NQ Minerals is a London listed (NEX exchange) minerals exploration and development company. The company holds advanced exploration projects in North Queensland in Australia; but the key focus for investors should be their recent acquisition of the Hellyer Tailings project in Tasmania, Australia, which has the potential to see the company be strongly cash generative in 2018.
REASONS TO CONSIDER NQ MINERALS
A company changing acquisition: We believe the market has yet to cotton on to this company changing acquisition. The Hellyer Tailings project involves the extraction and processing of precious and base metals from the tailings dam of the historic Hellyer Mine. Significant metals exist within the Hellyer tailings material, particularly precious metals; which were never focussed on for extraction by previous owners of the asset (focussing instead on base metals). NQ Minerals aim to produce 3 poly-metallic concentrates containing a combination of Gold, Silver, Lead and Zinc. All major plant and infrastructure required for operations to commence is already on-site (given the existing/historic plant will be used for processing). The project is Permitted, with a potential start early next year, and a 10 year life of operation.
Valuation and Cashflow potential: The key factors for investors to consider are the scale and profitability potential of this asset relative to NQ Minerals current market cap (~US$32m). At current commodity prices (detailed in this report), the Hellyer Project could have a DCF valuation of ~US$220m (inclusive of development capex, but not of funding costs). Furthermore, in its first full year of operations (likely, the 12 months ending March 2019), the asset could generate cashflows >US$37m. Finally, assuming flat metals pricing around current spot levels, the operation has the potential to generate All-in-Cash Margin in excess of 50% on a consistent basis. Thus should display robust economics in the face of the vagaries of metals markets.
A Clear Strategy: NQ minerals has enunciated a clear strategy, and is working towards that, which should provide investors with some confidence in management’s vision for the firm. The clear short term focus is on finalising the Hellyer acquisition and moving Hellyer into production. The commencement of cashflow from this asset would likely change the outlook for NQ Minerals, and allow significant further focus on their prospective exploration projects located in North Queensland
Funding is the focus: For the moment, the key area of caution for investors is the progression of securing funding to finalise the acquisition and development of Hellyer. Overall the company requires ~US$34m (for acquisition and development combined), and has secured ~US$20m through various sources. Two key areas of focus are of importance here, firstly that the company does in fact secure the total funding amount, and secondly what the overall cost/dilution effect of financing is. While we note that the asset value looks to have significant upside to current NQ market cap levels, the exact quantum of that upside will be determined by the final funding mix.
Overall: Overall, we believe that the relative complexity and technical detail associated with a polymetallic operation, which is processing historic tailings; may be keeping some investors away. However, we remain confident that the Hellyer Project itself is a highly valuable asset, and have little concern over its ability to generate copious amounts of cash, once operational. As mentioned above, the main area of caution is the finalisation of funding, but once operations do commence, the cashflow generation is likely to see many investors sit-up and take notice.
ASSETS
Hellyer Tailings Project
The company is currently completing the acquisition of the Hellyer Polymetallic Tailings Project (located in Tasmania, Australia), which should produce which Gold, Silver, Lead, Zinc and Pyrite. Hellyer is a previously mined and operated mine-site currently on care and maintenance. All required infrastructure and processing facilities are in place on-site for NQ Minerals to progress towards reprocessing tailings materials from the historic mining operations at the site.
For those investors not familiar with the idea of tailings reprocessing, it is a technique which has been widely used to extract value from historic minesites, taking advantage of improvements in technology, and structural changes in metals prices. Furthermore, historically the Hellyer operations did not focus on precious metals recovery, which has left relatively higher grade precious metals in the tailings available for extraction.
Resources & Reserve
The tailings dam currently hosts a JORC compliant Resource of 9.5Mt @ 2.6 g/t gold, 104 g/t silver, 2.8% lead, 2.5% zinc. NQ management believe there is potential for this number to increase.
Implied contained metals numbers are as follows:
Gold: 794Koz
Silver: 32Moz
Lead: 266Kt
Zinc: 238Kt
Copper: 19Kt
Accordingly, the resource should be sufficient to support a 10 year operation producing 3 polymetallic concentrates.
