LONDON (ResourceInvestor.com) -- The objective of Braemore Resources [LSE:BRR] - to become a top 10 producer of nickel and platinum group metals – is quite similar to that of many other resource companies. However its strategy for doing so is decidedly unique.
In general terms its strategy involves commercialising new generation smelting and refining technology in order to process challenging ore at low cost.
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More specifically its two major projects to date are:
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100% ownership of Western Consolidated Nickel (WCN): which has the right to process the waste the tailings dumps of BHP Billiton’s [NYSE:
BHP; LSE:
BLT] three nickel mines in Western Australia using in-house “Atomaer” technology. These dumps, which have already been mined and milled and are sitting on the ground by the processing facility with all the necessary infrastructure in place, have an estimated resource of 485,000 tonnes of nickel (of which 135,000 tonnes of which is defined to JORC standards) with an in-situ value at today’s prices of over $10 billion. Current and future production from the mines may add a further 500,000 tonnes.
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A 95% share in the South African company Independence Platinum (IPt): which has exclusive access for 10 years to the ConRoast smelting technology developed by the state-owned resource company Mintek. IPt plans to build a an independent smelting and refining facility based on this technology, which is not only greener and significantly cheaper than current smelter technology but, crucially, it will enable problematic high-chromium PGM ore from the UG2 reef of the Bushveld to be processed now that the Merensky reef is becoming exhausted or locked up by the majors.
So far the company is in the early stages of both projects. The technologies have been proved to work, small sale production has begun, feasibility and optimisation studies are underway and should be completed in 2008, and production could begin on both projects by 2010 rising to full capacity in 2014. There is plenty of scope for expansion as Braemore has the rights to exploit the technology on other nickel and platinum projects around the world.
The company has been described in a recent broker’s report “A Cash Cow in the Making” as one of the more “exciting but misunderstood” mining opportunities. It is certainly a complicated company to understand. But the 350% appreciation of the share price over the last 13 months from a low of 5 pence in November 2006 to a high of 22.75 pence in November 2007 suggests that the market is beginning to get to grips with the story and its potential. Matrix Corporate Capital, who wrote the broker’s report in October 2007, reckons that in five to 10 years Braemore will either be a major resources house or it will have been acquired by one.
Here’s a little more detail on the company.
Western Consolidated Nickel
Braemore acquired its first asset, Western Consolidated Nickel, shortly after listing on AIM in 2005.
WCN was set up by Australian technology company Atomaer (the major shareholder in Braemore) in 2002 to evaluate the tailings dumps of three major nickel sulphide mines in Western Australia, (Leinster, Mount Keith and Kambalda), which were then owned by WMC Resources (now BHP).
Total production from these mines, which have operated since the 1960s, is more than 100,000 tonnes of nickel per year. Historical records indicate that almost 500,000 tonnes of low-grade nickel (less than 0.5%) have been dumped in the tailings dams and that an additional 500,000 tonnes can be expected in the future.
After completing a pre-feasibility study in early 2005 WCN signed agreements with WMC/BHP to give WCN the exclusive right to complete a definitive feasibility study into the project. If this proves satisfactory, WCN will have the exclusive rights to build and operate process the tailings dumps using Atomaer technology (though BHP also has the right to take up a 50% interest in the project under JV arrangements either at the development stage or within thee years after the commissioning of a plant).
Atomaer’s technology is based on direct atmospheric leach, and the ability to apply direct atmospheric oxidation without prior concentration may lead to significant capital and operating cost savings. Recent results have suggested that more than 90% recoveries are achievable in less than six hours.
Under the agreements WCN will buy the contained nickel in the tailings for 5% of its market value (at LME prices) and once it is extracted BHP have the right to buy it back again for 70% of the market price.
WCN plans to begin construction of a plant at Leinster in 2009. Production at a rate of 10,000 to 20,000 tonnes per annum could begin in 2010 and if successful similar operations will be established at the other two mines raising output to 30,000 to 50,000 tonnes by 2012.
Since the dumps are large, homogenous, flat, soft, easily dug and next-door to the processing facility, the cost of delivering the raw material is very low and total operating costs are projected to be just $3,500. Early estimates of economic potential of a 15,000 tpa operation at Leinster if the long term nickel price is $20,000 per tonne (it is currently $25,000 per tonne) suggest net revenue of $139 million per annum just from Leinster alone and an IRR of 70%.
