hartleys put spec buy on mrx

14.4 valuation atm & significantly higher if Copper prices are maintained through 2007.

Major pump job coming me thinks

Date
11 April 2007
ASX Code
MRX
Share Price
9.7cps
Market Cap (fully diluted)
$68.2m ($68.3m)
Issued Capital (fully diluted)
702.7m shares (704.5m)
Cash (as at 15 March 2007)
$5.5m
Board
David Humann (Chairman)
Shane McBride (Managing Director)
Clive Donner (Non-Exec Director)
Geoffrey Jones (Non-Exec Director)
Ronald Hing (Non-Exec Director)
Richard Procter (Non-Exec Director)
Top Three Shareholders
Independence Group NL (18.9%)
LinQ (9.4%)
Glencore (6.3%)
Resources Analyst
Andrew Rowell
Ph: +61 8 9268 2837
[email protected]
Matrix Metals Limited’s (“MRX”, “Company”) plans to commence
production at the Leichhardt SX/EW copper operation (previously known
as the Mt Cuthbert/Mt Watson operation) during the September 2007
quarter at an initial production rate of 5,500tpa copper cathode.
Geotechnical and metallurgical studies are about to commence to confirm
the potential to increase this to 10,000tpa in the short term.
The development of the copper oxide deposits provides cashflow for the
Company to continue its strategy to focus on the discovery of world class
copper sulphide deposits within its 5,000km2 tenement holding in the
prospective Mt Isa region in Queensland.
We believe the Leichhardt operation has the potential to generate
significant cashflows, given that MRX is unhedged and the copper market
expected to remain tight throughout 2007,. In addition to the Company’s
copper projects, Matrix retains exposure to the booming uranium sector
through its investment and joint venture with Deep Yellow Limited.
We believe that MRX will be re-rated as the market recognises MRX’s
move to production, its leverage to the copper price and the exploration
potential of its ground holding. We continue to rate Matrix Metals
Limited as a Speculative Buy.
Investment Highlights
• Copper Production from September Quarter – The Leichhardt
Project will be developed in two stages. Stage 1 has low start-up
costs and a short time frame to production (September quarter 2007)
at the rate of ~5,500tpa copper cathode. In Stage 2, production is
expected to increase to 10,000tpa based on geotechnical and
metallurgical studies being completed to allow the resource to be
converted to a JORC compliant reserve.
• Leveraged Copper Play - MRX is a leveraged copper play that is
fully exposed to copper price movements due to the absence of
mandatory hedging,. Hartleys currently values MRX at 14.4cps,
however, we recognise that MRX is extremely sensitive to copper
prices. In order to highlight this, our valuation ranges from 4.4cps at
US$1.50/lb Cu to 50cps at the current spot price of ~US$3.35/lb.
Stage 1 of the Leichhardt project is robust at current copper prices
with a breakeven point of ~US$1.60/lb Cu. The development of
Stage 2 is likely to have low capital costs and reduced unit operating
costs, thus providing an enhanced financial outcome.
• Glencore Offtake Agreement for Existing Deposits – Glencore
has secured the offtake rights to existing sulphide deposits and their
extensions on MRX’s tenements by providing the funding for
production at the Leichhardt project. However, new sulphide
deposits discovered in the area remain available for offtake
negotiations.
• Xstrata JV and Deep Yellow Drill Programmes – Xstrata has the
right to earn up to 75% of primary sulphides around a small area
(210km2) surrounding the large McCabe deposit. Drilling is expected
to commence in late March 2007. In addition, Deep Yellow (earning
up to 80%) is targeting uranium anomalies in close proximity to the
Mary Kathleen uranium mine and the large undeveloped Valhalla and
Skal uranium deposits. As part of the transaction, MRX has been
issued 21.4m DYL shares with a current value of $8.5m.
Matrix Metals Limited Speculative Buy
Leichhardt Production from September Quarter
Share Price Performance
M A T RI X M E T AL S L I M I T E D ( M R X )
0
5
10
15
20
25
30
35
40
45
Apr-07
Dec-06
Aug-06
Apr-06
4
5
6
7
8
9
10
11
12
V o l u m e MRX
Source: Iress
Share Price (
cps)
Volume (m shares)

