Post about BCM by Ed Monton on another site
BCM Recommendation
Apparently from Paradigm (June 22)
Target Price Increased to Reflect Growing Resources
All figures throughout this report are in US$, unless stated otherwise.
• With the release of more drill results earlier this week, we now believe that the 70%-owned Corani property resource has grown from the published 250 Moz to 350 Moz+.
• This note examines a number of methods to value this asset, an inexact science given the lack of metallurgical assessment (expected July/August) or scoping study (late-Q3/FY06).
• We maintain our Speculative Buy rating, and have raised our target price to C$8.75 (was C$7.15) to reflect our expectations of the growing silver resources.
Earlier this week, Bear Creek announced additional drill results from its70%-owned Corani silver project in southern Peru. Refer to our June 16th research note for a detailed discussion of those drill results. Size aside, two other near-term events are likely to shape Corani’s economics: an independent metallurgical assessment due in late July-August and a scoping study expected to be completed by end of Q3/FY06. These will give us a much better sense of the project economics. That being said, we have examined a number of methods to gauge a sense of valuation now. We have assumed that the next resource estimate (which will presumably form the basis of the scoping study) is likely to show the Corani resource at 350 Moz of silver, up from the current 250 Moz.
Method #1: Value per Ounce
After examining a number of silver companies, ranging from advanced explorer/developers to producers, we have observed a wide range of market cap per-ounce valuations, ranging from less than $0.50/oz for “troubled” stories such as IMA Exploration (a lawsuit overhangs the ownership of the project, plus the metallurgy still remains as a big unknown), to $2.00-$2.50/oz for silver producers (e.g. Pan American), and up to $4.00/oz or more for some of the “hotter” exploration stories with good momentum. A continuing problem when trying to compare silver deposits is their polymetallic nature. There are almost no “pure silver” deposits, so some are gold-silver, some are lead-silver or zinc-silver. Depending upon the nature of the ores, these by-product metals could be significant to the economics of the project.
We have chosen to use a $1.50/oz value, which we feel is reasonable relative to the differing types of peers. Corani looks, at this stage, to have average-ish costs. It is a much larger than average deposit, which usually commands a premium, but it is also located in Peru at high altitude, which we assume offsets its size. The US$1.50/oz is also very close to where an average gold explorer-producer is now trading, comparing gold and silver on an equivalent-basis. For our assumed 350 Moz, we calculate a value of C$8.85/sh (diluted, in-the-money shares), based on Bear Creek’s 70% share, and adjusted for cash received for in-the-money option conversion, and remaining acquisition and success payments due to Rio Tinto.
Table 1: Paradigm’s NAV Assumptions
Paradigm Base Case
Resource Est of Mineable
Moz Silver 350
gpT 68
Capital Cost (100%) US$424m
Primary Mining Method Open Pit (100%)
Mine Life 15 years
Daily Mill Throughput (tonnes per day) 29,500
Processing Recovery 75%
Oper Cost/tonne ore Mining $3.00
Milling $6.00
Gen & Admin $0.75
Total cash cost/tonne ore $9.75/tonne
Base metal credits, net -$3.62/tonne
Net Cash Cost/tonne $6.13/tonne
Long Term Cash Cost/oz production $4.16/oz
including Royalties $4.78/oz
Annual Production at full capacity (100%) 17.5 Moz/yr
IRR after Tax @$10/oz 15%
IRR after Tax @$12.50/oz - Base Case 23%
Pre-Project Financing
NAV @ 5% C$/share at $10/oz C$4.48/sh
NAV @ 5% C$/share at $12.50/oz - Base Case C$8.69/sh
100% Equity Financing at Market
NAV @ 5% C$/share at $10/oz C$4.71/sh
NAV @ 5% C$/share at $12.50/oz - Base Case C$6.46/sh
Method #2: A Rough NAV Estimate
With no scoping study, there are no details with which to build a detailed NAV model of the Corani deposit. So instead, we have modeled a non-detailed, rough estimate of NAV based upon “rule-of-thumb” estimates we use for broad-brush estimation of gold deposits prior to scoping studies. We have estimated construction capex of ~US$60/oz of gold-equivalent resource, a 15-year mine life,“reasonable” mining, milling, and G&A costs. Another critical assumption is that silver process recoveries will average 75%.
Corani generates a robust 23% IRR after tax at our assumed US$12.50/oz price for silver, despite our fairly conservative cash cost assumption of US$4.78oz of silver. Prior to financing, we estimate an NAV (5% discount rate) of C$8.69/sh (diluted, in-the-money shares).
The figure for post-financing depends greatly upon your assumption of the financing: the number can be “engineered” into quite a broad range considering we estimate that Bear Creek’s 70% share of the capex financing could run close to US$300m – half again as much as the current share capitalization of the Company.
