adminBy Lloyd Mlotshwa
What is the underlying asset?
Any investment must begin with a clear understanding of the underlying fundamentals of the asset.
There are two premium addresses for PGMs (platinum group metals) globally, the Bushveld Complex in South Africa and the Great Dyke in Zimbabwe.
The Great Dyke runs an estimated 550km and is estimated to be the second largest PGM resource globally. That length is an important factor as claims on the Great Dyke are limited; current leading PGM miners on this address include Zimplats,
Mimosa and Unki. KMH has secured a circa 24k hectares block just north of Zimplats’ Ngezi operations, which is a sizable area. The block has been well explored with a total resource of 96m oz of PGMs and planned production 190 000 oz per annum in phase 1. This phase comprises a 17-year life of mine (LOM) that is open pit at an estimated grade of 3.0 (6E) g/t (grams per ton) average.
What does all this mean?
Mining exploration is simply the scientific process of establishing that there are in fact minerals in the ground, the size of the resource speaks to the quantum of minerals.
Exploration maps the occurrence of those minerals and where they can be extracted, it is key to the financial viability of the project and reducing level of risk to early-stage investors.
Open cast mining suggests that the mineral is close to the surface which tends to improve the economics of mining by lowering the cost of extraction, the deeper the mining activity below the ground surface, the more expensive as a simple rule.
The LOM (life of mine) speaks to the sustainability of mining activity on the project, that is, over how many years can the project be mined during a specific phase. Grade expressed as g/t speaks to how many grammess (in this case PGMs) per tonne of ore will be extracted, this number is compared to other mining peers to establish whether the mine is a high-grade or low-grade operation.
So where is the value?
There are several methods to value a mining project, however, this requires a separate dedicated article.
For now, a simple method to assess the financials is to note the planned production per oz, per annum, which is production volume per year and multiply that by global commodity price per oz (in the case of KMH, global basket price per oz PGMs).
KMH forecasts to produce 190k oz per annum once production begins in 24 months at a forecast price per oz of US$2,140, which implies revenue of US$391 million, this conveys size of the operation (revenue) once in production. To build a view on production costs, an investor can look at cost of production per oz; KMH estimates a cash cost per oz of US$1,096.
The margin between price per oz ($2,140) and cost per oz ($1,096) gives an investor a picture of initial profit margins.
What are the risks?
New mining projects are often referred to as ‘greenfields’— this simply means that there is no pre-existing operation or track-record.
A primary risk in greenfields is execution risk; will the project be implemented successfully? Commodity price risk; will commodity prices remain favourable over an extended period of time?
These are leading risks amongst many others.
With KMH, the parent company Tharisa Plc has a 12 year track record of mining PGMS and is listed both on Johannesburg
Stock Exchange (JSE) and London Stock Exchange (LSE), revenue is circa US$700million, EBITDA circa US$240m; Tharisa has provided a full Corporate Guarantee for the US$50m KMH bond, this provides some mitigation that is worth consideration.
Contact Details:
IH Group
Telephone: +263 (24) 2745119/2745139/2745937
Email: [email protected]
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