HAZELWOOD RESOURCES LTD (HAZ) Ramp up on track at the ATC ferrotungsten plant Hazelwood Resources Limited recently announced DecQ activities at its majority owned Asian Tungsten Company (ATC) ferrotungsten plant in Vietnam which commenced its production ramp up in mid 2013. The Company produced 106 tonnes of saleable ferrotungsten product during the DecQ with the remaining 215 tonnes from the 3rd campaign shipped subsequent to the end of the quarter. From our modelling we estimate 3rd campaign profit margins of ~10%, slightly lower than our long term expectations (~13%) which we understand is due to seasonal movement in the tungsten price. Feedstock costs were higher during the quarter with some sales revenue still to be received this coming quarter. Recent purchasing for the 4th campaign suggests margins will be back in line with our expectations. Pre-feasibility completed for Mt Mulgine tungsten concentrator A recent pre-feasibility study (PFS) for a concentrator at the Mt Mulgine Tungsten project resulted in an estimated pre-production capital requirement of A$31.5m. The 330ktpa concentrator could conceptually provide a third of the required annual feedstock for the ATC plant based on CY15 ferrotungsten production estimates. Our preliminary modelling suggests a small underground mining operation at Mt Mulgine may add value for Hazelwood. More importantly the project would allow HAZ to lock in a portion of its feedstock costs, allowing greater leverage to the ferrotungsten spot market, improved margins and a lower risk of feedstock supply weakness. Benefits of 3rd campaign still to be seen A majority (215t) of the 3rd campaign at the ATC plant was shipped subsequent to the end of last quarter. This equates to a provisional invoiced value of ~A$8.8M. We expect a small 4th campaign before the end of MarQ to produce a total ~300t of saleable product for the quarter. This equates to EBITDA of ~$1.5M based on current margins (~10%). Moving forward we see consistent, cheap feedstock supplies critical to the success of the ATC plant. History suggests the margin between feedstock costs and the saleable product will improve although timing of payments and receipts can squeeze this margin slightly. For this reason we expect some variance in margins between quarters but long term margins to be in line with our expectations (~13%). Capital raising helps clear short term bridging debt facility During the quarter, the Company completed a fully subscribed share placement raising $5M @ 3.8cps and a well subscribed Share Purchase Plan raising a further $0.9M @ 3.8cps. Funds were applied to ramping up ferrotungsten production and helped clear a $3.5M short term bridging debt facility. The Company is now able to negotiate with financiers a new debt facility on improved terms. Retain our Speculative Buy recommendation Unfortunately the full benefit of the 3rd campaign at the ATC plant is not seen in this quarter’s results as the majority of sales revenues are to be received in the MarQ. The ramp up is in line with our expectations although a short term increase in feedstock costs has squeezed margins slightly, we expect margins to improve in subsequent campaigns and hence we retain our Speculative Buy recommendation with a price target of 8.6cps.
HAZ Price at posting:
3.4¢ Sentiment: LT Buy Disclosure: Held
