Bezant). While we see a clear upside in La Zarza, we note that at this stage the project has no compliant JORC resource and is at a very early stage of the development to provide a substantial contribution to the company’s combined value. Exhibit 8: Ormonde SOTP summary valuation
Barruecopardo tungsten project La Zarza (copper exploration) Other assets (gold exploration) E nte rpris e va lue Net cash Equity value Number of shares (m) E quity va lue pe r s ha re Current share price Difference
Owne rs hip 100% 100% 100%
V a lua tion me thod NPV EV/t, Book value N/A
U nris k e d €'000s 95,265 7,500 0 102,76 5 7,117 109,8 8 2 371 0.3 0 0.11 170%
N PV £ '000s 78 ,08 6 6,148 0 8 4,23 3 5,8 34 90,067 371 0.24 0.09 170%
Source: Edison Investment Research
Barruecopardo NPV Our base-case un-risked Barruecopardo NPV is based on the DFS assumptions, a US$350/mtu benchmark APT price, a 25% discount for concentrate, a 30% statutory tax rate and 10% discount rate. We understand that the project should benefit from a combination of capital grants, tax and
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capital allowance, which we have pencilled into our model. As the project’s resource base extends beyond the original nine-year open pit operation, we have valued the residual resource at an average multiple derived from a peer group valuation (Exhibit 9). Finally, to incorporate the ongoing acquisition of the 10% minority interest in the project, we discounted the respective tranches (according to the payment schedule with the overall consideration amounting to €2.3m) by 10% to date. As a result of this acquisition, which should be completed by 2015, Ormonde will gain a 100% interest in Barruecopardo. The purchase price, which implies a €23m valuation of the project, appears to have been a good deal for the company and its shareholders. Exhibit 9: Barruecopardo NPV valuation 0 2012 LT APT price LT concentrate price Ormonde realised price Open pit resource ROM production Feed grade Recovery in concentrate Saleable concentrate Revenue Total cash cost EBITDA Operating profit PBT Tax payable Profit after tax FCF Discount rate Discount factor Discounted FCF Sum of discounted FCF Residual resource Less payment for 10% stake E nte rpris e va lue Enterprise value
US$/mtu US$/mtu €/mtu 000t 000t % % 000mtu €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 % # €'000 €'000 €'000 €'000 €'000 £'000
-48 ,500 10% 1.00 -48 ,500 79,933 17,324 1,992 9 5,26 5 78 ,08 6
1 2013 350 263 202 7,940 750 0.30% 78 .0% 176 35,438 17,48 3 17,955 13,514 20,78 9 0 20,78 9 22,935 10% 0.91 20,8 50
2 2014 350 263 202 6,8 40 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,698 20,042 0 20,042 24,503 10% 0.8 3 20,251
3 2015 350 263 202 5,740 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,259 19,58 5 0 19,58 5 22,704 10% 0.75 17,058
4 2016 350 263 202 4,640 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,215 19,8 08 0 19,8 08 26,533 10% 0.68 18 ,123
5 2017 350 263 202 3,540 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,171 19,230 -1,572 17,658 24,427 10% 0.62 15,167
6 2018 350 263 202 2,440 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,127 19,18 6 -3,417 15,769 22,58 2 10% 0.56 12,747
7 2019 350 263 202 1,340 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,08 3 19,143 -3,404 15,739 22,595 10% 0.51 11,595
8 2020 350 263 202 240 1,100 0.30% 78 .0% 257 51,975 25,641 26,334 19,040 19,099 -3,391 15,708 22,608 10% 0.47 10,547
9 2021 350 263 202 0 240 0.30% 78 .0% 56 11,340 5,594 5,746 3,207 3,266 -470 2,797 4,941 10% 0.42 2,096
Source: Company data, Edison Investment Research
Barruecopardo NPV sensitivity Our valuation sensitivity to changes in main model assumption suggests that the Barruecopardo project’s NPV has a breakeven APT price of c US$240/mtu, compared to the current spot benchmark price of US$388/mtu and year-to-date average of US$434/mtu. A 10% reduction in our long-term APT price of US$350/mtu leads to c 30% decline in the project’s NPV. As far as sensitivity to the discount rate is concerned, we estimate that to arrive to the current market valuation of the company (£33.4m in equity) we would have to discount the Barruecopardo project at c 30% rate, ignore the value of the residual resource (adds £14.2m to our valuation), assume a book value for the La Zarza project (our base case) and zero value for all other projects (our base case). Based on our valuation, Ormonde currently trades at 0.4x P/NAV. This compares to the 0.2x P/NPV ratio for Wolf Minerals (which is developing the greenfield opencast Hemerdon tungsten project in the UK), which has completed a BFS, secured off-take and part of the financing, and 0.4x P/NAV for Woulfe Mining, which has recently signed an off-take and financing deal with IMC and released its BFS for the Sangdong project in South Korea.
