We are initiating coverage on Exco Resources, an exploration and mining company currently focussed on copper and gold projects in Australia. With a significant cash injection expected from the sale of selected tenements to Xstrata, the company is planning a A$0.28ps special dividend and is well placed to develop its existing resource portfolio as well as to acquire further projects. Our pre-distribution valuation is A$0.70ps and our post distribution valuation is A$0.42ps (22% premium on effective market price), which does not account for the exploration upside. Exploration success will be the key value driver going forward. We recommend as a speculative BUY.
Asset sale raises A$175m. In April 2011 EXS announced the signing of an Asset Purchase Agreement worth A$175m with Xstrata over selected tenements in its Cloncurry Copper Project (CCP) area. The board has recommended the transaction to the shareholders and the company is confident that the sale transaction will proceed (>50% required from voting shareholders), despite uncertainty regarding the direction of Ivanhoe Australia's vote (22.9% share). We estimate a net A$140m receipt post tax, with around A$100m expected to be redistributed to shareholders (A$0.28ps) and the balance as well as existing cash of A$36m going towards exploration on remaining licences and possible acquisitions.
Short-term income stream from the White Dam Gold Mine where the company has a 75% stake in a Au heap leach operation expected to produce around 60koz Au over the next year, will also supplement the strong EXS cash position. Furthermore, EXS will also likely receive around A$30m in royalty payments (NPV ~A$15m) over the next 4 years from an agreement with CopperChem Limited to mine the copper sulphide orebody at the EXS-owned Great Australia mining lease in Queensland.
Exploration upside remains. Resource extension drilling at the White Dam mine is likely to add further gold to the existing heap leach operation as well as the underlying sulphide resource, but this is not likely to add significant additional value. The remaining NW Queensland tenements, particularly the remaining CCP tenements, are highly prospective and could conceivably be drilled out to a resource at the same scale of that just sold to Xstrata. Exploration success at the existing EXS tenements, as well as acquisition of further prospective licences/JV relationships is seen to be the key value driver going forward. Given the strong financial position of EXS, they will be in a position to rapidly advance exploration projects to discovery and through resource definition without the need for further capital input.
Valuation does not reflect exploration upside. A preliminary sum of parts valuation on EXS gives an NAV of A$0.70ps, a A$0.08 or 12% premium on the current share price. Given the expected A$100m to be redistributed to shareholders (A$0.28ps), the post distribution valuation is reduced to A$0.42ps, a 22% premium on the effective market price of A$0.34ps. We note however that the value of exploration upside to the remaining CCP tenements is not included in the valuation.
Catalyst: Successful shareholder vote in favour of CCP sale.
EXS Price at posting:
61.0¢ Sentiment: ST Buy Disclosure: Held
