Blackthorn Resources Limited (ASX:BTR): Zinc Leverage, Copper Exposure
Blackthorn Resources has a current market capitalisation of around $40 million and had cash of $28 million at the end of March 2013, leaving an “enterprise value” of around $12 million. This seems low, given the company’s assets, and is therefore worth a closer look.
The share price has been a roller coaster ride for shareholders in recent years. The price declined from around $1.00 in early 2010 to around $0.50 in early 2012. Then, in early 2012, on the back of an announcement of drilling results from the Mumbwa copper project, the share price almost reached $2.00. It then settled at around $1.20 until another announcement on Mumbwa in April 2013 which showed a substantial decline in the total resource base. This appears to have caused a precipitous fall in the share price to the current level of around $0.25.
On 2 May 2013, it was announced that both the Chairman, Mr Bill Cash, and the Managing Director, Mr Scott Lowe, were to resign. It is understood that Mr Cash is retiring, however the reason for the resignation of Mr Lowe is not clear. The announcement stated that he was resigning to “pursue the next stage of his career.” It is not clear what, if any, implications there are for shareholders from the resignations of these two key executives.
The question is: has the selloff been overdone? I believe this is possible and will look into the company’s assets in a little more detail below.
The company has two main assets; the Perkoa Project nearing production in Burkina Faso, and the Mumbwa Project in Zambia. It also has early stage exploration projects in Burkina Faso that will not be considered here.
This zinc project is operated by Glencore International AG in joint venture with Blackthorn. Blackthorn currently has a 39.9% interest in the project, which will dilute to 27.3% as, and when, Glencore sole funds USD80 million in final construction and commissioning costs. Glencore has already spent around USD140 million on project development.
The project hosts a total mineral resource of 12.2 million tonnes at a grade of 10.3% zinc, 53.9g/t silver and 0.16% lead. This in turn contains an ore reserve of 6.3 million tonnes at a grade of 13.9% zinc at a cut-off of 9% zinc.
First concentrates have already been produced and positive cash flow is expected by the end of 2013. The total cash cost is USD1,500 per payable tonne of zinc, including treatment charges, freight etc. The mine is expected to produce around 90,000 tonnes of zinc concentrate a year. At the current zinc price of USD1,800 per tonne, this would produce revenue of USD162 million, and give a cash flow after operating costs of USD27 million, of which USD7.4 million would be attributable to Blackthorn. However, when other costs are taken into account I expect the project to be marginally cash positive.
Since the depths of the global financial crisis in 2009, zinc has traded in the range USD2,500 to USD1,700 per tonne. Now, while no one can predict the future, although many try, it does appear that there is more upside than down for the zinc price going forward.
This project is 100% owned by Blackthorn and is currently the subject of a pre-feasibility study. It also referred to as the Kitumba Project, which is a subset of the Mumbwa project and hosts the existing copper resource described below.
On 8 April 2013, the company announced a total mineral resource of 108 million tonnes at a grade of 1.09% copper, at a cut-off of 0.5% copper. This includes a high grade indicated mineral resource of 29.8 million tonnes at a grade of 2.13% copper, at a cut-off of 1.0% copper. This is a significant decrease compared with the previous resource estimate, released on 29 June 2012, of a total mineral resource of 187 million tonnes at a grade of 1.145% copper, at a cut-off of 0.5% copper. It included a high grade indicated mineral resource of 36.3 million tonnes at a grade of 2.08% copper, at a cut-off of 1.0% copper.
The loss of almost half of the total resource is serious and the company has not explained the reason for the loss. However, although the high grade core has seen a reduction in tonnage, it remains largely intact. I presume that it will be this high grade core that will be mined, probably by underground methods. The pre-feasibility study now under way is expected to be completed by the end of July.
While the Company reported cash of $28.6 million at the end of March 2013, this was after spending $22.3 million for the nine months to that date. An understanding of the Company’s cash management plans for the future will be integral to any investment decision.
The unexpected resignation of a director, including for “family” or “personal” reasons is always taken as a red flag by the investment community. It can often signal problems within the company that are not within the public domain.
This a particular concern with BTR, where the two most critical directors have announced their resignation simultaneously, without satisfactory explanation and without a clear succession plan. While I don’t think there is anything to be unduly concerned about, more clarity is required.
The huge downgrade at Mumbwa throws a question mark on the remaining resource. An explanation for the downgrade is required as any feasibility study is only as reliable as the underlying resource.
The Perkoa project is well advanced and looks as though it will show a modest positive cash flow, even at these depressed zinc prices. Any sustained rise in the zinc price will see a substantial rise in cash flow from this project. Look at BTR as excellent leverage to zinc
The Mumbwa project has been clearly misunderstood and misinterpreted in the past. Nonetheless, the resource appears robust and I would expect a positive outcome to the pre-feasibility now underway.
Disclosure: Market Capital holds securities in Blackthorn Resources Limitedas at the date of publication of this article.