| BUY, Speculative Risk* 12-month target price: C$0.60 (was C$0.45) | October 19, 2012 |
| David Charles, CFA / (514) 396-0320 dcharles@dundeesecurities.com Patrick Racicot, CFA / (514) 395-0296 pracicot@dundeesecurities.com |
| Increased Resources. Expecting operational improvements in Q3 |
| Source: See Note 1 | Q3 should show improvements over Q2 and lower cash costs MNB is expected to report its Q3/12 quarterly activity results next Monday October 22nd, 2012, after the close. The MD&A and full financial statements will be released about a week after the activity report. Once the full results are out, we expect MNB to report a loss of ($0.03)/share, in line with consensus. Earnings are expected to improve from last quarter loss of ($0.05)/share as we expect operational improvements including lower cash costs. In Q3, with the help from the installation of the deslimer along with the 2nd crusher, we expect steady mining with ore grades and recoveries similar to Q2 levels despite higher MgO content. Additionally, costs in Q3 should benefit from lower restructuring charges compared to Q2 and with the steady Real/USD exchange rate, costs could fall below $6/lb (compared to $6.03/lb achieved in Q2). While exchange rate and operational improvements should help, the benefit will be partly offset by a drop in the nickel price over the quarter, which averaged $7.43/lb in compared to $7.83/lb in Q2. Changing our Real/US$ exchange rate assumptions Given the relative stability in the Real/US$ exchange rate over the last quarter, we are adjusting our exchange rate assumption. While we were previously assuming an exchange rate of 1.80 R/US$ in 2013, 2014 and 2015, we are now assuming an exchange rate of 2.00 R/US$ for these years. This had a positive impact and lowered our cash costs estimates as most of the operating costs are in Brazilian Real. Larger resources supports higher throughput Last night, MNB announced the results of its open pit extension drilling program which was completed in Q3. This provides the basis for the potential throughput expansion to 9Mtpa (from 7.2Mtpa) while keeping the mine life unchanged. The feasibility study for the 9Mtpa throughput expansion should be completed in Q1/2013. While there are no changes to the total reserves at the moment, the total measured and indicated resources for the open-pit increased by almost 20% to 204Mt. However, we note that the average grade declined by 6% to 0.49% nickel (down from 0.52%). This news is positive, but we are not making any change in our model based on this news as we prefer to wait for the conversion of the resources into reserves. Reiterating BUY but increasing target to C$0.60/share With the pre-stripping and the 7.2Mtpa expansion complete, the recent equity financing closed, the improved throughput and recoveries (expected to start to show up in Q3/12) along with talks of an additional expansion to 9.0Mtpa, the building blocks are in place for Santa Rita to fulfill its role as a world class nickel mine. We believe MNB removed most of the impediments to its business that are in its control. We still expect to start to see operational improvements due to the second crusher and the desliming circuit starting in 3Q12. We are reiterating our BUY recommendation but are increasing our 12-month target to C$0.60/share (up from $0.45/share) based on a 5.5x EV/EBITDA multiple (unchanged) to our 2013 EBITDA of $140M (up from $116M). This target price also represents a 0.67x multiple to our NAV of $0.89/share and an 18x 2013 EPS multiple. |
Company overview
Over the last 20 months, Mirabela has constructed what could be considered a "stand alone" nickel division. MNB's main asset, the Santa Rita mine, is the largest nickel sulphide discovery in over a decade and is also conveniently located close to essential infrastructure such as power, rail, road and port. At full capacity, the operation has the ability to produce between 50 and 55 million lbs of nickel per year and essentially consists of a simple open pit which feeds a conventional, low technology nickel sulphide concentration plant. Based on the current reserves the expected mine life is approximately 17 years, although new drilling will likely expend the current resources and mine life.
Shares had fell by more than 85% in 12-months
At current trading level, we believe there is still significant upside in Mirabela. While the second stage ramp-up to 7.2Mtpa has finally been achieved in 1Q12, unit costs remained high due to operational hiccups and an unfavorable exchange rate. The higher costs combined with depressed nickel market hampered profitability and cash flows and at one point the company was facing a potential cash shortfall. Combined with depressed capital markets, MNB's stock had fell by more than 85% in 12-months.
However, in response to the potential liquidity shortfall, Mirabela raised approximately A$120 million in equity (in May 2012) with the issuance of 383 million shares at an average price of A$0.31/sh. While this financing increased total shares outstanding from 494 to 877 million, it essentially removed the liquidity risk faced by the company. Mirabela Nickel Ltd. October 19, 2012 Page 5
Additionally, the company initiated a cost reduction program and is confident that unit cash costs will move down toward $6.00/lb by year end. Furthermore, a higher grade zone is currently being mined and the company also expects improved recoveries due to the completion of the de-sliming plant. Lastly, the new second crusher commissioning should finally be completed and is expected to enable higher throughput while also enhancing recoveries further. Therefore we believe we will see further improvement in operational metrics, starting in 3Q12.
Recommendation - Reiterate BUY but increasing target to C$0.60/share
Turning the corner
With the pre-stripping and the 7.2Mtpa expansion complete, the recent equity financing closed, the improved throughput and recoveries (expected to start to show up in Q3/12) along with talks of an additional expansion to 9.0Mtpa (feasibility study expected in Q1/2013), the building blocks are in place for Santa Rita to fulfill its role as a world class nickel mine. We believe MNB removed most of the impediments to its business that are in its control. We still expect to start to see operational improvements due to the second crusher and the desliming circuit starting in 3Q12. We are reiterating our BUY recommendation but are increasing our 12-month target to C$0.60/share (up from $0.45/share) based on a 5.5x EV/EBITDA multiple (unchanged) to our 2013 EBITDA of $140M (up from $116M). This target price also represents a 0.67x multiple to our NAV of $0.89/share and an 18x 2013 EPS multiple.