Alecto Minerals
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Alecto Minerals
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22 July 2016
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Transitioning from explorer to miner
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Speculative Buy Alecto's acquisition of the Matala and Dunrobin gold mines via the purchase of
Luiri Gold Mines Ltd (LGML) was a genuinely transformational transaction.
Price: 0.08p Target Price: 0.31p Sector: Metals & Mining
Alecto is now a Zambian focused mine developer with a 760Koz decent grade resource and a 25y mining lease. Its West African projects are no longer the operational focus and will be progressed by JV partners such as Randgold.
Alecto's planned approach to developing LGML will require minimal new Alecto equity. Mining will be contracted-out, while c$15m of debt should be sufficient
Share Price Performance to fund the plant and other surface infrastructure. The plan is for an oxide
operation with average production of 28Koz per annum over 5 years. Management expects the mine life to double, we believe 250Koz of production over 8 years is a reasonable target, with potential for significantly more.
Perfect partnership - complementary skills
Alecto's acquisition of LGML was in effect a partnership between Alecto and the property's main vendor, Gerald Chapman, who now owns 20% of Alecto. He and his team have a detailed understanding of the project, its metallurgical and other technical nuances. Alecto provides, geology, mining and corporate expertise, plus the advantages of the listed vehicle.
Source: London Stock Exchange
Key Data
Market: AIM
TIDM: ALO.L
1 Year Hi/Lo: 0.17p - 0.054p
Existing Shares: 4,472m
Market Cap: 3.46m
ISIN: GB00B5SCHP68
SEDOL: B5SCHP6
Co. Website: alectominerals.com
Charles Long Research Analyst
[email protected]
+44 020 7382 8384
Sheldon Modeland, P.Geo.
Research Analyst
[email protected]
Background - how the opportunity came about
LGML was most recently controlled by ASX Co. Luiri Gold who spent C$20m. Unfortunately for its shareholders, the board focused on building too small an operation (11Koz / annum) which was initially based on a $1550/oz gold price. When the gold price fell in 2013, they couldn't find the finance and de-listed.
Alecto's plan - 150Koz oxides start-up
One of the characteristics of LGML is the presence of cyanide consuming copper minerals in deep sulphides. Alecto's plan is to mine and process the oxides (gravity + CIL) in the first 5 years and then to decide whether a sulphide circuit makes commercial sense. Importantly, based on $1260/oz the oxide start-up generates excellent returns for Alecto shareholders. A sulphide phase would represent additional upside.
Project economics - 169% IRR
Johannesburg based consultant, PenMin, first worked on the project in 2013 and is responsible for the recent oxide-only feasibility study. Based on $1260/oz It shows that a 400ktpa open pit operation, with upfront capex of $14.4m (mostly fundedby debt) delivers an IRR of 169% and an NPV10 of$28.6m.
Infrastructure - massive advantage
The Dunrobin mine was once the largest gold mine in Zambia and although the old plant and equipment has decayed or been removed, there remains some valuable basic infrastructure. This includes nearby mains power, concrete foundations and a bitumen road to Lusaka only 2 hours away.
Valuation and recommendation
Our valuation is based on a cashflow model of the 150Koz oxides start-up operation. We have also included G&A costs and a 20% risk factor. We calculate a 0.31p price target and recommend a Speculative Buy.
THIS RESEARCH BROCHURE IS A MARKETING COMMUNICATION: For full disclosures, please see the back page. © Beaufort Securities Ltd Beaufort Securities is Authorised and Regulated by the Financial Conduct Authority and is a Member of the London Stock Exchange.
Investment summary
In 4Q15 Alecto acquired the LGML property (Matala and Dunrobin gold mines) for £1.54m. 74% of the consideration was in shares while the small cash element and working capital requirements were funded through a £0.65m placing. Post transaction the property's vendors owned 29.9% of Alecto.
Alecto had been a gold explorer since 2010. But with exploration funding scarce and in-ground gold ounces worth less than the cost of discovery, management changed strategy.
With competition for near cashflow assets fierce, we feel that Alecto's management has done an excellent job in identifying and completing the LGML acquisition. The timing was also very good, and perhaps a little fortuitous. Since the acquisition in November the gold price has increased c.22% (November 23rd $1075/oz, current spot
$1321/oz). We are surprised LGML's value hasn't been reflected in the Alecto share price.
LGML - C$20m data and 760Koz
Matala and Dunrobin are well known historical gold mines, located in south central Zambia. They were originally mined in the 1930's, and were more recently explored and progressed by ASX listed Luiri Gold Ltd (LG). The project is 120km from Lusaka and access is by bitumen road.
LG invested approximately C$20m in the ground between 2006 and 2013 and the project has a JORC resource of 760Koz, an average grade of 2.2g/t, and a 25y mining licence. Alecto controls 100% of the property - on any measure the £1.54m acquisition cost was a fantastic result for Alecto's shareholders.
Matala versus Dunrobin
In the "project background" section below we discuss reasons why LG failed to take LGML into production. The main reason was management's focus on a very small Dunrobin only operation (only 80Koz production over 10 years) which had a capital cost estimate of $21m. Although designed to be a start-up operation, it was still too small to attract debt funding.
