Almonty Industries — Update 16 August 2016

Almonty Industries — Update 16 August 2016

Almonty Industries

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Almonty Industries

Tough as tungsten

Company update

Metals & mining

16 August 2016

Price

C$0.31

Market cap

C$31m

C$1.27/US$

Net debt (C$m) at end March 2016

45.1

Shares in issue
(excluding 5m ATC deal shares)

100.0m

Free float

63.2%

Code

AII

Primary exchange

TSX-V

Secondary exchange (pending completion of ATC deal/approvals)

ASX

Share price performance

%

1m

3m

12m

Abs

0.0

(16.2)

(62.2)

Rel (local)

(2.0)

(22.1)

(63.5)

52-week high/low

C$0.86

C$0.23

Business description

Almonty Industries is an independent tungsten producer, with three operating mines: Los Santos (Spain), Wolfram Camp Mine (Australia) and Panasqueira (Portugal). It also has the large and low-cost development-stage flagship Sangdong (South Korea) and earlier stage Valtreixal (Spain) projects. The company produced 99.6kmtu of contained WO3 in FY15 at all-in sustaining costs of US$150/mtu.

Next events

ATC deal completion

Q416

Sangdong financing

Q3-Q416

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Almonty Industries is a research client of Edison Investment Research Limited

Operating against persistently low tungsten prices, Almonty has continued to grow its business and has raised two-thirds of the capex required, as debt, for its flagship South Korean Sangdong project, with the remainder likely via equity-linked instruments. We consider development of Sangdong as key to the company managing its gearing levels and the current low tungsten price environment. Aside from growing its production capabilities, Almonty plans to take over Vietnamese ferro-tungsten producer ATC Alloys, thereby diversifying into downstream processing.

Year
end

Revenue (C$m)

PBT*
(C$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

09/14

29.6

9.9

25.3

2.0

1.2

6.5

09/15

36.1

(19.2)

(36.8)

0.0

N/A

N/A

09/16e

63.4

6.2

0.6

0.0

51.7

N/A

09/17e

111.5

20.1

4.3

0.0

7.2

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Tungsten prices and Sangdong are key drivers

A critical factor governing Almonty’s success, in our opinion, is Sangdong’s development. This is pivotal to the company’s ability to pay back its debt load. Successful development of Sangdong, a mine with projected gross margins of
c 43-49%, would transform Almonty’s cash flow profile.

Revised SD Reserves provides for 13-year mine life

A key support for Sangdong’s development is a material increase in the projects compliant reserve base, from 4.7Mt at 0.42% WO3 to 7.9Mt at 0.45% WO3. This represents a 78.4% increase over the previous estimate and provides for a further four years of mining. This revision equates to a 47% uplift in our DCF on this project alone from C$32.2m to C$47.4m.We have adjusted our model to reflect 13 years of mining, an increase over the January 2016 updated FS, which stated nine.

Valuation: Heavily diluted due to Sangdong, ATC deal

We use the same production profiles as in previous notes and adjust our long-term tungsten (APT) price down from US$325/mtu to US$300/mtu. We also include production from the Panasqueira mine modelled on the basis of 2014 operating results and adjust our equity raise price assumption to fund Sangdong down from a notional C$0.80 to C$0.35. We estimate that Almonty also has to manage a total net debt load of C$67m by end FY16 as it builds out Sangdong. This development phase, and its associated funding and dilution, are now included in our model, resulting in a fully diluted DDF value of C$0.77, cf C$1.26 previously (both use a 10% discount rate to reflect general equity risk). This then rises to C$0.88 in FY18 as Sangdong production starts to occur alongside all other mine production. The acquisition of ATC Alloys, including its 60% JV interest in Vinh Bao, is relatively neutral to our valuation, adding a tentative C$0.05 per share based on unaudited financial data. Upside to ATC’s value is geared to improving the plant’s performance; we await completion of this deal and news concerning progress being made in Vietnam. The development of Sangdong is critical to our valuation.

