RATINGS REVISION | COMMENT
OCTOBER 19, 2012
Mirabela Nickel Limited (ASX: MBN; TSX: MNB)
Upgrade to SP ahead of expectations of a Very Good
Sept Q on Tuesday
Sector Perform (prev: Underperform)
Above Average Risk
Event
Resource updated, Sept Q Preview: Upgrade to SP (UP), target to A60¢ (A50¢)
Investment Opinion
Mirabela is a strong beneficiary of "risk-on" equity markets but is also making
positive step-changes at its wholly owned Santa Rita nickel mine in Brazil.
Resources are up ~40% to 283Mt and we are confident that its Sept Q on 23 Oct
will be very good and amongst the most improved in our coverage.
Unfortunately, free cash flow is still lacking at US$7-8/lb nickel and the burden
of ~US$470m of debt won't go away any time soon. However, momentum is with
the company and much lower costs and the promise of an expansion to 9Mtpa are
good signs. Valuation is difficult for a loss making entity with a plus 20 year life
but overall risk is reduced and we raise our rating to Sector Perform (UP) and the
target to A60¢ (A50¢)
• Sept Q: We est. a much improved Q of 5.2kt at US$5.45/lb vs. 4.3kt at
US$6.03/lb. Losses will still be reported but are estimated to be at about half
the June Q US$33m loss.
• Resource Upgrade: total resources grew from 198Mt to 283Mt at similar
~0.50% nickel grades. Reserves are 159Mt, sufficient for a 22 year mine life at
the current 7.2Mtpa rate. MBN is assessing an expansion to 9Mtpa and needs
additional reserves to maintain plus 20 year mine life. Hence the recent drilling
program. The 9Mtpa study should be released in Q1 2013. We do not model it
as yet.
• Outlook: 2H guidance remains for costs to be sub US$6/lb. Nickel production
guidance is for the "lower end" of 19–21kt Ni, and capex of US$60m in CY12.
RBC is at 19.3kt at US$6.04/lb for CY12E.
• Cash: Projected to dip to US$157m at 30 Sept from US$166m at June.
Operations are forecast to be cash flow positive in the Q but are not sufficient
to meet outflows relating to capex (US$16m) and debt repayments (US$7m).
• Valuation: We raise our rating to Sector Perform from UP and our target to
A60c from A50c based on a P/NAV of 0.7x (0.6x), well below comparable
nickel peers but with reducing overall risk.
Upgrade to Sector Perform on Improved Outlook
Mirabela has come a long way in 2012. At the start of the year, production was a lowly 4.2kt Ni in the March Q and costs were a very
disappointing and unsustainably high US$7.37/lb. Fast forward 6 months and after a A$120m capital raising, unit costs are forecast by
us to be below US$5.50/lb with production a respectable 5.2kt Ni per Q and cash on hand at ~US$150m.
While some more work remains to be done we believe that Mirabela is on its way to putting to rest many of the issues of the past that
have plagued Santa Rita. While our current forecasts don’t have Mirabela earning a profit until 2014, we do expect the company to be
cash flow positive in 2013 after all cash outflows. The stock is trading at about a 50% discount to our NAV of A$0.91/share. We feel
this discount is a little too steep given good progress this year and hence we reduce our discount to generate our target to a 0.7x (0.6x)
P/NAV multiple.
Consequently we upgrade Mirabela to Sector Perform from Outperform and raise our target to A$0.60/share from
A$0.50/share. There are still major issues out there such as the heavy debt burden and lack of free cash flow but we regard Mirabela
as an excellent proxy to movements in the nickel price and particularly in a “risk on” equity market.
We don’t believe Mirabela deserves an Outperform rating at this time because the nickel price remains undesirably low at around
US$7.80/lb while gearing is still very burdensome. Unfortunately for Mirabela these two factors weigh on its outlook and cash flow
and we believe that the debt burden will be an overhang for some time because free cash flow at the group level is capped or limited at
prevailing nickel prices.
September Q Preview – another Improvement Expected !
