IBG - Ironbark Zincironbark.gl/wp-content/uploads/2013/09/Hartleys...Ironbark Zinc Limited...

of 12

Ironbark Zinc Ltd

Zin

c: D

evelo

per

IBG.asxSpeculative Buy

Share Price

Price Target (12 month) $0.189

Brief Business Description:

Hartleys Brief Investment Conclusion

Chairman & MD

Major Shareholders

Nyrstar Int 26.5%

L1 Capital 15.9%

Glencore Xstrata 11.4%

Company Address

Issued Capital 368.4m

- fully diluted (no conv. Notes)

Market Cap

- fully diluted

Cash (31 Mar 13a)# A$3.0m

Cash (31 Mar 13a) notes drawn A$53.0m

Debt (31 Mar 13a)# A$0.0m

EV

EV* assume notes drawn & convert -A$31.2m

EV/Resource Zn

EV/Reserve Zn

Prelim. (A$m) FY15e FY16e FY17e

Prod (kt Zn eq) 0.0 0.0 186.9

Op Cash Flw -10.4 -19.5 85.3

Norm NPAT -10.5 -44.1 105.5

CF/Share (cps) -0.5 -1.1 2.6

EPS (cps) -0.5 -1.1 2.6

P/E -9.4 -4.0 1.7

Zn Pb

Resources (Billion lb) 11.9 1.2

Reserves (Billion lb) 0.0 0.0

# we assume convertible notes are never drawn

Trent Barnett

Head of Research

Ph: +61 8 9268 3052

E: [email protected]

Hartleys has provided corporate advice within the past

12 months and continues to provide corporate advice

to Ironbark Zinc Limited, for which it has earned fees

and continues to earn fees. Analyst has a beneficial

interest in IBG. See back page for details.

384.4m

A$16.2m

A$16.9m

A$13.2m

A$0.0011/lb

-

31 May 2013

$0.044

Very large zinc development project in Greenland

Jonathan Downes (Managing Director)

Level 1, 350 Hay St

Subiaco, WA, 6008

Deposit is large and implies long mine life. Marginally

economic on consensus estimated zinc prices, very

economic at industry (the upper end of sell-side

consensus) forecasted prices.

Peter Bennetto (Non Executive Chairman)

IRONBARK ZINC LTD

The next zinc rocket Ironbark Zinc Limited (“Ironbark”, “IBG”, “Company”) is a zinc focussed

developer. The main asset is the Citronen project in Greenland, with a total

resource (M+I+Inf) of 132Mt @ 4.0% Zn and 0.4% Pb and a high grade

resource (M&I) of 52Mt @ 5.3% Zn and 0.5% Pb. It is located on the edge

of a fjord in northern Greenland and can be accessed by sea for three

months a year when the ice melts. The Company has recently released an

updated feasibility study. The capex has fallen slightly from US$502m to

US$484m but total costs are expected to be reasonably high. We assume

costs of US$0.84/lb Zn net of credits (CFR, including royalties and our

assumed smelter fees) – see Fig 5 on page 9.

The mine plan is for underground ore to be mined first (11 years), and then

progress to the lower grade open pits in years 11-14. The operation is

expected to have a mining rate of 3.3mtpa (2.2mtpa processing). Operating

costs are low at ~US$52/t ore, although the remote and isolated location

means that shipping and logistics costs are meaningful, adding an extra

~$10/t ore. There are additional smelter fees of ~12-25c/lb, with the fee

linked to the prevailing zinc price (adds 14c/lb or $13/t ore in our model).

Needs upper end zinc price assumptions to be viable We assume a ~14 year mine life and a 3.3mtpa mine operation (2.2mtpa

processing) beginning in late CY16 and payable zinc equivalent of >200k

tonnes pa for the first two years before declining to ~160ktpa with a

separate lead concentrate. We assume total cash costs of ~$80/t mined ore

(~$0.84/lb zinc eq in early years). We assume ~$500m of capex spent over

two years, funded ~70% debt. At current zinc prices (85c/lb), the project is

not financially viable (NPV12), in our view. Using our assumed zinc price

profile (which is similar to consensus and above spot prices) our NPV12 is

marginally positive. The Company pre-tax estimated NPV8 of US$609m is

based on life of mine zinc prices of ~US$1.37/lb (in-line with industry

estimates, but at the upper end of sell-side estimates). At US$1.37/lb, we

conservatively (we assume substantial dilution) value IBG at 28cps.

Excellent exposure to long term zinc….

Zinc prices have historically been very volatile and are currently trading

below the mid-point of the ten year range (~US$0.30/lb to US$2.10/lb).

