" unrisked valuation is A$1.90/share.
KEY POINTS
Experienced partner with a strong balance sheet: The agreement with MinRes brings in a partner with extensive experience in mineral project development, execution and operations, as well as the balance sheet to fulfil its obligations to achieve commercial production, subject to a positive feasibility study.
Significant, low risk cash flow: Dependent upon a future decision to mine, the entry of MinRes significantly de-risks the Project for Hexagon, with no need for the Company to source project financing, and also raises the possibility of significant cash flows - using the Company’s current basket price of US$2,200/tonne for graphite concentrate annual pre-tax free cash flows could be as much as A$90 million; even using prices of US$1,500/tonne our modelled pre-tax cash flows are still A$46 million per annum based on operating costs of ~A$1,050/tonne including royalties.
Potential for high end products: Metallurgical test work to date, including recent crystallinity analysis highlights the potential for McIntosh concentrate to be suitable for high end applications and attract premium pricing; this is a key facet for the success of the Project, and with a low strip ratio and ready access to infrastructure overcomes what is a relatively low grade mineralisation amongst peers.
Growing graphite markets: The outlook for graphite, and in particular high value premium products, remains strong largely driven by the forecast growth in the battery markets.
Steady News Flow: Ongoing work, although now to be managed by MinRes at McIntosh should provide steady news flow through 2018; we would also now expect increased news flow from Halls Creek.
VALUATION SUMMARY
We have updated our valuation for Hexagon, taking into account the MinRes earn-in deal. This results in a base case risked after tax Company valuation of A$271 million or A$0.93/share for a 20 year, 100,000tpa concentrate operation. The per share valuation is based on the current share structure diluted for in-money options. We would expect this to increase with further derisking through positive results from ongoing activities (including metallurgy and resource/reserve upgrades amongst others) leading to the delivery of a positive FS - our unrisked valuation is A$1.90/share.