Investment summary

Company description: Positioned for a recovery

Currently one overriding factor dictates the script for Almonty: the tungsten price. However, the company’s underlying portfolio of tungsten projects, in production (Los Santos, Wolfram Camp Mine and Panasqueira) and pre-development (Sangdong, and Valtreixal), collectively provide a secure source of tungsten to Western customers at all-in production costs of c US$150/mtu (for the three producing mines mentioned, FY15 actual). The A$6.0m (plus debt) acquisition of ATC Alloys brings a negative NAV of C$2.5m but should be viewed on the basis of the replacement value of its Vinh Bao plant – c A$25m. The ATC deal brings in-house ferro-tungsten processing capacity, which is to be used to treat Wolfram Camp Mine (WCM) concentrates.

Valuation: Fully diluted for ATC deal and Sangdong

We have migrated our previous SOTP DCF valuation approach to our standard dividend discount flow (DDF) method, ie effectively discounted free cash flow. We retain all production profiles from our last valuation (September 2015) and add production from the Panasqueira mine acquired in early 2016. We note that at 31 December ATC Alloys recorded a negative net asset value of A$2.5m and a net loss of A$4.4m. For the purpose of our financial model, we include the acquisition as if it completes at end Q416. We have reviewed third-party unaudited data on the ATC Alloys operation in Vietnam and consider it to be broadly neutral to our valuation, adding a tentative C$0.05 per share. This assumes that Almonty enforces stricter cost controls at the Vinh Bao plant in Vietnam and reaches 2,000t of ferro-tungsten (FeW) by 2017, at a US$22,000t FeW price (equivalent to current spot). We include the recent Sangdong debt finance agreement for C$57.9m, and assume the remaining C$31.7m is raised as equity at C$0.35 per Almonty share. Assuming Almonty achieves its stated objectives (including the 10.3m shares issued in connection with the takeover of ATC Alloys) and tungsten prices average US$250/mtu over 2016, rally to US$300/mtu by early 2017 and are maintained until 2027 (the last year of our valuation period), we value Almonty’s shares on a fully diluted basis at C$0.77 (previously C$1.26, the main change being due to the equity raise price used for financing Sangdong reducing from a notional C$0.80 in our September 2015 note to C$0.35 now, plus the dilution caused by the ATC deal).

Financials: Many moving parts during H116 and going forward

Q216 group APT concentrate production rose 15.4% q-o-q, driven mainly by Los Santos and Panasqueira. Production at WCM ceased in Q216, as tungsten prices deteriorated and management suspended ore production until a programme of optimisation completes. The APT price bottomed at c US$165/mtu in late January. However, higher production and a subsequent rally in prices pushed group revenues ahead by 27% q-o-q. Q2 operating costs included a C$2.4m WCM inventory revaluation (reflecting the lower tungsten price). Excluding this, mine costs rose only 2.2% in the quarter despite higher concentrate production, helped by lower production costs resulting from the newly acquired Panasqueira operation. Depreciation and amortisation of C$5.1m in H116 reflected the closure of WCM and the inclusion of amortisation at the Panasqueira mine. End-March 2016 net debt was C$45.1m, up by C$0.2m from end September 2015. Operating cash flow was C$0.3m. Cash outflows were C$5.6m (of which C$4.6m was capex), offset by new debt (C$4.3m net) and equity (C$3.7m). Since end March, Almonty has announced a further C$1.5m in financing via a 5m share placing at C$0.30. In all, we estimate end-September 2016 net debt of C$67m, rising to C$112.5m by end September 2017 (mainly due to the heavy outflows in 2016/17 related to Sangdong capex). This includes the recent announcement concerning a conditional agreement with a Korean bank over C$57.9m in debt for Sangdong’s development.

Asset overview: Three producing mines, two projects

Almonty currently produces tungsten in APT and trioxide forms from its Los Santos and newly acquired Panasqueira operations on the Iberian Peninsula and at the Wolfram Camp Mine in Australia. Off-take agreements have been extended for five years for Panasqueira and Los Santos, providing security over future revenues from these mines. Almonty’s flagship asset Sangdong in South Korea is not yet in production, but is expected to start producing in 2017. Valtreixal is the company’s fifth main tungsten asset and is a smaller pre-development project. The following sections provide further detail on these mines and projects.

