FAT have reported JML as a buy outlined below
Jabiru Metals
Buy JML around 82 cents
Production remains on track for mid-2007 start up
SYMBOL DEFINITIONS
Construction and commissioning activities are continuing in line with schedule on Jabiru Metals Jaguar base metals project in Western Australia. The project remains firmly on track for first metal production in the first half of 2007, allowing it to lake full advantage of strong zinc and copper prices. Whilst industry-wide cost pressures have impacted the project's capital costs to some degree, increases in base metal prices have more than offset them. The company will be entirely unhedged, offering Members full exposure to strong base metal prices.
"The emerging Jaguar deposit remains one of the few new sources of base metals on the horizon in A ustralia, und at a low cash production cost."
Fat Prophets initially recommended Jabiru as a buy around 25 cents in February {Fat Mining 14). Our last review of this stock was during August (Fat Mining 38).
PAILY CBARTJ
2005-2006
Buoyant investor support for Jabiru has seen a further acceleration of the upward trend during the past week. Monday's high of 81 cents represented a gain of more than 375% over the past 12 months.
During the past month alone, Jabiru has rallied more than 70%. Following such extensive gains, the upward trend of any stock would be at risk of pausing for consolidation. Jabiru is no exception.
However, growing trading volumes reflect increasing investor support for the stock, which we believe will serve to limit downside risks. The previous high of September at 68 cents provides initial support. Below here, we believe support between 50 cents and 47 cents underpins the shares in the near term.
As shown on the weekly chart, Jabiru is lifting away from a base that formed between 2001 and 2005. We believe that the rally of the past year will extend to new highs above 81 cents in the months ahead.
Some of the key issues facing any emerging mining project at the present time are questions regarding capital cost overruns and possible development delays. These issues are affecting the entire sector and virtually no company is immune. For instance, BHP Billiton has experienced major cost over-runs on several of its key resource project developments, both domestically and internationally.
It is encouraging therefore, to see that Jabiru Metals development of its Jaguar base rnetais deposit in Western Australia remains firmly on track to begin production during the second quarter of 2007. This is despite significant labour and materials shortages that are impacting the entire resources sector. Furthermore, whilst capital costs have increased, higher metal prices have more than offset them.
Managing Director Gary Comb advised recently that the company has firmed up most of its capital costs and have committed prices on most items. The revised capital figure of $69 million compares with an initial estimate of $56 million {a 23% rise), although not all of this increase is due to cost inflation. The company has increased the capacity of its plant by 20% to around 420,000 tonnes to allow it to treat additional resources identified by recent exploration. The cost increase compares with industry averages of around 30-50% over the same period.
Jabirj has also recently upgraded its mineable reserves position and its financial forecasts associated with the Jaguar development. One of the key issues is the value of the Jaguar ore body itself. The per-tonne value of the ore is so high that the company aims to recover of mush of it as possible.
The company has completed geotechnical and engineering studies to determine how to recover some of the underground pillars by replacing them with structural concrete. Jabiru now expects to recover an additional 80,000 tonnes of ore by replacing the pillars with concrete and despite the cost, the return is high, as the value of the ore is roughly four times the cost of the equivalent volume of concrete.
Jabiru has also begun to assess the value of the Teutonic Bore stockpiles and has converted the first of those stockpiles, about 25,000 tonnes, into reserves. This also gives the company the flexibility to treat some ore earlier than the original plan if the concentrator is ready ahead of time.
The company's total reserves have increased from 1.6 million tonnes to 1.714 million tonnes grading 3.0% copper, 11.3% zinc, 0.7% lead and 115g/t silver. This updated reserve, along with revised costs and metal price assumptions, produced a revised financial model for Jaguar, showing Jaguar to be an extremely robust development:
EBIT (Earnings Before Interest & Tax) of $286 million - or 87 cents per share; NPV (Net Present Value) of $215 million - or 65 cents a share; IRR (Internal Rate of Return) of 103%; and
Zinc C1 cash costs (including other metal credits) of -US11 cents per pound and US50 cents per pound (excluding byproduct credits).
