Market Update

General - Rare Earth/Lynas/Peak - Caravel - Foran - Dacian - Perseus

Good afternoon

Finally, European equities are giving in to the very weak US$ today...In times of uncertainty, it used to be the case, that the US$ got stronger - under Trump, the opposite is the case, as he is part of the uncertainty! I do not believe, that the weakness is entirely due to Jackson Hole - in the end, it had started way before. All these very fine people in Charlottesville and other issues are hunting him!

Hurrican Harvey is devastating much rain in very few days as we have in Germany in a full year - and it´s raining quite a bit here! Damage estimates are still very uncertain, but could go to 100 bill US$. Prices for Gasoline and Natural Gas are rising. Trump might need a few ten thousand Mexicans to help rebuilding Texas!

Base metals especially, and also gold are profiting from the weak US$ - the former are up by 2-3% today, gold by about 1%. as the US$ is only about 0,5% weaker against the A$, A$-metal prices are looking very sexy.

Rare Earth / Lynas / Peak - I am a little confused to which price for Rare Earth different companies / analysts are actually using - wether it´s incl VAT or not including VAT. Some people quote today´s price as 65$, some as 76 US$/ any case, very strong and up from about 30$ at the beginning of the year. 

Lynas , using 65 US$/kg as today´s price, could actually make 250 Mill EBITDA in a full year....I have little doubt, that all convertibles would be exercised, resulting in total shares outstanding of a staggering 6.7 Billion shares. There are still 200 Mill US$ in debt outstanding - so the EV is roughly 1.3 Bill A$! This is equivalent to 5x EV/EBITDA...not that bad for the only significant producer of Rare Earth outside of China. But to make this stock a bargain, one actually has to use say 85 US$/kg for Pr/Nd - which is a distinct chance over the next year or two. Lynas are really the only signficant player worldwide...and with potential, to produce 400 Mill A$ in EBITDA at 85 US$/Nd PR, I think the stock is worth investing.

Peak Resources would produce just about 50% of the amount of Nd/Pr Lynas are producing , or about 2.800t p.a. according to the recent optimisation study. The project would produce 220 mill A$ in yearly EBITDA at 85 us$ for ND/Pr - again, roughly 50% of what LYC could generate. The After tax NPV10 would be 729 Mill A$. The World Bank and private equity investor Appian hold 25% of the project directly, PEK 75% - the former 2 also hold about the same % of PEK´s equity. PEK would need approx 550 mill A$ in pre-production + working capital for the plant in Tanzania, and the processing plant in England. A lot of money - but this is a strategic investment. At a market cap of only 20 mill A$ as at today, the upside is pretty dramatic,. But I have already indicated the major problem: The resource is in Tanzania, and currently the enviroment for miners is such, that I would rule out any significant bank-financing in Tanzania. But we have seen these things before - they will ( over time ) rectify themselves. But in any case, the country risk is very high currently - as is the upside...there is a lot of room between 500 Mill A$ NPV and 20 Mill$ market cap!! In my view, this more than covers the risks of Tanzania! PEK have announced, that they will shortly conduct a rights issue at 4ct - so this is nothing for short term punters! But this is the Rare Earth investment with real upside and speculative appeal....while Lynas is surely developing into a real investment grade stock, with some upside, but we are talking 30-50% here over the next 1-2 years, if Rare Earth price do, what I think they will do.

Caravel Minerals - I have been invested with a small holding in this one for a while. At a market cap of 5 mill$, it´s sort of a copper-option. The company is developing ( or rather: holding, as they did not have any cash ) a large copper deposit not far from Perth, with a resource of about 800.000t of copper at a cut-off grade 0,25%. A scoping study done last year has indicated commercial viability, by using a 15 millt p.a. processing plant. The study assumed a strip ratio of 1:1, a copper price of 2,75 US$ and an exchange rate of 72ct - the latter two are about equivalent of today´s prices. The resulting NPV7 ( obviously, using 7%, is a bit low! ), arrived at an after tax NPV of more than 500 Mill A$ = 100x the current share price. Problem as ususal: 440 mill A$ in capex! The company is coming to life again at a copper price of 3.10 US$, as at today....Recently, they did a small placement, largely done to a group of smart guys, who want to use an innovative ore-sorting method, to enrich grades before processing. This would not only cut opex of 1.50 US$ cash costs /lb, but also potentially reduce throughput rates and hence the initial capex. 

I think one day, the market will revisite these small/ultra-small developers....once that happens, the market cap could very quickly go back to 10 mill$ very easily, before you start even noticing. Obviously, there is absolutely no interest in this sort of company right now - so you should really see an investment here as a pure option. If long term forecats are right, and the EV-market actually does need as much copper as some analysts believe, we could have a bit of fun here!

Foran Mining - another one of the smaller developers, which has done absolutely nothing. As you know, I have been holding this little Canadian stock for some time now, and I have not given up! What more do you want but a holder of a zinc/lead/copper reserve in the current enviroment??? Smart people running it, and one day, tehy will realize value from the resource. I have not seen any recent calculations, but at current metal prices, the NPV should be close to 500 Mill Can$ or so - in any case dramatically higher than the current market cap of 27 Mill can$! Hudson Bay only have a few years of mine life left to feed their smelter, and one day they will get nervous and bid for this little beauty! Well, I hope - in any case, there is a lot of value for the patient investor.

back to some real , more sizeable and tradable investments....:

Dacian Gold - Dacian is developing the Mt Morgans gold project in Western Australia, with an initial reserve of 1.2 mill ounces. The company is cashed up with 114 mill A$ in cash, and a 150 mill debt facility ( 105 still available ). It´s more tha fully financed. Underground development has started and is ahead of schedule, the open pit will start by year end, and first production in March 2018. The company is run by experienced operator Rowan Williams. There is a lot of exploration potential, and the company is targeting it with a large 15 mill A$ budget. 

The project will produce more than 200.000 oz p.a., at AISC of approx 1000 A$/oz, generating between 100-and 120 mill A$ in free cash p.a. at current gold prices. The company is budgeting for 8 years of production, as some of the underground production will come from indicated resources.

DCN had a failed attempt at a placement a while ago, and finally raised the necessary equity at 2$, a level they have subsequently traded at for some time. I think this is now overcome, and once in production, the company will probably trade more in line with other,established producers in Australia. This should drive a re-rating to an EV of 750-800 mill A$, giving us upside of about 30%. Nothing fantastic, but nice enough to consider,  and exploration could be a nice profit driver here. In the end, there are not many Australian gold stocks of reasonable size, which offer 30% upside in a save jurisdiction, without needing any help from a better gold price. Also, I think the stock will be included in the GDXJ in the not too distant future, offering some nice buying support. The market would very much welcome a new, halfway sizeable producer of reasonably good quality - DCN would fit this.

Perseus - Hartley´s initiated coverage with a buy, and 58ct valuation. That might be a bit rich at their gold price forecast, which is essentially unchanged going forward - but what I find interesting is, that they indicate a sensitivity of 64% in earnings on a 10% improvement on gold price - that is very tempting for gold bulls and one of the reasons, why I like PRU.They remain just about the most leverage stock in my universe of reasonable quality! The stock has clearly been left behind vs the recent move in the gold price, and should have some shorter term catch-up- , as well as some longer term rerating potential.

Have a nice evening