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AML Investment Guide, page-6

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Kookaburra777

1,381 Posts.

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14/02/18

15:04

Post #: 31052371
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Originally posted by speccy ↑

AML Investment Guide

It's good to see so many new posters! Given all the questions, hopefully the following will help:

The most important factor at play here is a world-class, copper/cobalt/zinc/lead/silver resource at Walford Creek in QLD.

The plumbing system for this resource is the Fish River Fault which runs for more than 20 kms.

There has been a lot of drilling over the last 30 years which together has now proven up/is continuing to prove up a truly world-class resource with average grades of more than 1.25% copper and 0.15% cobalt plus potential credits from zinc, lead and silver.

So we don't try to compare apples and oranges we talk about copper equivalent grades. Cobalt is US$36.40/pound and Copper is US$3.20/lb (so cobalt is 11.4 x copper).

11.4 x 0.15% = 1.71% Co/Cu Eq + the 1.25% average copper grade = 2.96%Cu Eq, or, comfortably over 3% with credits from zinc, lead and silver.

Now this is very economically attractive when you consider that there are many mines across the world profitably mining copper at just 0.5% average grade (i.e. ⅙ the AML grade).

Both copper and cobalt are forecast to continue to increase in price as the demand for electric car and home storage batteries grows.

The major unknown at the present time is just how big this resource is? There is solid evidence that it runs for much of the 25 km of the Fish River Fault plumbing system. This would make Walford Creek one of the five biggest new resource discoveries in the world over the last decade. I'll give you an overview of the evidence for this later in this piece - but rest assured the resource is the major strength.

The major weakness is management IMO. Unfortunately, while the drilling/geology is going very well, mgmt continue to make mistakes which leads to questions about their competence:

1) New Century – AML mgmt had access to the same data as the current owners (i.e. all the historical high grade zinc assays, information about the processing plant with a replacement cost of over $1billion, the extra value of cattle properties with 38,000 head of cattle etc etc and, what’s more they had this access for about 2 years with AML shareholders led to believe that AML would acquire these assets from MMG who wanted to move on. This was highly attractive as the Century plant is only 100 km away from Walford Creek and has an underground pipeline to the port at Karumba (plus the huge incentives including cash payments to take it on provided by the previous owners MMG).

However, inexplicably, AML management chose to walk away from the deal which was quickly acquired and relaunched as “New Century” (NCZ) and even more quickly gained a market cap of $450m proving how good this asset was and what a huge mistake it was for AML mgmt to walk away from it. (i.e NCZ is triple AML’s cap of $150m)! This has cost AML shareholders at least $1/share and SH are likely to hear more about this in the coming months….

2) The original Walford Creek JORC resource done in 2015 was 73mt at 1.43%Cu Eq. Now this was a very robust proposition until mgmt released a preliminary economic analysis (PEA) which used the highest mining costs in the world to come up with an estimated production cost which equated to 1.2% Cu Eq!

This was breathtakingly incompetent IMO. The Walford Creek deposit is mainly shallow and suited to a scoop and truck open pit mine. To then develop a PEA with production costs higher than the deepest mines around the world is diabolical.

After the sustained criticism finally made management realise that perhaps they stuffed up, they have now attempted to restage things but unfortunately they’ve got it wrong again.

After shareholders were promised a new overall resource upgrade including the very successful recent drilling, the upgrade was released on Jan 24th.

However, it wasn't an overall upgrade but a resource for a small subset of Walford Creek (i.e. the ‘Vardy’ and ‘Marley’ zones) which are concentrated in a 2 km subset of the much larger Fish River Fault. Moreover, management didn't bother to explain any of this in the announcement. They just announced this new (smaller) resource of 15.7mt of 1.24% Cu, 0.15% Co, 0.98% Pb, 0.82% Zn and 34/g/t Ag plus what they called a ‘peripheral’ resource of 18.9mt @0.11% Co, 0.16% Cu, 1.03% Zn, 0.85% Pb, & 22g/t Ag around the main resource above.

Now, don't get me wrong this is an amazingly good resource; the 15.7mt has a Cu Eq of 3.5% which is excellent high grade stuff.

So what they have done is now very clear with the benefit of hindsight.

Having stuffed up the initial 2015 JORC resource of 73mt with with a PEA with unbelievably high production costs, they are now trying to re stage and concentrate on the highest grade areas.

Now this does make very good economic sense. It's just a shame they haven't bothered to explain it clearly so the market can understand.

Further, the Jan 24 resource update is very poorly written IMO. Worse still there is an ever-changing way of naming the deposit areas which makes it very hard to follow.

First we had the ‘Vardy’ high grade zone, then ‘Marley’, and now in this latest Jan 24 ann, Vardy and Marley seem to have been renamed as the ‘Copper Load’?

They really need to get their act together and get some professional help as clearly they can't do it themselves. The Jan 24 ann seems to have been very quickly cobbled together from a report which is hidden on the Aeon website. If you would like to read it here is the link: http://aeonmetals.com.au/assets/upl...k_Updated_Resource_Estimates_Final_220118.pdf

What we know we have is a very high grade copper/cobalt resource which runs over around 4 km. It may well run for another 20 km of the FRF. This will be explored in a major drilling program beginning in April.

However, the biggest open pit mines in the world are about 4 km long so this is already a high grade world class resource. Therefore, from an economic viewpoint, it is arbitrary how many more kilometres the deposit runs for. A 4 km open pit mine would run very profitable for the next 30 years or so (unless, of course, the next drilling reveals even better, higher grade economics - which it may well do).