Hartleys Limited
- 2 -
Figure 1: MRX Project Locations
Source: Matrix Metals Limited
Principal Assets
Leichhardt Project
The Leichhardt project is located 90km north-west of
Cloncurry in Queensland and was commissioned in
1996 by Murchison United NL (Figure 1). The project
was a copper oxide heap leach, SX/EW operation
and produced ~20kt of copper cathode to the end of
2002. At this time, the operation was placed on care
and maintenance due to low copper prices and
limited ore feed. In the short term, MRX aims to
restart the Leichhardt SX/EW copper operation after
funding was provided by metals trader Glencore and
MRX’s two major shareholders.
In Stage 1, MRX is targeting a 4 to 5 year mine life
with production levels of around 5,500tpa of Grade A
LME copper. Ore will be mined from two pits at the
Mt Watson deposit and hauled approximately 25km
to the Mt Cuthbert plant. There it will be crushed,
agglomerated and stacked in the existing leach pad
area. We understand there is already ~3kt of copper
oxide ore contained in the heap leach pads that has
not been included in the project economics and may
support early cashflow.
Mt Watson has an initial mining inventory of 2.1Mt at
1.1% for 23.1kt Cu. Mineralisation is exposed from
surface. It is significant that only 2.1Mt of the existing 8Mt resource will be utilised in the Stage 1 operation. A
significant portion of the remaining resources is expected to be converted to reserves based on positive
geotechnical and metallurgical results.
Stage 1 will cost ~$10m in upfront capital. Major items include the refurbishment of various parts of the plant,
overhauling the power station, installation of a crushing circuit, new accommodation village and leach pad
earthworks. Additional work outside the direct Mt Cuthbert plant area involves construction of a 26km haul road
to Mt Watson and minor upgrading of the access road to the project. Stage 1 production is expected to
commence in the September quarter 2007.
In Stage 2, MRX plans to increase production to 10ktpa of Grade A LME Copper. Some of the equipment has
already been secured to allow the plant to operate at these rates. MRX estimates that the upfront capital
requirements are low and in the order of ~$7m. Stage 2 production is possible within 9 months of the
commencement of production at Leichhardt.
White Range
The White Range Project is located ~200km south of the Mt Cuthbert Plant. It is approximately 35km south of
Cloncurry in western Queensland and covers ~1,500km2.
The White Range Project resource inventory is much larger than Mt Watson with exploration potential and thus
appeared to offer a more attractive development option. MRX planned to relocate and upgrade the Mt Cuthbert
SX/EW plant to the White Range Project area. The interim results of the feasibility study were released in early
2005. The project parameters were a 15ktpa copper cathode operation for 6.2years and upfront capital of $39m
and cash costs of US$0.72/lb. At a flat copper price of US$1.40/lb, this resulted in an NPV5 of ~$53m. While
the economics were positive, project funding was considered difficult. At the time, the banks were using a long
term copper price of ~US$0.80/lb. Based on this price, the project was uneconomic.
The final feasibility study released in 2006 indicated that, with higher copper prices, the project delivered a
better result, albeit at higher capital and operating costs. Capital costs and operating costs have risen
dramatically across the industry and have particularly impacted projects moving towards development. We now
understand that the capital cost for the development of White Range has now been revised to $110m whilst
operating costs are expected to be ~US$1.30/lb Cu.
The White Range Project remains in play to be developed and could be funded at a later time, partially using
cashflow from production at Leichhardt. The project go-ahead is highly dependent upon industry cost pressures,
and robust copper prices.