In hindsight LG would have been better off spreading the $21m capex between two open pits, one at Matala and one at Dunrobin. This is the basis of Alecto's approach whose start-up plan is to produce c140Koz over 5 years rather than LG's plan of 80Koz over 10 years. Alecto's plan also requires $14.4m of capex versus LG's $21m, so more ounces and a much lower capital intensity.
Although Matala is a narrower orebody than Dunrobin, it contains the bulk of LGML's 760Koz resource and is open pittable to 100m at $1200/oz gold. In fact, Matala's strip ratio for the open pit phase is a reasonable 6:1.
Oxides start-up…..
The LGML gold deposits are associated with copper sulphide minerals. In the weathered zone where minerals have been oxidised, the metallurgy is reasonably straightforward and gold recoveries are +95% using standard gravity and carbon in leach processes. In the deeper fresh rocks, copper minerals seriously interfere with the leaching - consuming acid and reducing recoveries.
As a result, Alecto's mine plan focuses entirely on open pittable oxide and transitional ores at Matala and Dunrobin. This will sustain a 28Koz operation over 5 years.
Importantly, the oxides start-up operation offers excellent financial returns on a stand-alone basis and this is the basis of our Alecto equity valuation/0.31p target price. There is no requirement to build the sulphides circuit or go underground.
…sulphides later, probably
Assuming the oxides start-up operation progresses profitably, Alecto may look to develop the sulphide resources. As yet the best sulphides processing route is undecided although there are several options. Probably the most straightforward (lowest capital cost) would be flotation to produce a copper-gold concentrate, although this relies on finding a copper smelter willing to pay well for the contained gold and not penalising too heavily for the arsenic content
Matala schematic showing oxides-transitional-sulphides:
Oxides (gravity + leach = >95.6% recovery)
Upper transitional (gravity + leach = >93.6% recovery) Lower transitional (gravity + leach = >81.0% recovery)
Sulphides (gravity + leach = >64.2% recovery)
Source: PenMin, Beaufort Securities
Potential scale - 30Koz probably optimum
ASX listed Luiri Gold's (LG) plan was for its very small scale Dunrobin start-up operation to fund a much larger scale, higher tonnage operation. LG management had longer term expectations for 2.0Moz of resources and production of 50Koz+ per annum.
Alecto's approach is to build a mid-sized 400ktpa operation, mine the oxides at both Matala and Dunrobin, and potentially use the cash generated to fund a sulphide circuit and go deeper (underground at Matala and deeper open pit at Dunrobin).
There are currently no plans or expectations to increase the throughput to above 400kt.
Alecto-Digmin-PenMin team
These three companies are working very closely together. Digmin will be the mining contractor, PenMin will be the owner's team while Alecto's management team will oversee all aspects of the operation and be responsible for exploration and reserve development.
Funding options
The current plan is for mining to be contracted out to Digmin who will provide all the mining equipment and save Alecto c.$10m in upfront capex. Alecto is currently negotiating terms for c.$15m to fund the mine build (processing plant, tailings, working capital etc) through to commercial production. In an industry where traditional project finance is less widely available, Alecto is exploring several different funding options including a potential Chinese loan introduced by PenMin. PenMin has been involved in and managed African mines with the same source of Chinese funding, so we are comfortable this is a realisable option. Alecto is also in negotiation
with more traditional African focused banks and a chunk of vendor financing is a possibility. Alternative financing structures such as streaming have not yet been explored.
Summary and catalysts
Alecto is a transformed company. It has farmed-out its exploration activities in West Africa, retaining an equity interest in case one of its projects succeeds. Its team is now fully focused on Zambia and the development of LGML.
We believe the LGML acquisition was excellent business for Alecto, probably the most exciting corporate event since Alecto Minerals was created (2010). Management plans to finance the project primarily through debt and a mining contract agreement. If successful, this funding route has the potential to deliver very substantial upside to current equity holders. We recognise the risk associated with highly leveraged mining juniors, however given Alecto's current market value and the relatively small size (i.e. simplicity) of the project, we believe the risk is to the upside.
The main upcoming catalysts are securing funding, followed by breaking ground and a timeline to production.
Project location:
Source: Company
LGML - metallurgy
Both the Matala and Dunrobin deposits are associated with copper and other sulphides minerals. At both deposits the weathered ores are straightforward to process using gravity and standard carbon in leach, although cyanide consumption is elevated in the Dunrobin oxides, and especially in Dunrobin transitional ores.
In the fresh rock (>100m depth at Matala, >50m depth at Dunrobin) the copper minerals consume cyanide to such an extent that CIL becomes uneconomic at the current gold price. Dunrobin sulphides have higher levels of copper and arsenic and are more problematic than Matala's. There are various processing solutions for the sulphides including flotation which is relatively low capital cost, low operating cost and straightforward to implement. The copper concentrate would however be relatively low grade and contain elevated levels of arsenic, presenting a marketing problem.
Other processing solutions include fine grinding, POX and BiOx.