Almonty’s Q216 and H116 results were released on 30 May 2016. Almonty produced a (first half) total (across all operations) 47,535mtu of WO3 concentrates and sold 46,268mtu for total group revenues of C$10.4m. Almonty’s all-in sustaining cost of production at the half-year stage was C$176/mtu, roughly flat compared with Q116 (C$180/mtu). The average grade was 0.33% and the recovery factor 61.0%. A breakdown by operation is provided in the following sections.

Los Santos, Western Spain, 100% ownership

The Los Santos operation has provided the mainstay of production for Almonty and continues to operate profitably at current tungsten prices.

Los Santos reported a 5.2% q-o-q decrease in ore production, and a 39.3% q-o-q decrease in revenue, driven by reduced throughput, lower ore grades (down 24.3% q-o-q) and lower recovery rates (down 3.7% q-o-q). Almonty’s focus on cost reduction was affected by the increased level of waste mining (up 88.4% q-o-q) , therefore lifting its all-in sustaining cost of production for Q216 by 45.2% q-o-q to US$180/mtu (Q116: US$124/mtu).

Exhibit 1: Los Santos quarterly production metrics

Q415

Q116

Q216

Q1-Q2 Delta

Ore treated

t

135,956

133,293

126,400

-5.2%

WO3 produced

mtu

25,949

26,847

20,688

-22.9%

WO3 sold

mtu

26,090

27,013

19,615

-27.4%

Sales revenue

US$m

4.6

5.6

3.4

-39.3%

Cash operating costs

US$/mtu

82

81

99

22.2%

Waste rock mining costs, including deferred stripping costs

US$/mtu

70

43

81

88.4%

All-in cash operating costs

US$/mtu

152

124

180

45.2%

Ore mined

t

124,329

146,375

132,301

-9.6%

Average grade WO3

%

0.31%

0.37%

0.28%

-24.3%

Average WO3 recovery rate

%

61.0%

62.0%

59.7%

-3.7%

Source: Almonty Industries

Although Los Santos’s Q216 recovery rate was below guidance, management expects tungsten recovery to be in the range of 60% to 65% (becoming 65% to 69% post optimisation) for the remainder of the mine’s life. However, the 59.7% realised during Q216 was without a corresponding loss of grade, which is what one would logically expect. Careful monitoring and management of the process plant recovery is needed in subsequent quarters to bring recovery back in line with projections. All-in Q216 sustaining costs rose 45.2%, reflecting lower ore tonnages treated and a quarter-on-quarter increase of 72.1% in waste rock mining costs, including deferred stripping costs.

The third-party tailings reprocessing study has been completed and a decision to proceed with this is now being considered. In view of current low tungsten prices, we would consider re-treatment of tailings as secondary to development of Almonty’s Sangdong asset and bringing back online WCM post completion of its optimisation programme and subject to APT prices.

The Los Santos mine is by far Almonty’s lowest-cost producer. In FY15 Los Santos sold 97,768t of WO3 at an all-in cash operating cost of US$150/mtu. The mine’s head grade was 0.32% and recovery 60.0%.

Wolfram Camp Mine

As a result of the very low tungsten prices experienced throughout Q216, Almonty’s management decided to cease production from WCM in Q216 while it completes the optimisation programme that has been running for the past year. For reference only, WCM’s last three operating quarters are detailed below. Almonty will re-start mining and milling operations as and when there is a sustained and improved outlook for APT.

Exhibit 2: Wolfram Camp Mine quarterly production metrics

Q415

Q116

Q216

Q1-Q2 Delta

Ore treated

t

74,634

48,078

25,819

-46.3%

WO3 produced

mtu

6,450

4,436

2,891

-34.8%

WO3 sold

mtu

5,859

6,230

3,086

-50.5%

Sales revenue

US$m

1.0

1.0

0.4

-60.0%

Cash processing costs

US$/mtu

248

354

435

22.9%

Cash mining costs

US$/mtu

83

111

103

-7.2%

All-in cash operating costs

US$/mtu

331

465

538

15.7%

Ore mined

t

26,037

24,006

0

N/A

Average grade of WO3 mined

%

0.20%

0.21%

0.00%

N/A

Average WO3 recovery rate

%

50.3%

48.20%

63.30%

31.3%

Source: Almonty Industries

Panasqueira, Central Portugal, 100% via Beralt subsidiary

The purchase of the Panasqueira tungsten mine in Portugal was completed in January 2016. Almonty acquired a 100% interest in Beralt Ventures, a holding company for the mine, from Japanese-owned Sojitz Tungsten Resources for €1.00. In connection with the purchase Almonty acquired €12.3m in debt owed by Sojitz in exchange for a cash payment of €1.0m on closing the deal and a promissory note issued by Almonty in the principal amount of €0.5m, bearing 4% per annum and maturing 29 December 2017.