Over the next few years several large mines will be depleted and should

lead to a shortfall and lead to price increases. As the Citronen feasibility

study results suggests, the incentive price for new mines is high.

Consequently, we believe zinc prices will increase, and potentially be

stronger than consensus and perhaps even higher than the assumptions

used in the Company’s valuation. For example, at US$1.60/lb, our IBG

valuation is conservatively 40cps. If we value IBG as a series of out-of-the-

money AUD zinc calls (50% volatility), we derive a 19cps valuation.

Retain Speculative Buy recommendation. Using our base case zinc prices we derive a marginally positive NPV12.

Consequently, we view IBG as a high risk investment and speculation on

rising zinc prices or a takeover. There is substantial upside if one uses

credible, but higher than sell-side consensus, zinc price assumptions. We

have a 19cps twelve month price target, based on better zinc prices.

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

May-13Feb-13Oct-12Jun-12

Volume - RHS

IBG Shareprice - LHS

Sector (S&P/ASX SMALL RESOURCES) - LHS

A$ M

Ironbark Zinc Ltd

Source: IRESS

http://www.ironbarkgold.com.au/investor-relations/reports/doc_details/385-citronen-feasibility-report-29-april-2013

Hartleys Limited Ironbark Zinc Ltd 31 May 2013

of 12

Ironbark Zinc Ltd Share Price

IBG $0.044 Speculative Buy

Key Market Information Directors Company Information

Share Price $0.044 Peter Bennetto (Non Executive Chairman) Level 1, 350 Hay St

Market Capitalisation - ordinary but assumes notes are converted A$0m Jonathan Downes (Managing Director) Subiaco, WA, 6008

Net Debt (cash), ex undrawn US$50m notes -$3m Adrian Byass (Executive Technical Director) Ph +61 8 6461 6350

Market Capitalisation - fully diluted A$17m Gregory Campbell (Executive Engineering Director) Fax +61 8 6210 1872

EV A$8m David Kelly (Non Executive Director)

Issued Capital 368.4m John McConnell (Non Executive Director) www.ironbarkgold.com.au

Chris James (Non Executive Director)

Options 16.1 Gary Comb (Non Executive Director)

Issued Capital (diluted for options but not convert. notes) 384.4m Top Shareholders Dil. For notes

Issued Capital (diluted inc. options and new capital) 3994.0m m sh. % m sh. %

1 Nyrstar Int 97.7 26.5% 97.7 #DIV/0!

12month price target $0.19 2 L1 Capital 58.5 15.9% 58.5 #DIV/0!

3 Glencore Xstrata 42.0 11.4% 42.0 #DIV/0!

P&L Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 4 Reserves & Resources Mt Zn % Pb %

Net Revenue A$m 0.0 0.0 0.0 0.0 460.0 5 Citronen - High Grade M+I 52 5.3% 0.5%

Total Costs A$m -1.9 -2.0 -2.1 -2.2 -283.5 6 Citronen - High Grade Inf 19 4.7% 0.4%

EBITDA A$m -1.9 -2.0 -2.1 -2.2 176.5 7 Citronen - High Grade Total 71 5.1% 0.5%

- margin - - - - 38% 8 Citronen - High Grade Reserve -

Depreciation/Amort A$m 0.0 0.0 0.0 -24.6 -35.9 9 Citronen - Global M+I 94 4.2% 0.4%

EBIT A$m -2.0 -2.0 -2.2 -26.8 140.6 Citronen - Global Inf 38 3.8% 0.4%

Net Interest A$m 0.0 0.0 -8.3 -17.3 -17.9 10 Citronen - Global Total 132 4.1% 0.4%

Pre-Tax Profit A$m -1.9 -2.0 -10.5 -44.1 122.7 Citronen - Global Reserve -

Tax Expense A$m 0.0 0.0 0.0 0.0 -17.3 Production Summary Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

Normalised NPAT A$m -1.9 -2.0 -10.5 -44.1 105.5 Unbeneficiated Mill Throughput Mt 0.00 0.00 0.00 0.00 3.28

Abnormal Items A$m 0.0 0.0 0.0 0.0 0.0 Processed Mill Throughput Mt 0.00 0.00 0.00 0.00 2.20

Reported Profit A$m -1.9 -2.0 -10.5 -44.1 105.5 Mined grade Zn % 0.0% 0.0% 0.0% 7.1%

