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Venturex Resources (VXR)
Analyst: Brett McKay, Petra Capital
Recommendation: Buy (initiation)
Price target: 60c
Thursday's close: 24.5c
Reason: Emerging mid-tier copper-zinc producer
Comments: Venturex Resources (VXR) owns 100% of the Sulphur Springs copper-zinc project, located 144km south of Port Hedland in Western Australia. The recent definitive feasibility study (DFS) defined a 1.25Mtpa project producing 15,000tpa copper and 35,000tpa zinc for +10 years. Economics for the combined open pit and underground project are solid, with an impressive post-tax IRR of 41% and average annual cash flow of $77 million. Importantly, given the quality of the project, we believe the $169 million start-up capex is fundable through the debt/equity markets, as well as alternative funding sources such as offtake or a project sell-down. Permitting is advancing, with a native title agreement in place and amendments to the existing mining lease due in coming months; this should allow financing and start of construction in 2H CY19. With considerable valuation upside and significant opportunity to further optimise key project parameters, VXR is well placed to benefit from strong interest in quality base metal projects as both copper and zinc prices lift in response to tight supply/demand fundamentals. We initiate coverage with a buy and 60c/share price target (1xP/NPV). We estimate average output of 15,000tpa copper and 35,000tpa zinc (26,000tpa copper equivalent) at AISC of US70c/lb copper on a by-product basis, or US$1.84/lb copper equivalent; copper:zinc revenue is split 50:50. 10.5-year mine life, four-year open pit at 7.7:1 strip ratio followed by six years of underground operations. 12.6Mt mining inventory likely to increase as exploration advances; notably, the deposit remains open at depth. High-grade at average 3% copper equivalent (1.4% copper and 3.5% zinc), with higher copper grades in early years. Finance pathway defined, debt negotiations underway with full funding targeted after permitting in mid-CY19, 18-month construction period, first production early CY21. Priority drill programs to test Sulphur Springs at depth and advanced near-mine exploration targets. Tightening supply/demand dynamics increasingly support higher copper and zinc prices in short-medium term. We assume development of Sulphur Springs broadly in line with the DFS assumptions. LOM prices US$3/lb copper, $1.20/lb zinc and 0.73 FX. Our PT is fully diluted for new shares, assuming 60/40 debt/equity split with A$70 million equity at A25c/share.</P>