Exhibit 3: Panasqueira quarterly production metrics (Q216: first quarter reported)

Q415

Q116

Q216

Ore treated

t

N/A

N/A

146,347

WO3 produced

mtu

N/A

N/A

15,701

WO3 sold

mtu

N/A

N/A

17,982

Sales revenue

US$m

N/A

N/A

2.5

Cash processing costs

US$/mtu

N/A

N/A

62

Cash mining costs

US$/mtu

N/A

N/A

138

All-in cash operating costs

US$/mtu

N/A

N/A

200

Ore mined

t

N/A

N/A

164,180

Average grade of WO3 mined

%

N/A

N/A

0.089%

Average WO3 recovery rate

%

N/A

N/A

80.0%

Source: Almonty Industries

We have modelled the mine based solely on 2014 operational data, such that the mine processes 0.75Mt of ore per annum at a WO3 grade of 0.13%, and recovers 79.6% of the contained tungsten trioxide into concentrate. We note there is no requirement for capital expenditure at the mine beyond maintenance capex totalling US$0.3m per annum. We use a 10-year mine life to value the mine, supported by 1.7Mt of proven and probable reserves and 9.5Mt of resources (all NI 43-101 compliant).

Sangdong, Korea, 100% owned via Woulfe Mining subsidiary

Final engineering design of the Sangdong processing plant has been underway since Almonty announced the appointment of specialist Korean engineering firm Korea Engineering Consultants Corporation, on 5 January 2016. Completing this design would pave the way towards obtaining the final surface permit required for construction to start at this brownfields mine site. With a contingent agreement in place with Korea Development Bank over two-thirds of Sangdong’s required capex, we look to Almonty to secure the remaining capex required; this itself is a requirement of the loan agreement. To assist with pre-development works for Sangdong, Almonty has appointed POSCO Engineering & Construction Co. as the pre-EPC (engineering, procurement and construction) contractor. Pre-EPC works are due to start in July 2016.

Valtreixal, NW Spain, 51% ownership, increasing to 100%

Almonty has increased its stake in Valtreixal from 25% to 51% over the last nine months, through a series of cash payments to SIEMCALSA, to a total of €1.4m, of which the latest instalment was €0.3m on 3 June. Almonty has an option, until 24 December 2016, to acquire the residual 49%, which would require three annual instalments of €0.75m from the initial exercise date.

Valtreixal is pre-development and has an NI 43-101 compliant reserve base (proven and probable) of 2.5mt at a WO3 equivalent (tungsten and tin) grade of 0.34% for 867,000mtu of WO3. Measured and indicated resources (inclusive of the aforementioned reserves) are 2.8mt of ore at 0.34% (WO3 equivalent) for 962,000mtu. Inferred resources are 15.4mt at 0.17% for 2,621,320mtu. Almonty intends to make a decision on filing for the necessary permits and is fine tuning its planning and budgeting for the potential build-out and commissioning of the Valtreixal mine to the extent it exercises its option to acquire the remaining 49% of the project. Subject to this, permitting and development is targeted for 2018.

Almonty to acquire 100% of ATC Alloys (Vietnam)

Almonty announced on 24 April that it had signed a heads of agreement to sell its Wolfram Camp Mine in Australia in return for shares of the buyer, ATC Alloys (ASX: ATA). ATC was formerly known as Hazelwood Resources. This deal, if it had completed, would have seen Almonty becoming 53% majority shareholder in ATC, a specialist downstream ferro-tungsten producer with a 60% JV interest in a newly completed plant in Vietnam. This deal, as stated in Almonty’s 30 May announcement, has been revised and now sees Almonty seeking a full takeover of ATC Alloys, while retaining its full ownership of the Wolfram Camp Mine. While not clearly accretive in terms of its current balance sheet value, the deal does bring in-house specialist downstream ferro-tungsten processing capacity, which diversifies Almonty’s business and provides an ability to supply to market a far higher-value ferro-tungsten product (end March 2016 price: US$23/kg or US$23,000/t). The takeover, upon successful completion, brings:

A 60% interest in the Vinh Bao ferro-tungsten plant in Vietnam.