Minority A$m 0.0 0.0 0.0 0.0 0.0 Produced Zn kt 0.0 0.0 0.0 0.0 209.3

Profit Attrib A$m -1.9 -2.0 -10.5 -44.1 105.5 Payable Zn kt 0.0 0.0 0.0 0.0 177.9

Payable Zn Equiv kt 0.0 0.0 0.0 0.0 186.9

Balance Sheet Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 M&I High Grade Resource Conversion % 89.3% 89.3% 89.3% 89.3% 90.2%

Cash A$m 1.7 4.2 300.5 12.6 30.6 Mine Life yr 13.25 13.25 13.25 13.25 13.25

Other Current Assets A$m 0.2 0.2 0.2 0.2 56.9 Assumed Reserve Mt 46.0 46.0 46.0 46.0 43.5

Total Current Assets A$m 1.8 4.4 300.7 12.8 87.4 Assumed Reserve - Zn grade % 5.2% 5.2% 5.2% 5.2% 5.1%

Property, Plant & Equip. A$m -1.0 -1.0 154.2 397.6 428.8 Assumed Reserve - Pb grade % 0.5% 0.5% 0.5% 0.5% 0.5%

Exploration A$m 90.8 91.2 91.6 92.0 92.4 Capex - - 155.2- 268.0- 67.0-

Investments/other A$m 1.2 1.2 1.2 1.2 1.2 Costs Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

Tot Non-Curr. Assets A$m 91.0 91.4 247.0 490.8 522.4 Cost per milled tonne $A/t - - - - 78.3

Total Assets A$m 92.9 95.8 547.7 503.6 609.8 EBITDA / tonne milled ore $A/t nm nm nm nm 53.7

Total cost per milled tonne 86.3

Short Term Borrowings A$m - - - - - Total Cash Costs $A/lb Zn eq 0.69

Other A$m 0.1 0.1 0.1 0.1 0.8 C1: Operating Cash Cost = (a) $A/lb Zn eq nm nm nm nm 0.62

Total Curr. Liabilities A$m 0.1 0.1 0.1 0.1 0.8 (a) + Royalty = (b) $A/lb Zn eq nm nm nm nm 0.68

Long Term Borrowings A$m - - 300.0 300.0 300.0 C2: (a) + depreciation & amortisation = (c) $A/lb Zn eq - - - - 0.71

Other A$m - - - - - (a) + actual cash for development = (d) $A/lb Zn eq - - - - 0.79

Total Non-Curr. Liabil. A$m - - 300.0 300.0 300.0 C3: (c) + Royalty $A/lb Zn eq - - - - 0.77

Total Liabilities A$m 0.1 0.1 300.1 300.1 300.8 (d) + Royalty $A/lb Zn eq - - - - 0.85

Net Assets A$m 92.8 95.8 247.6 203.5 309.0

Net Debt A$m -1.7 -4.2 -0.5 287.4 269.4 Price Assumptions Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

AUDUSD A$/US$ 1.03 1.04 1.02 1.02 1.01

Cashflow Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 Zinc US$/lb 0.91 0.98 1.03 1.10 1.12

Operating Cashflow A$m -2.0 -2.0 -2.1 -2.2 120.5 Lead US$/lb 1.02 1.08 1.10 1.13 1.11

Income Tax Paid A$m 0.0 0.0 0.0 0.0 -17.3 Hedging Unit Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

Interest & Other A$m 0.0 0.0 -8.3 -17.3 -17.9 none

Operating Activities A$m -2.0 -2.0 -10.4 -19.5 85.3 Sensitivity Analysis

Valuation FY17 NPAT

Property, Plant & Equip. A$m 0.0 0.0 -155.2 -268.0 -67.0 Base Case 0.05 105.5

Exploration and Devel. A$m -1.5 -0.4 -0.4 -0.4 -0.4 Spot Prices 0.01 (-77.6%) 47.9 (-54.6%)

Other A$m 1.0 0.0 0.0 0.0 0.0 Spot USD/AUD 0.97, Zinc $0.85/lb,Lead $0.99/lb.