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Exhibit 10: Barruecopardo NPV sensitivity APT price, $/mtu Barruecopardo NPV, £m ORM equity value, £
- 3 0% 245 5.1 0.07
- 20% 28 0 26.1 0.13
D is c ount ra te Barruecopardo NPV, £m ORM equity value, £ U nit c a s h c os t, E U R /mtu Barruecopardo NPV, £m ORM equity value, £
69 8 9.3 0.30
79 8 1.4 0.28
- 10% 315 46.2 0.18
Bas e cas e 350 65.5 0.24
10% 38 5 8 2.5 0.28
20% 420 99.4 0.33
3 0% 455 116.4 0.37
8% 73.8 0.26
10% 65.5 0.24
15% 48 .6 0.19
20% 35.6 0.16
3 0% 17.5 0.11
89 73.5 0.26
99 65.5 0.24
109 56.6 0.21
119 46.8 0.19
129 37.0 0.16
Source: Edison Investment Research
Risks to our valuation While the biggest sensitivity for Barruecopardo’s NPV is the performance of APT prices, we see execution delays as the major risk for the project, as the company is yet to complete the permitting process, raise financing and sign an off-take agreement. While we believe that both funding and off-take should not be a big issue as the project’s economics look robust and tungsten market fundamentals remain strong, we note that delays in permitting and therefore project commissioning are possible. This would have negative implications for the company’s valuation.
Comparative valuation: At premium to peers At US$6.4/mtu of contained tungsten trioxide, Ormonde’s stock currently trades above the weighted average EV/Resource multiple for the sector of US$3.8/mtu. We believe that some premium to peers is justified by the relatively low capital intensity of Barruecopardo, its advanced development stage, and Ormonde’s other resource projects (La Zarza and gold). Exhibit 11: Tungsten peer group valuation Note: Hazelwood valuation is prior to the trading halt on 1 May 2012.
Largo Resources North American Tungsten Woulfe Mining Ormonde Mining Carbine Tungsten (Icon Resources) Wolf Minerals Malaga Inc Hazelwood ADEX Mining King Island Scheelite We ighte d a ve ra ge
Mc a p ( U S $ m) 116.4 71.3 72.4 52.8 30.0 28 .3 28 .7 22.7 12.4 13.0
EV ( U S $ m) 113.0 96.9 69.4 45.7 27.0 112.9 33.3 20.9 9.7 10.0
C onta ine d WO3 mmtu 40.9 41.3 15.9 7.1 6.6 53.7 3.8 4.8 4.7 8 .2
Gra de %
E V /R e s ourc e
0.10 0.8 6 0.44 0.26 0.12 0.13 0.76 0.10 0.33 0.90
2.8 2.3 4.4 6.4 4.1 2.1 8 .8 4.4 2.1 1.2 3 .8
Recent capital market activity On 12 March 2012, the company announced the closing of an equity placement to raise approximately €4.0m in gross proceeds. According to the company, the net proceeds from the placement will be spent on Barruecopardo, with some €1.6m to be used in funding the initial engineering design work at the project, and payment to SIEMCALSA in respect to Ormonde’s acquisition of the remaining 10% stake in the Barruecopardo project. The balance of the funds will be used for general working capital purposes. In general, given that the company has completed
12 | Edison Investment Research | Outlook | Ormonde Mining | 17 May 2012
the feasibility study and has no substantial financing commitments at its other projects, we believe that the outstanding cash position should be enough to get it through the permitting stage (assuming there are no severe delays). More funds will have to be raised (via JV funding, equity or debt) to finance the construction of the Barruecopardo project and advance it to production. We understand that the company contemplates a number of options to fund the project aiming to reduce any equity portion of funds to be raised. This is likely to be achieved through JV and/or offtake financing.
