RESERVOIR MINERALS INC V.RMC

Summary from GMP update yesterday.....

[thorgb1]

 

Mid-day Comment
 

 

Reservoir Minerals (RMC CN); BUY, C$10.00

 

Site visit: Timok to regain momentum post JV agreement, 100% ground looks exciting

 

100% ground looks exciting

 

We visited Reservoir’s 100% ground last week, where the company has three rigs, soon to be four, turning. We reviewed the geology and drill core, which showed sub-angular clasts hosting copper sulphide mineralisation in andesites. That Reservoir is drilling the right age rocks with mineralisation within transported clasts suggests the source rock is proximal to the drill collars. While early days yet, results thus far, together with the company’s good understanding of the local geology, bodes well for a discovery.  

 

Cukaru Peki to regain momentum 

 

We sense that negotiations with Freeport regarding the definitive JV terms are drawing to a close. We expect funding terms to remain unchanged, but the definitive agreement to define the rules on cash call, timing and spend going forward. As a result, pending metallurgical test work should be released in due course, allowing Reservoir to publish a PEA with maiden economics in 2015. In addition, we expect drilling to resume at Cukaru Peki, specifically infill of the high sulphidation and wide step outs on the underlying porphyry. 

 

Project remains world class

 

We retain our view that the Cukaru Peki project remains world class with the high sulphidation (HS) allowing the development of a potential, long-life block cave operation in the underlying porphyry at a low cost. Ahead of a PEA, we estimate our capex and opex numbers using peers comps, but flag that we may have been overly conservative given road, rail, power and an underutilised smelter all sit adjacent to the property. We estimate the HS alone is worth US$2bn, or C$10/sh, and has a very healthy ~150% IRR.

 

Valuation update – retain BUY rating and C$10/sh price target

 

We have made no changes to our project assumptions, but have updated our model to include recent financials with cash reported at US$42m, or ~C$1/sh. This suggests the market currently ascribes ~C$3.20/sh for the HS versus our 1.0xNAV8% of ~C$12/sh using our LT copper price of US$2.80/lb, and zero for the underlying porphyry and 100% ground. As such, we believe the stock looks very cheap at current levels (0.25xP/NAV on HS, or 0.2x on GMP NAV). So, we retain our 0.6xNAV price target of C$10/sh and BUY rating.