While, for non-mining experts, the above may present as overly technical, we stress that the processing techniques to be used are wellestablished and well-understood processes. Furthermore, the company has attempted to optimise the saleability of the concentrates, rather than optimising metals recovery, which should facilitate offtake discussion moving forward.
Permitting
We understand the company has good relationships with the relevant mining authorities, and all major permits are in place for operations to commence.
Operations
The tailings dam will be mined by means of hydraulic dredging and processed through the onsite proven base metal flotation facility to produce the three saleable metal concentrates, as outlined above. The complexity of 3 product streams, each containing 2-3 payable metals, means that it is a little more difficult to express production levels and cash costs in a simplified, easy to understand way for non-mining specialist investors. We can aggregate metals production across the three concentrates to give an idea of the project scale:
Importantly, we highlight that NQ minerals believes their average Life of Mine All-in-Cash Cost for equivalent gold production (i.e. all metals converted into a gold equivalent using a ratio of metals prices) to be ~US$520/oz (compared to current gold prices ~US$1200/oz). While there are also pro-rata calculations which can be done to show allocated costs per metal (NQ minerals has presented their versions of these in its investor presentations), perhaps the easiest representation of the financial attractiveness of the project is to look at the operating margins.
Assuming flat metals pricing around current spot levels, the operation has the potential to generate All-in-Cash Margin in excess of 50% on a consistent basis. Thus should display robust economics in the face of the vagaries of metals markets.
Given the relative simplicity of mining, the benefit of a well-established processing plant, and associated infrastructure, we would expect the ramp up profile for production to be relatively fast.
Asset Level - Financial Summary
At current metals prices (Zinc: US$2777/t, Lead US$2270/t, Gold US$1200/oz, Silver US$15.00/oz) we believe the first full year of operation (12 months ending March 2019)) could see the asset generate net cashflow of >US$37m. Considered within the context of NQ Minerals ~US$32m market capitalisation, this certainly represents a significant sum of cash. We stress that this calculation is based on the asset itself, and does not include any consideration for mix of capital required to fund the project (Discussed further below).
At current metals prices, the asset could exhibit a DCF valuation (@10% discount) of ~US$220m. A 10% movement across the board in assumed metals prices, would see a ~15% swing in valuation. Thus, we believe we would need to see >50% uniform move downwards in Zinc, Lead, Gold and Silver prices, before the DCF valuation of the asset (pre-funding) was close-in on the current market capitalisation of NQ Minerals. Accordingly, investors should be excited about the asset’s potential within the NQ minerals portfolio.
We stress again that this is a range of ‘asset valuations’, not a range of valuations of the NQ minerals entity.
North Queensland Assets
NQ Minerals also possesses two early stage exploration projects in North Queensland, Ukalunda and Square Post. Each of the projects are located within the Charters Towers Gold Province which has produced more than 20 million ounces of gold.
Both are potentially prospective for gold mineralisation, and certainly present the company with some future optionality and upside following the expected cashflow generation from Hellyer.
FUNDING
NQ Minerals has contracted to acquire the Hellyer assets from Keen Pacific for a cash consideration of A$20m (USD15.2m) and 29.9% of NQ shares. A monthly fee is being paid to keep the contract in good standing. We also understand a further ~US$15m will be required to undertake initial capital works to bring the project to commercial production. Accordingly a total funding bill of US$34.2m faces NQ minerals (including some working capital requirements).
As we understand the company has currently secured ~US$20m of this funding through a variety of sources (i.e. Gold Streaming, Private Equity). The company remains confident it can secure the balance of funding from multiple sources (including private investors, and further offtake agreements).
While the stress of raising such an amount relative to the ~30m market capitalisation of the company may seem excessive to some observers, we note that the strong cashflow generation and project economics of the Hellyer Project should heavily outweigh any reasonable funding costs.
That being said, the final mix of funding and how the company progresses its funding needs will likely be keenly observed by the market.