Investment Activities A$m -0.5 -0.4 -155.6 -268.4 -67.4 AUDUSD +/--10% 0.04 / 0.05 (-5.8% / 5.3%) 96.5 / 116.4 (-8.5% / 10.4%)

Zinc +/--10% 0.12 / 0.01 (150.4% / -85.5%) 127.8 / 83.1 (21.2% / -21.2%)

Borrowings A$m 0.0 0.0 300.0 0.0 0.0 Lead +/--10% 0.05 / 0.04 (16.0% / -21.4%) 106.7 / 104.3 (1.1% / -1.1%)

Equity or "tbc capital" A$m 0.0 5.0 162.4 0.0 0.0 Production +/--10% 0.12 / 0.01 (161.3% / -84.5%) 129.9 / 81.0 (23.2% / -23.2%)

Dividends Paid A$m 0.0 0.0 0.0 0.0 0.0 Operating Costs +/--10% 0.01 / 0.11 (-88.7% / 141.6%) 89.4 / 121.5 (-15.3% / 15.3%)

Financing Activities A$m 0.0 5.0 462.4 0.0 0.0 Unpaid Capital (excluding convertible notes which are assumed to be never used)

Year Expires No. (m) $m Avg price % ord

Net Cashflow A$m -2.5 2.6 296.3 -287.9 18.0 30-Jun-13 0.0 0.0 0.00 0%

30-Jun-14 9.6 4.2 0.44 3%

Shares Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 30-Jun-15 0.5 0.2 0.45 0%

Ordinary Shares - End m 368.4 502.9 3988.0 3988.0 3989.0 30-Jun-16 0.0 0.0 0.00 0%

Ordinary Shares - W'ted m 368.4 435.7 2245.5 3988.0 3988.5 30-Jun-17 1.0 0.1 0.10 0%

Diluted Shares - W'ted m 384.4 446.9 2251.7 3994.0 3994.0 30-Jun-18 5.0 1.5 0.30 1%

TOTAL 16.1 6.1 0.38 4%

Ratio Analysis Unit 30 Jun 13 30 Jun 14 30 Jun 15 30 Jun 16 30 Jun 17 Valuation $m $/shr

Cashflow Per Share A$ cps -0.5 -0.5 -0.5 -0.5 2.1 100% Citronen (pre-tax NAV at disc. rate of 12%) 192 0.05

Cashflow Multiple x -8.1 -9.5 -9.5 -9.0 2.1 Other Assets/Exploration 30 0.01

Earnings Per Share A$ cps -0.5 -0.5 -0.5 -1.1 2.6 Forwards 0 0.00

Price to Earnings Ratio x -8.4 -9.4 -9.4 -4.0 1.7 Corporate Overheads -13 0.00

Dividends Per Share AUD - - - - - Net Cash (Debt) 3 0.00

Dividend Yield % 0.0% 0.0% 0.0% 0.0% 0.0% Convertible notes (assumed converted to equity) 0 0.00

Net Debt / Net Debt + Equity% -2% -5% 0% 59% 47% Tax (NPV future liability) -30 -0.01

Interest Cover X 146.0 151.0 na na 7.9 Options & Other Equity 5 0.00

Return on Equity % na na na na 34% Total 187 0.05

Analyst: Trent Barnett

+61 8 9268 3052

"tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained.

Sources: IRESS, Company Information, Hartleys Research

31 May 2013

Ordinary

Last Updated: 09/05/2013


of 12

BUSINESS OVERVIEW IBG is a zinc focussed developer/explorer. The main asset is the world class

Citronen project in Greenland.

CITRONEN ZINC, GREENLAND The Citronen Project (Citronen) is located adjacent to the Citronen Fjord in the

National Park of North and East Greenland. It is approximately 2,000 km north-

northeast from Greenland’s capital, Nuuk and 940 km from Qaanaaq – the nearest

Greenlandic settlement.

Fig. 1: Project location

Source: IBG

IBG is a zinc focussed

developer/explorer.

The main project is

the world c lass

Citronen project in

Greenland.

A

t

c

u

r

r

e

n

t

p

r

i

c

e

s

,

w

e

h

a

v

e

a

v

a

l

u

a

t

i

o

n

f

o

r

I

B

G

o

f


of 12

Fig. 2: Project location

Source: http://www.geus.dk/publications/review-greenland-96/gsb176p44-49.pdf

Platinova A/S discovered the large zinc and lead mineralisation at Citronen Fjord in

1993. Platinova worked on the project for five years with intensive drilling (32,839m

between 1993 and 1997) and environmental studies were also conducted. The

project was mothballed in the late 1990’s due to depressed base metal prices at the

time.

IBG purchased the Citronen zinc project in March 2007 when the project had a

resource of 17mt @ 7.8% Zinc and 0.9% lead. The purchase price was $6M cash

and 8M shares in Ironbark, plus 16M options in Ironbark with an exercise price of

$0.30 and maturity date of 1 February 2010 (since expired unexercised). Separately

a 2.5% Net Smelter Royalty (NSR) is payable to Platinova.

The Citronen deposit is hosted in the Ordovician Franklinian Basin that extends

across northern Greenland and into north-eastern Canada and is described as

Sedimentary-Exhalative (SEDEX) type deposit.