Matrix Corporate Capital, using the same assumptions about the nickel price, have estimated that the gross operating profit from all three tailings dumps could be more than $600 million per annum by 2014.
Independence Platinum
Braemore acquired its second asset - a 95% share in Independence Platinum - in December 2006. To understand the business case some background is necessary:
Background
The Bushveld Complex is a 2 billion-year-old, saucer-shaped, igneous intrusion in the north of South Africa. The complex, which is the largest and most valuable layered intrusion in the world, hosts more than half of the world’s reserves of platinum, chromium, vanadium and refractory minerals. It has ore reserves that will last for hundreds of years. Currently around three-quarters of annual world platinum supply comes from the Bushveld.
The complex is made up of a number of layers (reefs), and platinum has traditionally been produced by mining from the Merensky Reef and then smelting by one of the four large integrated producers (Anglo Platinum [JSE:AMS], Impala [JSE:IMP], Lonmin [LSE:LMI; JSE:LON] and Northam [JSE:NHM]) using six-in-line submerged arc furnaces.
However the Merensky Reef is becoming increasingly more difficult to mine as reserves become exhausted; ever deeper shafts and more costly refrigeration are required. So in the last decade producers have begun to mine the UG2 (Upper Ground 2) reef which has the advantage of cheaper mining costs and the Platreef. But UG2 ore typically has lower platinum group metal (PGM) content and much higher levels of chrome (up to 28%-34%) than ore from the Merensky Reef (0.1%Cr) while the Platreef has higher nickel content (0.36% compared with 0.13% in the Merensky).
This has made it more difficult to smelt in the current smelters as the chromium, which has a high melting point, builds up on the smelter walls and so reduces furnace volume. The existing smelters can only smelt UG2 ore by blending it with Merensky ore in order to limit the chromite content to 1.5%-2.5% or by heating the ore to significantly higher temperatures which brings with it a further set of costs and challenges. Moreover these smelters are running close to full capacity.
Looking ahead demand for platinum is set to increase on the back of increased demand for autocatalysts and industrial uses (see a recent RIarticle on Johnson Matthey’s view of the outlook for more detail). Platinum prices are currently high and expected to remain so in the near to medium term. Many juniors therefore have jumped on the band wagon and more than 25 UG2 developments are underway in South Africa; Braemore refers to a possible tidal wave of new production if all the junior projects become mines.
However only a few of these projects have off-take agreements in place. Yet the juniors will require off-take agreements in order to procure finance. It seems unlikely that the majors will make capacity available for low-grade platinum concentrates, or if they do high prices will be charged. While some of the juniors are considering establishing their own smelters using conventional technology they, like the majors, would confront the same technical challenges associated with UG2 ore and also the negative effects of economies of scale for small operations.
An RI article in June, PGM Refining May Need a Boost, summarised an RBC Capital Markets report which projected that South Africa could process planned platinum mine expansions to 2010, but if there was further expansion new capacity would be needed.
Enter Independence Platinum!
This then is the market gap that Independence Platinum has set out to fill.
IPt has an exclusive world wide licence to use the Mintek ConRoast Process for a period of 10 years after the decision to proceed with the construction and commissioning of a new smelter and base metals refinery which it will use to provide smelting and base metal refining facilities for PGM concentrates from junior resource companies.
The process has a number of cost and technical benefits:
The technology has already been proved to work on a small scale. Mintek completed a 2MW facility in Johannesburg in August of this year which began to treat UG2 concentrate from various sources in September. Feasibility studies are now underway for the UG2 smelter and refinery and due for completion during 2008. Construction is scheduled to begin in 2009 with production commencing in 2010-2011.
Matrix Corporate Capital estimates that gross operating profit could total around $220 million per annum by 2013.
Summary
Braemore undoubtedly has an interesting, if complex, business model. It has strong cash flow and growth potential and it has less risk than many other resource companies in that it is operating in two safe jurisdictions and geological risk has largely been removed as the nickel resources are already on site and the platinum resources have been defined by others.
Many of the technical hurdles have also been overcome and the technology has been proved to operate at least at small scale. Marketing risk has been reduced by the offtake agreement with BHP. The risks therefore are primarily in the scaling up and execution of the projects, and, as is so often the case, in the availability of labour and resources.
At today’s price of 19.75 pence, Braemore has a market cap of £133m ($270 million). Matrix Corporate Capital has estimated that the price could rise to 34 pence when the feasibility reports are submitted in 2008 and to 134 pence as the company nears production in 2010.
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