Hartleys Limited
- 3 -
Xstrata JV
In September 2006, Xstrata Copper entered into a JV agreement with MRX to earn an interest in the McCabe
deposit and the surrounding exploration permit (EPM). Xstrata Copper has the right to earn a 55% JV interest
by spending not less than A$5m within a three year period. Xstrata Copper then has the right to earn a further
20% JV interest during a sole funding period, by spending a further A$10m within a further five year period or by
completing a feasibility study during the sole funding period. Matrix maintains 100% ownership of the tenements
to a depth of 100m until a decision to mine is made, at which time the JV has the right to buy that part of the
tenements at fair market value.
Historical exploration work by Matrix has confirmed the growth potential of the oxide zone of the deposit as well
as demonstrated the sulphide potential at depth of the McCabe deposit. A drilling program in late 2005 reported
significant copper sulphide mineralisation at depth. Drill hole MMXRD 01 returned 58m at 1.61% Cu from 211m
(including 27m at 2.93% Cu from 235m, 3m at 6.10% Cu from 235m and 4m at 7.40% Cu from 245m).
Deep Yellow Uranium JV
In early 2006, MRX formed a JV with Deep Yellow Limited (“Deep Yellow”, “DYL”) to allow DYL access to the
MRX tenement holdings to explore for uranium. Previous work by MRX had identified 15 occurrences of
uranium mineralisation or anomalism. Many of the occurrences in the Ewen EPMA14916 are geologically
similar to the Skal and high grade Valhalla deposits owned by Summit Resources Limited.
DYL has the right to earn a 51% interest in the uranium rights by spending $3m over a 3 year period. As part of
the JV, DYL has recently issued Matrix with 21.4m ordinary shares in DYL, equal to 2.2% of the issued capital
of DYL. Deep Yellow must now spend $1m in the coming year and $1.5m in the following year, to earn its 51%
position. After earning the 51% position, Deep Yellow can acquire an additional 29% at any time up until the
commencement of a bankable feasibility study (“BFS”) on any specific resource, for an additional $3m, indexed
at CPI. After completion of a BFS on any particular resource, Deep Yellow may buy out Matrix’s residual 20%
position in that specific resource for a value equal to 15% of the in-ground value of Matrix’s 20% holding in the
resource (ie 3% of total in ground value).
This uranium JV allows MRX to focus on its copper developments, while participating in the upside of an
economic uranium discovery. MRX maintains upside exposure to the uranium sector at no cost and no risk.
Resources
Table 1: MRX Oxide Copper Resource Inventory
Measured Indicated Inferred Total
Tenement Area Mt Grade
(%Cu) Mt Grade
(%Cu) Mt Grade
(%Cu) Mt Grade
(% Cu)
Copper
Metal (t)
Mt Cuthbert 1.73 1.1 0.24 0.9 1.97 1.1 21,670
Mt Watson 1.14 1.2 5.52 1.0 1.68 1.0 8.33 1.0 83,300
White Range 3.29 1.2 7.16 1.1 4.39 1.0 14.84 1.1 163,262
Total Resources 4.43 1.2 14.41 1.1 6.31 1.0 25.14 1.1 276,562
Source: Matrix Metals Limited
Base Case Valuation
In our MRX valuation, we have assumed that Leichhardt and White Range are developed. Our Base Case
valuation considers the proposed Stage 1 and Stage 2 developments at Leichhardt, assumes the development
of White Range from mid-2009, significant usable tax losses and a conservative exploration value. Stage 1
provides a low upfront capital option, albeit as a higher cost SX/EW operation, and will provide cashflow in the
short term. Stage 2 provides good potential to reduce costs as the project increases in scale. The move into
production is supported by an offtake arrangement for the produced copper, which provides direct exposure to
the copper price without any hedging requirements.
Based on this analysis, we have updated our valuation for MRX to 14.4cps. We note that MRX is extremely
sensitive to the copper price due to the reasonably high operating costs relative to historical prices. If buoyant
copper prices are maintained throughout CY2007, we would expect MRX to be significantly re-rated in H2.