The deposit consists of five major sulphide mounds, forming three orebodies - the

Discovery (open pit), Beach (underground) and Esrum (underground). The

mineralisation at Citronen starts from surface, is flat lying and is currently open in all

directions.

Platinova A/S

discovered the large

zinc and lead

mineralisat ion at

Citronen Fjord in

1993. Platinova

worked on the project

for f ive years with

intensive dri l l ing

(32,839m between

1993 and 1997) and

environmental studies

were conducted. The

project was

mothballed in the late

1990’s due to

depressed base metal

pr ices.

A

t

c

u

r

r

e

n

t

p

r

i

c

e

s

,

w

e

h

a

v

e

a

v

a

l

u

a

http://www.geus.dk/publications/review-greenland-96/gsb176p44-49.pdf


of 12

Fig. 3: Citronen Deposit looking East (sulphide horizons in red)

Source: IBG

IBG completed a PFS for Citronen in early 2009 and recently released a DFS for the

project (April 2013). The current development plan envisages the process plant

being constructed on three barges and towed to site where they will be positioned

and joined together on the eastern margin of the Citronen Fjord. The site

infrastructure and mine development will be constructed concurrently. The mine plan

is to mine underground first (3.3mtpa beneficiated to be processed at 1.8mtpa), and

the low grade open pits will be mined near the end of planned mine’s life.

The fjord is only free of ice for three months of the year and so it is anticipated the

Company will stockpile concentrate through winter months. The DFS assumes a 45

day per year shipping window from mid-July to early September. The company

expects to receive payments for concentrate at the time of production discounted by

time value to delivery.

IBG completed a PFS

in ear ly 2009 and is

current ly undertaking

a feasib i l i ty study.

The current

development plan

envisages the process

plant being

constructed on three

barges and towed to

site where they wil l be

posi t ioned and joined

together on the

eastern margin of the

Citronen Fjord.

A

t

c

u

r

r

e

n

t

p

r

i

c

e

s

,

w

e

h

a

v

e

a

v

a

l

u

a

t

i

o

n


of 12

Fig. 1: Citronen Deposit looking East (sulphide horizons in red)

Source: IBG

Fig. 2: Latest Citronen Resource

Source: IBG feasibility study 2013

The global resource is

132Mt @ 4.5% Zn +

Pb.

A

t

c

u

r

r

e

n

t

p

r

i

c

e

s

,

w

e

h

a

v

e


of 12

MAJOR SHAREHOLDERS There are three substantial shareholders. Two are industry participants, Nystar

(26.5%), Glencore Xstrata (11.4%) and the other is an investment fund called “L1

Capital” (15.9%).

Glencore came onto the register in July 2007 with 12.5m shares via a primary

placement at $0.50. It increased the stake to ~42m shares at $0.71 in March 2008.

In late 2011 IBG issued a convertible note to IBG for $50m convertible at $0.42 and

$0.50. Glencore was also granted an off-take.

Nyrstar came onto the register in September 2009 also via a primary placement for

52.8m shares at $0.125. Nyrstar was also granted a life of mine off-take agreement

for 35% of the production from the Citronen deposit and a non-dilutive pre-emptive

right that would allow Nyrstar to participate on a pro-rata basis in any future capital

raisings in order to maintain its relative shareholding. Six months later (March

2010), Nyrstar took a second primary placement of ~42.3m shares at $0.35.

Fig. 3: Shareholders

Top Shareholders Ordinary Dil. For notes

m sh. %

m sh. %

Nyrstar Int

97.7 26.5%

97.7 20.4%

L1 Capital

58.5 15.9%

58.5 12.2%

Xstrata

42.0 11.4%

153.4 32.0%

Source: IBG

OPTIONS, CONVERTIBLES AND UNPAID CAPITAL

Options There are 15m options at various strikes and maturities (and all out-of-the-money).

Fig. 4: Options

Expiry Exercise Price number of shares Unpaid capital

16-Nov-13 $0.45 9,050,000 4.07

16-Nov-13 $0.35 500,000 0.18

20-Jan-15 $0.45 500,000 0.23

31-Dec-17 $0.30 5,000,000 1.50

18-Dec-16 $0.10 1,000,000 0.10

Total $0.38 16,050,000 6.1

Source: IBG

Glencore Xstrata convertible note In October 2011, IBG entered into an agreement with Glencore for US$50m of

convertible note funding in exchange for off-take at the Citronen project (up to 55%

and best endeavours for 100%) plus 100% off-take of all future IBG projects (if off-

take is not available on future projects than a 1% revenue royalty instead).

