Investing

Bass Metals is a junior miner with operations and exploration in Tasmania, Australia.

The value in Bass Metals is made up of the Hellyer Mine Project, net assets and exploration potential. They currently have a small mine called Que River that has generated enough cash to fund their exploration program to date. The Que River ore is current processed by a third party and this arrangement has generated enough cash flow to get the Hellyer Mine Project through a definitive feasibility study.

Hellyer Mine Project

The Hellyer Mine Project is based on mining the Fossey, Hellyer and Que River deposits and then processing them at the Bass Metals owned Hellyer Mill.  The Definitive Feasibility Study (DFS) for the Hellyer Mine Project assumes the development of a mine at Fossey with ore processed at Hellyer Mill.

The key aspects of the Definitive Feasibility Study are:

• Two to three year mine life
• Undiscounted free cash flow of around $50M, discounted closer to $40M
• Produces Zinc, Lead and Copper/ Silver/ Gold concentrate

The opportunities created include (but are excluded from the DFS valuation):

• Conversion of the nearby 2.3M tonne resource at the Hellyer, Que River and Fossey deposits into reserves which could be added opportunistically to increase the mine life (or run the mill at full capacity).
• Extraction of the 800,000 ounces of gold and 550,000 tonnes of zinc, lead and copper in the Hellyer Tails Dam. Note that these are resources not reserves. BSM is studying how to extract them economically but may not be able to find a way.
• Exploration of BSM’s extensive tenements in a historically productive area.

The exploration potential is particularly interesting because it appears that advances in geological techniques may bring about discoveries that would have been missed when these areas were previously evaluated. There are large zones that had been previously dismissed. One zone in particular (the Amoeba Zone) looks prospective using the new techniques but had previously only had one drill hole! The Fossey deposit was only recently discovered within 150m of the Hellyer mine which was mined from 1987 to 2000 when it was exhausted. If a new, substantial ore body can be discovered within 150m of a mine, using new techniques, then there is certainly the possibility of more major finds. Pervious geological evaluation had focused on a north south line along the historic discoveries. Fossey is East West and BSM are going to be using their new techniques on prospective East West ore bodies. Bass estimates that only 25% of the potential “ore host horizon” has been effectively tested for ore bodies.

Since the DFS was published BSM have negotiated an off take agreement with Nyrstar for the Zinc and Lead concentrate. The terms are better than those assumed in the DFS.

History

Bass metals was incorporated in 2004 and called Resource Finance and Investment.

• Between incorporation and June 2005: They raised $1M. Purchased a suite of exploration projects and raised $2M to fund the purchase. They entered into a couple of farm-in / joint venture agreements
• July 2005- June 2006: $3.5M IPO in October 2005. Exploration success at Hellyer-Que River project. Changed their name to Bass Metals
• July 2006- June 2007: Developed a mine plan for Que-River and commenced mining. Ore sales agreement for the Que River mine. Added new tenements.
• July 2007- June 2008: $1.8M profit. Que-River mine in production. Identification of Fossey Zone. Generation of other early stage targets including Heazlewood and Switchback
• July 2008- June 2009: $2.4M profit (excluding accounting gains on Mill acquisition). Continuing development of the Fossey Mine plan. Continued mining at Que-River. Acquisition of Hellyer Mill, all supporting infrastructure, Hellyer tailings resource and dredge for $4m. It is worth noting the incredible value that BSM received for their $4m.
• Subsequent to June 2009: Release of the Definitive Feasibility Study for the Hellyer Mine Project and capital raising.

Capital Structure

In the December quarter of 2009 BSM raised 15.3M before costs which resulted in an increase of shares outstanding to 171M from 104M. RMB Resources have been mandated to provide a $12M debt and hedging facility. The terms include hedging 30% of the lead and zinc concentrate. This is in addition to 2-4M bass options to be granted to RMB which will be exercisable at 10% above market. The options probably reduce the value of equity by half a cent but the use of debt increases the value of equity by much more than that. Any company with debt is taking more risk than a company without. Given the financials in the DFS a debt of $12M versus EBIT of $24M would give BSM a credit rating of at least AA. Other credit scoring models show that there is little risk in the assumption of $12M in debt. 

Valuation

The Hellyer Mine Project has an NPV of $40M at an 11.5% discount rate which reflects the risk of BSM based on their maximum cash drawdown and assumption of debt.

Assigning a 75% chance of converting the additional resource into reserves to extend the mine life by 2 more years (assuming the same economics) with a lower discount rate of 8% adds $17.6M

Finally adding net assets by:

• Taking cash and deferred tax assets at 100%
• Receivables and inventory at 80%
• Plant and equipment at 50%
• Derivatives, other assets, mine properties, Capitalized exploration and evaluation at 0%
• Liabilities at 100%

Leaves net assets of 16.97M (coincidentally almost equal to cash of 16.7M!). Since the DFS was published commodity prices have moved, the valuation here assumes the DFS prices for commodities though the realized price today would be slightly better.

Putting this together you can build up to some rather high valuations for BSM, compared to the current price. Shares outstanding do not include expected options issuance for the RMB facility.

Relative Valuation

Though Reuters categorizes BSM as being in the precious metals industry they should be in the Mining/ Metals industry. Mining / Metals has an average price to book of 1.17 today. That would value BSM at 37c. Precious metals comprise 20% of the Fossey DFS. The average price to book in precious metals is 3.45 which would make the case for a relative valuation of BSM nearer to 50c.

Conclusion

I’d value BSM between 33 and 43c with the higher end of that range still providing quite a conservative basis for valuation, that is at least 100% upside from today’s close of 21.5c . The valuation will improve as resources are converted into reserves and it will improve as debt is paid down. When you consider that only 25% of the potential zone has been evaluated, the blue sky upside is many times more. I’d hold a position until quite close to 43c and in the absence of additional discoveries or resource conversion, I would sell.

posted by Neil  # 1:06 AM