13 | Edison Investment Research | Outlook | Ormonde Mining | 17 May 2012
Exhibit 12: World tungsten market scorecard The main uses of tungsten Mill products 13%
Simplified tungsten production flow chart Crushing & milling
Ore from mine
Pre-concentration stage (photometric or UV fluorescence and air blast separation)
Hard metals 54%
Steel and other alloys 27%
Ore beneficiation (gravity, froth flotation, magnetic or electrostatic separation, or a combination of methods)
Global distribution of tungsten resource
Direct use in steel manufacture
Tungsten concentrate (65 – 75% W0³)
Hydrometallurgy (chemical processing including pressure leaching, filtration, solvent extraction and precipitation)
World tungsten production (2010)
EU 2% Bolivia 2%
Immediate tungsten Compunds, e.g. APT
Pyrometallurgy (rotary furnace, batch/pusher furnace or calcination)
Tungsten metal, trioxide, carbide or alloys
World largest known tungsten deposits Deposit
Type of deposit
Est. contained tungsten
Source: Company accounts, Edison Investment Research, British geological survey (after Roskill and USGS)
14 | Edison Investment Research | Outlook | Ormonde Mining | 17 May 2012
Exhibit 13: Financials €'000s Year end 31 December PR OFIT & LOS S R e ve nue Cost of Sales Gross Profit E B ITD A Ope ra ting Prof it ( be f ore a mort. a nd e xc e pt.) Intangible Amortisation Exceptionals Other Ope ra ting Prof it Net Interest Prof it B e f ore Ta x ( norm) Prof it B e f ore Ta x ( FR S 3 ) Tax Prof it Af te r Ta x ( norm) Prof it Af te r Ta x ( FR S 3 )
2009 IFR S
2010 IFR S
2011 IFR S
2012e IFR S
0 0 0 ( 48 3 ) ( 49 2) 0 (1,08 7) 0 ( 1,579 ) 4 ( 48 8 ) ( 1,576 ) (4) ( 49 2) ( 1,579 )
0 0 0 ( 1,055) ( 1,06 1) 0 (32) 0 ( 1,09 3 ) 6 ( 1,055) ( 1,08 7) (2) ( 1,057) ( 1,08 8 )
0 0 0 ( 8 6 4) ( 8 72) 0 0 0 ( 8 72) 0 ( 8 72) ( 8 72) 0 ( 8 72) ( 8 72)
0 0 0 ( 8 9 2) ( 9 00) 0 0 0 ( 9 00) 0 ( 9 00) ( 9 00) 0 ( 9 00) ( 9 00)
223.4 (0.2) (0.2) (0.7) 0.0
250.4 (0.4) (0.4) (0.4) 0.0
308 .6 (0.3) (0.3) (0.3) 0.0
395.6 (0.2) (0.2) (0.2) 0.0
B ALAN C E S H E E T Fixe d As s e ts Intangible Assets Tangible Assets C urre nt As s e ts Stocks Debtors Cash Other C urre nt Lia bilitie s Creditors Short term borrowings Long Te rm Lia bilitie s Long term borrowings Other long term liabilities N e t As s e ts
11,6 41 11,632 9 6 07 0 109 498 0 ( 6 74) (674) 0 ( 100) (100) 0 11,474
12,46 4 12,443 22 2,09 4 0 513 1,944 0 ( 273 ) (273) 0 0 0 0 14,28 5
15,46 1 15,443 19 2,714 0 0 2,201 0 (3 6 9 ) (369) 0 0 0 0 17,8 06
19 ,453 18 ,443 1,011 1,8 22 0 0 1,309 0 (3 6 9 ) (369) 0 0 0 0 20,9 06
C AS H FLOW Ope ra ting C a s h Flow Net Interest Tax Capex/Exploration Acquisitions/disposals Financing Dividends Other Net Cash Flow Ope ning ne t de bt/( c a s h) HP finance leases initiated Other C los ing ne t de bt/( c a s h)
( 76 3 ) (4) (2) (570) 0 695 0 4 (641) ( 1,13 8 ) 0 0 ( 49 7)
( 1,159 ) (6) (1) (8 61) 0 3,468 0 6 1,446 ( 49 8 ) 0 0 ( 1,9 44)
( 1,13 1) 0 0 (3,005) 0 4,394 0 (1) 257 ( 1,9 44) 0 0 ( 2,201)
( 8 9 2) 0 0 (4,000) 0 4,000 0 0 (8 92) ( 2,201) 0 0 ( 1,3 09 )
Average Number of Shares Outstanding (m) EPS - normalised (c) EPS - normalised and fully diluted (c) EPS - (IFRS) (c) Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)
Source: Company accounts, Edison Investment Research
15 | Edison Investment Research | Outlook | Ormonde Mining | 17 May 2012
Balance sheet strength
2 2 1 1 0
Growth metrics EPS CAGR 08-12e
Profitability metrics ROCE 11e
Balance sheet metrics Gearing 11e
Company details N/A
EPS CAGR 10-12e
Avg ROCE 08-12e
Interest cover 11e
EBITDA CAGR 08-12e
EBITDA CAGR 10-12e
Gross margin 11e
Stock turn 11e
9 Abbey House, Main Street, Clonee County Meath, Ireland Phone +353 (0)1 8253570
Sales CAGR 08-12e
Operating margin 11e
Debtor days 11e
Sales CAGR 10-12e
Gr mgn / Op mgn 11e
Creditor days 11e
CEO: Kerr Anderson Kerr Anderson is a geologist with extensive experience (in excess of 20 years) of work in Spain on gold and base metals mining projects.
Submission of final permitting documents
Capital funding/off-take agreement
Granting of permitting
Commencement of mine construction
Note: * = estimated Companies named in this report Wolf Minerals, Thor Mining, Woulfe Mining
+353 (0)1 8015906
COO: Steve Nicol Steve Nicol is a mining engineer with more than 20 years of experience in managing and developing mines in Australia and Europe. Executive Chairman: Mike Donoghue A mining engineer by profession, Mike Donoghue has wide experience in the evaluation, funding, development and operation of mines in Europe, Africa, South-East Asia, Australia and the Americas. His executive management experience includes an eight-year period as General manager – operations for Delta Gold NL, Australia.
16 | Edison Investment Research | Outlook | Ormonde Mining | 17 May 2012
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