Mirabel is scheduled to report its September quarter results on Tuesday 23rd October. We forecast a stronger Sept Q with
production of 5.2kt Ni, up 21% QoQ, and C1 costs down 10% to US$5.45/lb. The improved production performance is expected
to come from higher plant throughout and increased recoveries. The SAG mill was relined in June and positively impacted throughput
in the June Q while a full quarter of operation of the de-slime circuit should improve recoveries. Unit costs are expected to benefit
from higher production, the impact of cost reduction initiatives and the moderately weaker Brazilian Real. Incidentally, the Real
averaged 2.03 to the US$ during the Sept Q compared to 1.96 in the June Q.
Other areas of interest in the report include: Mirabela’s cash position, loader productivity and availability, de-slime circuit
September Quarter Cash Flow
We forecast a US$9m reduction in cash on hand at 30 Sept to US$157m, down from US$166m at 30 June. Operations are
projected to be cash flow positive with US$12m generated and a further US$1m of interest income. This will be offset on our
forecasts by cash outflows of US$16m for capex and US$7m of debt repayments related to the CAT Lease
Mirabela’s All-in-Cash-Costs
We estimate Mirabela’s all-in-cash-costs are ~US$9.40/lb in CY12. This all-in-cost includes the normal costs associated with running
the operation as well as capex & exploration, corporate overheads, net interest, and taxes & other. 2012 is a large capex year and
hence on a unit basis capex is particularly high at US$1.72/lb. Net interest payments add a further US$0.89/lb over the year, while
corporate overheads are ~US35¢/lb.
All-in-cash-costs are expected to come down materially in 2013, and average just below US$8.00/lb over the year. C1 Cash costs
are projected to average US$5.71/lb, compared to US$6.04/lb in CY12 while sustaining capex should average ~US60¢/lb. Net interest
payments associated with Mirabela’s US$395m unsecured notes and other debt, should add a further US78¢/lb to costs.
Santa Rita Resource Expanded
On 19 October, Mirabela announced a significant increase to its Santa Rita resource following drilling beneath the northern zone and a
re-interpretation of the geology. The new resource is 361Mt at 0.57% of open pit and underground material. This is up from the
previous resource of 285Mt at 0.57% nickel. The open pit resource alone rose 43% to 284Mt at 0.51% nickel from 198Mt at 0.52%
previously.
An updated resource estimate should, in time, allow Mirabela to increase its reserves significantly after completing additional infill
drilling. This in turn should extend the already long mine life of Santa Rita. The last reserve statement was dated December 2010 and
defined reserves were 159Mt at 0.52% nickel.
The company is assessing an expansion from 7.2Mtpa to 9Mtpa and internally requires a plus 20 year mine life. If the plant was
expanded on the current reserves, the mine life would drop below 20 years. Resource to reserve conversion has been very high in the
past at +90% and hence one can expect the mine life to be retained at +20 years at the higher rate once much of the resource is drilled
and upgraded.
Results of the Expansion Study should be released in Q1 2013 and we would think that the capital cost would be relatively modest
and under US$60-70m. Much of the plant is already capable of throughput rates in excess of 9Mtpa.
Conference Call Details:
Monday – 22 October 2012 6.15pm Toronto, 11.15pm London
Tuesday – 23 October 2012 9.15am Sydney
Dial in Numbers:
Australia 1 800 850 335
Canada 1 866 228 9189
US 1 877 941 1468
UK 0800 358 5256
International +1 480 629 9821
Valuation
We raise our rating to Sector Perform from UP and our target to A60c from A50c based on a P/NAV of 0.7x (0.6x), well below
comparable nickel peers but with reducing overall risk.
Price Target Impediment
Potential impediments to our price target include: (1) nickel price risk – a weak nickel price would adversely affect earnings; (2)
currency risk – a strengthening of the Real/US$ or A$/US$ rates would adversely affect earnings; (3) operating risks – general
mining/milling/transport/marketing risks and increases in key operating inputs (energy and labour costs) would adversely affect
earnings; and (4) balance sheet risks and cash burn.