Assuming 100% equity financing at close to the current share price, the post-financing valuation would be C$6.46/sh, although this is somewhat academic, as we do not expect the company to be raising US$300m in the near future.
Discussion of Rio Tinto’s Back-in Rights
One possible overhang to Bear Creek is that Rio Tinto has back-in-rights to the Corani property. Details of remaining payments and back-in-rights are:
US$2.0m payment due by January 19, 2007, and a final US$3.0m payment due by January 19, 2008 to earn 70%.
Following Bear Creek's earn-in, Rio Tinto has a 90-day period within which it may offer to sell its 30% interest to Bear Creek for an additional payment of US$5m, or continue under the joint venture terms.
Once Bear Creek has earned its 70% interest the project will operate as a joint venture with standard dilution clauses and Bear Creek will maintain a first right of refusal in the event RT decides to sell its interest to a third party.
Bear Creek will pay, pro-rata to Bear Creek's interest, Rio Tinto "success payments" of $1.10/oz of gold and $0.015/oz of silver, based upon recoverable ounces defined in a bankable feasibility study.
Bear Creek will pay Rio Tinto $5m for each event that the recoverable resource exceeds 1 Moz gold or 100 Moz silver.
Rio Tinto will hold a back-in right to acquire 60% of the project by reimbursing Bear Creek three times its pro-rated exploration expenditures should economic resources exceed 5.5m tonnes of copper and/or 10 Moz gold or gold-equivalent in exchange for providing Bear Creek a full 40% deferred carried interest through project construction (on which interest will accrue at LIBOR +4%, and be paid from cash flow from the operation).
It is pretty clear that the “set payment” of US$5m for Bear Creek to purchase the remaining 30% interest is almost assuredly NOT going to be what happens. Even if Rio Tinto wishes to sell the interest, we would assume they would continue with the JV and sell at another (higher) price to be determined.
But how likely is it that Rio Tinto will back in to this project? First of all, they cannot do so unless a bankable feasibility study identifies a deposit with economic ounces of 10 Moz of gold or gold-equivalent – this would be 550-600 Moz of silver, so considerably larger than the current resource of 250 Moz silver and even our 350 Moz silver estimate. Rio Tinto also has a back-in-right if 5.5m tonnes of copper are outlined, but so far there has been essentially no copper mineralization identified. To our understanding, the lead and zinc identified at Corani do not count towards gold-equivalent ounces.
Secondly, Rio’s rate of return might not be high enough unless it is willing to use a silver price over US$10.00/oz. At this silver price our analysis generates a 15% after-tax IRR to Rio and the capital efficiency ratio is still not terribly attractive. (e.g. The NPV to Rio with a 5% time-discount rate is US$240m, only 40% of Rio’s total investment of US$495m, and just 14% at a 10% discount rate.)
Assuming a 580 Moz silver resource were to be outlined, which would bring the deposit into the 10 Moz+ gold-equivalent range, and assuming that Rio Tinto exercised their option and built the mine (using the same estimates of mine development as per our rough NAV valuation), Bear Creek’s share of ounces
would be 232 Moz, still a large stake. We believe that the value of the resources would increase with the greater certainty of a positive bankable feasibility study, assured financing without dilution (i.e. a carried interest) and one of the world’s best mine builders and operators at the helm.
If we assume a value of US$2.00/oz, then Bear Creek’s share would be worth about C$13.15/sh, including an assumed initial US$90m to cover three times the estimated spending to the point of feasibility.
Investment Implications
Corani is, in our opinion, already a world-class silver deposit, and growing. There are still many risks ahead (e.g. metallurgy) before a development decision will be made, but we like what we see so far.
The various methods we examined in this note led to valuations of C$8.85 (flat $1.50/oz valuation), C$8.69 (pre-financing rough NAV), C$6.30 (post-financing NAV), and C$13.15 (Rio Tinto takeover). We should point out that none of these valuations include anything for the Company’s other projects such as Santa Ana and Condor (upon which drill results should be out by the end of July). These projects – particularly Santa Ana, in our opinion – are potential “wildcards”: they are given zero value, so there is really only upside.
We believe the first two valuation methods are probably the most relevant. The post-financing C$6.46 valuation unrealistically assumes a massive equity dilution (which by its nature tends to drive the valuation towards the equity issue price assumed). The Rio Tinto takeover valuation of C$13.15 is of academic interest, but unlikely to occur unless Corani gets much, much larger. Thus, we have chosen the mid-point of our two remaining valuations, or C$8.75/sh, as a reasonable measure.
We maintain our Speculative Buy rating, and are increasing our target price to C$8.75/sh (was C$7.15/sh). Bear Creek is one of our favorite explorers at this time and one of our top picks among our “Takeover 20”. |
