14 September 2011
Covering note from Keith Goode
“Herewith our latest report on Focus Minerals (FML) rating it as a BUY at $0.07 (its close yesterday (13 September 2011) with an NPV of $0.14 at a gold price of US$1800/oz, and a target of >10c. The NPV or value of Focus rises by ~1.5c per US$100/oz, and it traded between US$1800/oz and US$1842/oz last night).
At 7c, FML has a market cap of ~$240m on its 3.4bn shares in issue. Its current production (excluding the Crescent acquisition) is ~100kozpa increasing to 120kozpa to 150kozpa – that alone infers that its market cap should be >$400m.
Its PER in 2013 is 3.5 x and we have seen that companies with forecast PERs of ~3 have never stayed at that – usually they are closer to 5 x.
7c per share is equivalent on our modelling to a gold price of US$1360/oz, with an NPAT of $21m in FY2012 and $28m in FY2013. At US$1800/oz, the NPATs become $47m in FY2012 and $69m in FY2013 – and the revenues at US$1800/oz are being realised now….
As FML commented at Diggers in early August 2011 “we sold 1000oz and received more than $1.7m !!”
……….which all infers that FML should be >10c per share.
The market has missed the fact that FML has completed its transition year to June 2011 – first it fixed / built the plant to January 2010, then it fixed the mining operation, which included finishing toll treatment that extended to September 2010.
So now it should literally “be able to fly” :
* The decline into the Mount has been upgraded to get the ore out and is increasing to ~20tpm to 25ktpm based on the German Lodes.
* The Tindals underground has settled down to ~50ktpm.
* And the 1g/t surface stockpiles are being replaced by open cuts at 30ktpm (initially 3 open-cuts : Empress, Dreadnought and Big Blow at ~10ktpm each), with expected average grades of ~2g/t to 3g/t (the first cut in the north end of Dreadnought was closer to 5g/t).
* The open-cuts are mostly located over the historically old workings and in some cases historically shallow pits.
* There are many more open-cuts to come such as Undaunted, Alicia, Happy Jack and CNX – which are only a few of them
* And there are satellites that are up for evaluation – such as the old Bonnievale district / region which appears to have been little touched since ~1910, after the Varischetti rescue in 1907.
And there is upside potential in the grades of all of its operations:
* We have modelled the Mount at 5.5g/t, but some of its development has been at 4.5g/t – that infers stopes of ~7g/t (usual rule of thumb of dividing the dev grades by 60%). And the Mount was earlier achieving >7g/t. So diluted by development it could become 6g/t to 7g/t.
* Tindals underground has been modelled at 3.3 to 3.4g/t increasing to 4g/t and then 4.5g/t (as grades appear to be increasing at depth and the resources are >4g/t). And Perseverance South’s face has occasionally been running at >10g/t …..in development.
* And the open-cuts modelled by us/ERA are possibly overconservative at an average grade of 2.3g/t.
And if you want more:
* Our current 8-year life model only uses about 4mt of the possible ~10mt available in delineated open-cuts before the recent campaigns.
* And of course there is the significant progress being made at Treasure Island – showing the St Ives mining sequence passing over the island and many encouraging >15g/t grades. Even the usually barren quartz wash averages 6g/t to 7g/t. We have not included any value for Treasure island in our valuation.
Hence rating FML as a BUY with a target of >10c.
It should be noted that this report does not include Crescent as it is still being taken over. FML does have control at ~80%, and is expected to re-optimise it. We / ERA wrote a report on CRE in 2006 (available under “Reports” on our website : www.eagleres.com.au) ahead of the mill modification (yes CRE modified the old mill at Barnicoat to an ~1mtpa or so capacity – but it was not used, CRE toll treated through the old Granny plant instead and sold the crushing circuit out of the mill they refurbished). Many drill targets, possible old mines, etc, from our original report and presentation made by Crescent and its predecessor Apollo, do not appear to have been undertaken, despite the finances that CRE apparently once had.
And FML does have knowledge of the area which is in the proximity of some significant orebodies and significant gold producers like Anglogold (Sunrise Dam), Barrick (Wallaby), Regis (north of Laverton) and Saracen (Red October and further west).
FML has shown that it is capable of turning mining operations around – which it has done at Coolgardie and could gradually make a significant impact on Crescent’s operations which are cashflow positive at current gold prices (~US$1800/oz).
As a combined group, FML could potentially be worth 10c to 15c….or more.
And yes, we/ERA do still expect FML to consolidate at some stage at 10-for-1 or so.
Regards
Keith,viz :
Focus Minerals Ltd (FML) – Building its Current operations (Coolgardie & the Mount) up to 100,000ozpa to 150,000ozpa for >5years
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