The US$50m facility is in two tranches:

There are three

substant ia l

shareholders. Two

are industry

part icipants, Nystar

(26.5%), Xstrata

(11.4%) and the other

is an investment fund

cal led “L1 Capita l”

(15.9%).

.


of 12

Tranche 1: US$30m may be converted into IBG shares at the election of

either Glencore Xstrata or Ironbark at A$0.42 per share; and triggers

Glencore Xstrata’s right to increase from 35% to 55% of off-take of Citronen.

Tranche 2: US$20m may be converted into Ironbark shares at the election of

Glencore Xstrata at A$0.50 per share;

Interest will accrue at an annualised rate of 5% + LIBOR (London Interbank Offered

Rate, currently approximately ~0.85% for a 1 year term). Rights of conversion and

redemption commence 18 months after date of issue, and the term of any notes is 4

years following the date of issue.

We assume the notes are never used.

Nyrstar non-dilute Nyrstar is a substantial shareholder with 98m shares. It has an non-dilute option

which means that it has the option to top up any equity raising by IBG with additional

funds at the same terms as such an equity raising may be offered such that Nyrstar

does not have its percentage of the ordinary shares outstanding reduced. If the

Glencore convertible note is converted into equity this is a trigger for the non-dilute.

Additional, shares issued for an acquisition also can trigger the non-dilute.

NFC MOU “China Non Ferrous Industry’s Foreign Engineering and Construction Co. Ltd” (NFC)

is listed on the Shenzen Stock Exchange and is based in Beijing. It is mainly an

engineering design and construction company but also operates a wide array of

mines and processing plants around the world including zinc mines and a zinc

smelter.

In September 2011 IBG signed an MOU with NFC which establishes a framework for

formal agreements for NFC to engineer, design, procure, supply, construct, test and

commission the Citronen project on a full turnkey basis and for NFC to facilitate

funding of development costs from major banks in China. Citronen’s Feasibility

Study with all the supporting studies is being presented to NFC for the purposes of

preparing the EPC and financing work. NFC is expected to be in a position to begin

delivering the results from their work towards the end of 2013.

The MOU encompasses a 70% debt funding proposal through Chinese banks and

provides NFC with a right to buy a 20% direct interest in the Citronen Project at the

time of decision to mine. The purchase price would be decided by an “independent

valuation”.

OFF TAKE Assuming the Glencore Xstrata convertible note facility is drawn down, Glencore

Xstrata has first right of refusal effectively for 100% offtake of all IBG base metal

projects (current and future) where available and a 1% revenue royalty if offtake is

not available.

The exception is Citronen where Glencore Xstrata has a current off-take agreement

for 35% which will increase to 55% if the convertible note is drawn. Nyrstar has a life

of mine off-take agreement for 35% of the production from the Citronen deposit.

This leaves 10%-30% unallocated.

The NFC MOU allows for “NFC entering into an offtake agreement for the

concentrate products of the Project or a portion thereof”.

In October 2011, IBG

entered into an

agreement with

Glencore for US$50m

of convert ib le note

funding in exchange

for of f - take at the

Citronen project (up to

55%) plus 100% off -

take of a l l future IBG

projects ( i f off - take is

not avai lable on future

projects than a 1%

revenue royal ty

instead).

Nyrstar is a

substant ia l

shareholder with 98m

shares. I t has an non-

dilute option which

means that i t has the

option to top up any

equity ra is ing by IBG

with addit ional funds

at the same terms as

such an equity raising

may be of fered such

that Nyrstar does not

have its percentage of

the ordinary shares

outstanding reduced.

.


of 12

VALUATION We assume a 53Mtpa mining inventory at 4.9% zinc and 0.5% lead. We assume a

~15 year mine life and ~95% conversion of the high grade resource.

We assume a 3.3mtpa mine operation beginning in late CY16. We assume payable

zinc equivalent of >200k tonnes (~400kt concentrate) for the first two years before

declining to ~120-160ktpa.

We assume costs of ~$80/t mined ore which equates to ~$0.80/lb zinc in early years

rising to $1.00/lb in later years.

We assume ~$500m of capex spent over two years,

funded ~70% debt and ~30% new equity at current prices. We assume the debt is

funded at 6% (it could be lower). We use a 12% discount rate.

We assume the convertible notes ($50m) are never drawn.

Fig. 5: Hartleys Cost Assumptions

Source: Hartleys

PRICE TARGET Our price target is a blended valuation based on a scenario of different of commodity

price and discount rate assumptions and capital raising prices.