Higher capital costs have resulted in an increase in the co-products zinc and copper costs, but importantly, the C1 costs after credits still show that the copper and silver credits more than cover all of the company's costs, leaving the zinc effectively as all profit. Current spot zinc and copper prices are US$1.90 and US$3.30 per pound respectively, so the margins are potentially enormous.
Project financing arrangements that require no mandatory hedging should enable Jabiru Metals to exploit these high metals prices.
Jaguar is likely to be a low cost operation in all respects. Annual ongoing capital is modest at just $5 million. Jaguar is also a relatively high-grade base meta! deposit, which means relatively low cash operating costs compared with its sector peers. Around 55% of revenue will come from zinc, 35% from copper and 10% from silver.
With respect to earnings, we anticipate EPS (Earnings per Share) of 15 cents in 2007/08 and 20 cents in 2008/09. This would put Jabiru on a very modest PER (Price/Earnings Ratio) of 5.5x for 2007/08 and 4x for 2008/09. We do not anticipate the payment of a dividend in the initial years of production.
In terms of project development, Jabiru achieved one of its major development milestones during the September quarter, with the mine decline now more than 50% complete. Work on other key infrastructure items is well on the way, including refurbishment and construction of the concentrator, ball and SAG mills, and flotation cells. Concentrator construction is now around 45% complete.
The company is in a good position to leverage off any discovery, as plant and infrastructure will shortly be in place. The Cadgebut plant has a design capacity of 350,000 tonnes annually, but can operate at rates of up to 550,000 tonnes. The potential for extensions to the current five-year mine life at Jaguar is substantial. Jabiru holds 30km of continuous strike length to the north and south of the Jaguar and Teutonic Bore deposits. This ground is highly prospective, as deposits like those that Jaguar and Teutonic Bore tend to occur in clusters rather than in isolation.
The most likely and immediate resource expansion opportunity is the down-plunge metal potential at Jaguar. A hole drilled 100 metres down plunge from the existing Jaguar resource intersected both the main lens and the footwall lens, indicating the massive sulphide mineralization is continuous. Further drilling of this zone will be undertaken in the near future. In addition to the down-plunge potential at Jaguar, further mineralization exists in close proximity to both deposits.
Earlier this year, Jaguar announced a drill intercept of 131 metres @ 1.4% copper equivalent from the interpreted Teutonic Bore feeder zone, which in our view was extremely encouraging. This is because it confirms the existence of both a feeder zone and remnant massive sulphides around the old workings at Teutonic Bore, with the potential for mining down the track.
The Dairnler prospect lies about 1 kilometre north of Teutonic Bore and hosts feeder zone-style mineralization, with intercepts including 30 metres @ 2% copper equivalent. Its current dimensions cover 150 metres of strike length and 100 metres vertical depth, which simply represent the current limits of drilling.
Snowy's Bore is a less advanced prospect, where massive sulphide mineralization exists, including feeder zone-style mineralization. All these targets warrant follow-up and Jabiru has committed to an exploration budget of $5 million per annum for the next two years.
The immediate focus is on the Teutonic Bore/Jaguar trend. The original drilling in the area was only to 100 metres depth and the Jaguar deposit starts at 300 metres depth, so there is certainly potential to find more deposits like Jaguar. For patient investors, Jabiru Metals represents an emerging, low cost base metals opportunity. A $10 million exploration program over the next two years is sure to generate speculative interest. It could significantly boost the resource base.
We also believe there is strong potential for a possible corporate play, with diversified miner Consolidated Minerals holding a 32% stake in the company. CSM has stated that is looking to continue to grow its diversified metals business. Jabiru would make a neat fit in our view.
Jabiru Metals will remain Held in the Fat Prophets Mining & Resources portfolio, but for Members with no current exposure we recommend the stock as a Buy around 82 cents.