3) Another management issue is that they refuse to promote this deposit which is why so many HC posters are amazed at how ‘under the radar’ AML is. Almost every other small mining company use any excuse to shout from the nearest rooftop. AML management refuse to. I'll speculate as to why a little later.

In contrast, the Bell Potter analyst, David Coates, writes a very good report. His analysis of AML is very comprehensive and well-written (valuation of $0.48 and one of Bell Potter’s top picks for 2018).

Unfortunately, AML management don't bother to upload these reports to the AML website in a timely manner. David's latest report on Jan 25 isn't on the website, nor is his previous report. How hard is it to upload an 8 page report?

4) In this same vein, SH have to do their own digging to try to extract relevant bits of otherwise hidden information. This explains why I have a high degree of confidence in the drilling starting in April.

Hidden in an ann on December 12th about the Qld Govt. awarding some drilling grants is some amazing information which marries some of the previously hidden historical drilling with the current. See diagram below:

As you'll see from this 12 km long section view, there is the original high grade Vardy zone in blue and then to the west, the Marley zone in green. These two small bits of the total deposit make up the 15.7mt resource discussed above.

Not only is this deposit open to the east (i.e. the East zone) but it is also open to the West where there has been a lot of historical drilling.

You'll see that the PY3 deposit thickens up to the West where yet another name is introduced, the ‘Amy’ zone. This it is highly significant because on the Western edge of the Amy zone is historical whole 157 which recorded a massive 75 metre intersection of 1.3% Cu, & 0.18% Co (i.e. 75m of 3.4% Cu Eq). This is approx triple the thickness of the deposit in the Vardy and Marley zones and is a further 1.8 km west of Marley!

If we move another 1.8 km west, we see historical hole 179 which has 42m intersections and, moving still further West, we see the estimated position of the PY3 mineralised lens in the ‘Aria' zone i.e.now 12 km long and still open to both the west and east.

This is already huge and could well be giant! The 2018 drilling will test these outer boundaries and will hopefully prove up even more economic and thicker intersections.

Hopefully you'll now share my strong optimism about this world class resource?

So why don't management do anything at all to promote it?

I'm in touch with many other SH on a regular basis and the most common theory is that mgmt are worried that the company will be taken out too early and they’ll lose their jobs. Why else wouldn't they be shouting from the nearest rooftop?

Readers can make up their own minds as to whether mgmt is acting in all shareholders’ best interests?

The unfortunate consequence of this is that the share price/market cap is a fraction of what it should be.

If we just look at the Vardy/Marley resource of 15.7mt; this represents 43.5kt of cobalt at A$100,000/t = A$4.35billion and 224kt of Cu at A$8,800/ton = A$2billion.

So in this 2km high grade subset of the overall resource we have more than A$6billion in contained cobalt and copper. Against this AML has a market cap around A$150m!

Now it's not unreasonable for the market to penalise AML for its management deficiencies but the current market cap is a complete joke IMO.

NB The SP was 30% higher just a few weeks ago before management made another dumb mistake IMO.

They announced an SPP at 28c when the SP was in the mid 30’s. However the ann said that the ex date had passed so management didn't give shareholders an incentive to buy, only to sell, and the SP responded accordingly rapidly going down to 28c and then worse. The previous strong positive buying momentum had now been replaced with selling momentum which the very poorly written and poorly explained resource statement ann on Jan 24 just exacerbated.

Now in case any of you reading this might be close to mgmt and feel that I'm not sufficiently recognising management for the great drilling results, you might be right - they are fantastic results. The only issue which dampened my enthusiasm for management’s role in this is the fact that the Zambian model should have been obvious to them 3 years before!

This diagram is from the AML June 2014 annual report:

As you see it clearly shows the close similarity to the Zambian copperbelt model with the two lens of strong mineralization (originally molten) driven upwards and then deposited close to the Fish River Fault.

Now, here is the (very similar) diagram from where they recently announced and explained the Zambian copperbelt model that they are now following (i.e. some 3 years later):

Now apparently the scuttlebutt goes that back then they had a geologist working for them who tried to convince management that Walford Creek was a Zambian copper belt look alike. Not only didn't they listen but supposedly they sacked him.

I have no idea if this is true but they certainly should have realised from their own work in 2014 (as shown above) what this deposit was IMO.

Had they have done so we would be 3 years further ahead than we are now (and without all that misdirected drilling over the last few years….).

Finally, it would appear that a lot of the new HC posters are day traders so all this explanation might not suit you. However, for the rest of us, the Walford Creek resource is already world-class and about to get a lot better.

The resource is a lot bigger than the current management so a degree of patience is required. IMO this patience will be very well rewarded when the stock is re-rated with a market cap well north of A$1billion (SP range $1 to $3+).

Hope this helps answer a few questions….

Expand

Great post speccy

I've only been holding for a few weeks so your post has given me some really interesting background.

Other than the possible management concerns (to which you refer) the only negative I see is the remote location which will increase both capex and operational costs. Maybe this was significant w.r.t. the high forecast production costs in the 2015 PEA? Proving up a much bigger resource via drilling in 2018 may help to bring this cost down by amortising capex costs over a longer period as well as by cherry-picking the highest grade zones (the best of which are hopefully still to be found this year!).

Hard to believe management can be that incompetent? I don't buy the argument that they feared takeover and being sacked though. Surely, if they were so confident in the resource but feared a takeover, they could buy stock on-market and still profit from a takeover? Possibly they were looking for cheap options before singing the resource's praises too clearly and loudly? Purely speculation on my part ...

AML Price at posting: 24.5¢ Sentiment: Buy Disclosure: Held
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