Fig. 6: Price Target Methodology

Source: Hartleys

Underground only Open Pit

Total US$/t ore US$/t Zn eq Total US$/t ore US$/t Zn eq Total US$/t ore US$/t Zn eq

Mine life 11 3 14

Ore 36.1 9.9 46.0

grade Zn 5.8% 3.1% 5.2%

grade Pb 0.5% 0.6% 0.5%

Payable Zn Mlb 3,522 500 4,022

Payable Pb Mlb 197 65 261

Payable Zn eq Mlb* 3,705 560 4,264

Mining 975 27.0 0.26 69 7.0 0.12 1,044 22.7 0.24

Processing 508 14.1 0.14 165 16.8 0.29 673 14.6 0.16

Overheads (inc corporate) 566 15.7 0.15 107 10.9 0.19 673 14.6 0.16

Logistics 361 10.0 0.10 99 10.0 0.18 460 10.0 0.11

Royalties 191 5.3 0.05 31 3.1 0.05 222 4.8 0.05

Smelter fees 521 14.4 0.14 76 7.7 0.14 597 13.0 0.14

Operating Costs 2,049 56.7 0.55 341 34.7 0.61 2,391 52.0 0.56

+ logistics 2,410 66.7 0.65 440 44.7 0.79 2,850 62.0 0.67

+ royalties 2,602 72.0 0.70 470 47.8 0.84 3,072 66.8 0.72

+ smelting 3,123 86.5 0.84 546 55.5 0.98 3,669 79.8 0.86

TOTAL CASH COSTS 3,123 86.5 0.84 546 55.5 0.98 3,669 79.8 0.86

* assume Zn / Pb price ratio of 108%

Price Target Methodology Weighting Spot 12 mth out

17% $0.047 $0.046

NPV at spot commodity and fx prices 30% $0.010 $0.015

NPV using spot fx, but zinc prices a US$1.37/lb 17% $0.28 $0.30

NPV using spot fx, but zinc prices a US$1.60/lb 17% $0.40 $0.44

AUD zinc price calls (1.9Mt over 12yrs, avg strike @A$0.86/lb) 17% $0.19 $0.19

NPV using spot fx, but zinc prices a US$1.60/lb, no equity dilution 1% $1.39 $1.56

Risk weighted composite $0.18

12 Months Price Target $0.19

Shareprice - Last $0.044

12 mth total return (% to 12mth target + dividend) 330%

NPV base case, assuming significant equity dilution


of 12

CONCLUSION Using our base case zinc prices we derive a marginally positive NPV12.

Consequently, we view IBG as a high risk investment and speculation on rising zinc

prices or a takeover. There is substantial upside if one uses credible, but higher

than sell-side consensus, zinc price assumptions (ie if one uses the prices expected

by many industry sources rather than those expected by equity markets). We have

a 19cps twelve month price target, based on better zinc prices.

Fig. 7: Companies with high exposure to zinc prices are very volatile, but have an ability to

“rocket” from the bottom of a zinc cycle

Source: Hartleys, IRESS


of 12

Fig. 8: Zinc Price assumptions

Source: Hartleys, Bloomberg

Fig. 9: Key assumptions and risks for valuation Assumption Risk of not realising

assumption Downside risk to

valuation if assumption is

incorrect

Comment

Fifteen year mine life Low Upside The current high grade resource implies a mine life of >15years.

Zinc price rises

Moderate Upside Our zinc price assumptions imply prices rise over coming years.

Large proportion of capex is funded with debt

Moderate to high Not meaningful The long mine life should support debt funding

Limited value for exploration and other projects

Moderate Upside The other assets may have exploration success

Conclusion Using our base case zinc prices, we do not derive a positive NPV for Citronen’s development. Consequently, we view IBG as a high risk investment and speculation on rising zinc prices.

