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    Saturday, February 13, 2010


    Bass Metals (BSM.AX AX:BSM R2F)

    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:

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

    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.


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

    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. 


    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:

    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.

    Commodity Price Assumptions Fossey DFS


    % of Fossey DFS


    DFS Price

    Current Price

    Zinc 46% US$/t 1,950 2,151
    Lead 31% US$/t 2,100 2,060
    Copper 4% US$/t 6,000 6,672
    Silver 17% US$/oz 15 15.51
    Gold 2% US$/oz 980 1092
    AUD:USD     .87 .89

    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.

    Valuation based on decreasing levels of confidence


    Source of value


    Per share

    Most Conservative (Hellyer Project fails) – Liquidation value Net Assets $16.97M 10c
    Conservative (Hellyer project delivers to DFS but no reserve additions) Hellyer Project Per DFS $40M 33c
    Less Conservative (Hellyer project is extended by conversion of resource to reserves) – Reasonable intrinsic value Hellyer project extension, 75% chance of extension cash flow $17.6M 43c
    Blue Sky
    (Elephant/ baby elephant / outsourced milling)

    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.


    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.

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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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