Source: Hartleys

0.00

0.50

1.00

1.50

2.00

2.50

3.00Hartleys Assumption for Valuations

Zinc (US$)

US$/lb

0.00

0.50

1.00

1.50

2.00

2.50

3.00Hartleys Assumption for Valuations

Zinc (A$)

A$/lb

of 12

HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052

Mike Millikan Resources Analyst +61 8 9268 2805

Paul Cartwright Oil & Gas Analyst +61 8 9268 2826

Peter Gray Oil & Gas Analyst +61 8 9268 2837

Janine Bell Research Assistant +61 8 9268 2831

Corporate Finance Grey Egerton-

Warburton

Head of Corp Fin. +61 8 9268 2851

Richard Simpson Director –Corp. Fin. +61 8 9268 2824

Paul Fryer Director–Corp. Fin. +61 8 9268 2819

Dale Bryan Director–Corp. Fin. +61 8 9268 2829

Ben Wale Snr Mgr–Corp. Fin. +61 8 9268 3055

Ben Crossing Snr Mgr – Corp.Fin. +61 8 9268 3047

Stephen Kite Snr Mgr- Corp. Fin. +61 8 9268 3050

Scott Weir Mgr - Corp Fin. +61 8 9268 2821

Registered Office

Level 6, 141 St Georges Tce Postal Address:

PerthWA 6000 GPO Box 2777

Australia Perth WA 6001

PH:+61 8 9268 2888 FX: +61 8 9268 2800

www.hartleys.com.au [email protected]

Note: personal email addresses of company employees are

structured in the following

manner:[email protected]

Hartleys Recommendation Categories

Buy Share price appreciation anticipated.

Accumulate Share price appreciation anticipated but the risk/reward is

not as attractive as a “Buy”. Alternatively, for the share

price to rise it may be contingent on the outcome of an

uncertain or distant event. Analyst will often indicate a

price level at which it may become a “Buy”.

Neutral Take no action. Upside & downside risk/reward is evenly

balanced.

Reduce /

Take profits

It is anticipated to be unlikely that there will be gains over

the investment time horizon but there is a possibility of

some price weakness over that period.

Sell Significant price depreciation anticipated.

No Rating No recommendation.

Speculative

Buy

Share price could be volatile. While it is anticipated that,

on a risk/reward basis, an investment is attractive, there

is at least one identifiable risk that has a meaningful

possibility of occurring, which, if it did occur, could lead to

significant share price reduction. Consequently, the

investment is considered high risk.

Institutional Sales Carrick Ryan +61 8 9268 2864

Justin Stewart +61 8 9268 3062

Simon van den Berg +61 8 9268 2867

Chris Chong +61 8 9268 2817

Simon Andrew +61 8 9268 3020

Veronika Tkacova +61 8 9268 3053

Wealth Management Nicola Bond +61 8 9268 2840

Bradley Booth +61 8 9268 2873

Adrian Brant +61 8 9268 3065

Nathan Bray +61 8 9268 2874

Sven Burrell +61 8 9268 2847

Simon Casey +61 8 9268 2875

Tony Chien +61 8 9268 2850

Travis Clark +61 8 9268 2876

Tim Cottee +61 8 9268 3064

David Cross +61 8 9268 2860

Nicholas Draper +61 8 9268 2883

John Featherby +61 8 9268 2811

Ben Fleay +61 8 9268 2844

James Gatti +61 8 9268 3025

John Georgiades +61 8 9268 2887

John Goodlad +61 8 9268 2890

Andrew Gribble +61 8 9268 2842

David Hainsworth +61 8 9268 3040

Neil Inglis +61 8 9268 2894

Murray Jacob +61 8 9268 2892

Bradley Knight +61 8 9268 2823

Gavin Lehmann +61 8 9268 2895

Shane Lehmann +61 8 9268 2897

Steven Loxley +61 8 9268 2857

Andrew Macnaughtan +61 8 9268 2898

Scott Metcalf +61 8 9268 2807

David Michael +61 8 9268 2835

Damir Mikulic +61 8 9268 3027

Jamie Moullin +61 8 9268 2856

Chris Munro +61 8 9268 2858

Michael Munro +61 8 9268 2820

Ian Parker +61 8 9268 2810

Charlie Ransom

(CEO)

+61 8 9268 2868

Brenton Reynolds +61 8 9268 2866

Conlie Salvemini +61 8 9268 2833

David Smyth +61 8 9268 2839

Greg Soudure +61 8 9268 2834

Sonya Soudure +61 8 9268 2865

Dirk Vanderstruyf +61 8 9268 2855

Jayme Walsh +61 8 9268 2828

Samuel Williams +61 8 9268 3041

Disclaimer/Disclosure

The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold

shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those

securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising

from any advice mentioned in publications to clients.

Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Ironbark Zinc Limited, for which

it has earned fees and continues to earn fees.

Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting

your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs.

Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued.

Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in

negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.

IBG - Ironbark Zincironbark.gl/wp-content/uploads/2013/09/Hartleys...Ironbark Zinc Limited...

Documents

Transcript of IBG - Ironbark Zincironbark.gl/wp-content/uploads/2013/09/Hartleys...Ironbark Zinc Limited...