4,000tpa of ferro-tungsten processing capacity.

A customer base of three.

The plant currently operates on a make-to-order production strategy. As of ATC’s last quarterly cash flow and activities report, dated 29 April for the period ending 31 March 2016, production occurred in January and February totalling 400 tonnes. No production occurred in February due largely to lunar new-year celebrations.

The ATC takeover bid is subject to the following conditions:

1:10.38 AII:ATC share ratio. Almonty will place these new shares on the TSX, subject to the usual regulatory approvals.

A 90% minimum acceptance by ATC shareholders.

Completion (3 June) of an interim financing by Almonty, via a brokered private placement, placing Almonty shares at C$0.30 each for gross proceeds of C$1.5m (before fees of 4%). This has now been secured.

Completion of a US$5.5m financing, to be met via equity, equity-linked instruments (eg convertible notes), debt or a mixture thereof.

Subject to all financings, regulatory approvals and permits being successfully met or obtained, Almonty will bring in-house a state-of-the-art ferrotungsten production plant in Vietnam, along with three Japanese ferrotungsten customers. The status of these customer agreements are as follows:

Two of the three customer contracts have recently been extended to August 2016 and March 2017.

The third contract has now been re-activated after a brief pause (ending in June) and runs to November 2016.

Through conversations held with Almonty’s management we understand that ATC’s customer base will be maintained so as not to compromise the existing customer agreements Almonty has over its existing primary tungsten production. We also understand that production of ferrotungsten will be derived from the processing of WCM concentrates. Management expects to complete the deal during Q416 (ie by end September 2016).

Valuation assumptions and base case valuation

Our previous SOTP valuation was based on a discounted cash flow approach, which we now migrate to our standard dividend discount flow (DDF) approach, this being effectively discounted free cash flow. We retain all production profiles from our last valuation of the company in September 2015 and add production from the Panasqueira mine purchased in early 2016. We have not included a DCF-type valuation of ATC Alloys and note that at 31 December 2015 the company recorded a net loss of A$4.4m, and a negative net asset value of A$2.5m. For the purpose of our model, we include the financial impact as though the acquisition completes at end Q416. We await Almonty’s guidance as to its strategy for returning the assets of ATC to profitability.

Tungsten price assumptions revised down

We have now adjusted our long-term tungsten price of US$325/mtu (US$260/mtu net of APT discount) down 8% to US$300/mtu (US$240/mtu net). We apply this price level flat across all Almonty’s mines and development stage projects.

Sangdong: 74% increase in reserves results in 64% increase in NPV

Sangdong is a past producing mine and its development is pivotal to Almonty remaining a going concern. We have updated our production model for this asset based on the findings of the recently updated feasibility study announced on 6 January 2016. On 26 July 2015 Almonty also announced a revised Sangdong NI43-101 reserve base of 7.9Mt at 0.45% WO3, a material increase of 78% over the previously stated compliant reserve base tonnage of 4.7Mt at 0.42% WO3 (see following exhibit). This revised reserve estimate has the material effect of extending Sangdong’s mine life from the nine years given in the updated FS to 13 years. The revised 6 January feasibility study indicates a reduction in grades mined and a comparison of the old mine’s scheduled tungsten grades with those in the new FS are provided in Exhibit 5.

Exhibit 4: Revised Sangdong reserves and resources

 

AKT 31 October 2015

 

AKT 16 July 2016

 

 

 

Tonnes

Avg grade WO3

Contained WO3

 

Tonnes

Avg grade WO3

Contained WO3

 

% change

 

 

Tonnes

mtu

 

 

Tonnes

mtu

 

 

Reserves

 

 

 

 

 

 

 

 

 

 

 

Proven and probable

4,744,000

0.42%

19,925

1,992,480

 

7,896,000

0.45%

35,532

3,553,200

 

78.3%

Mineralised tailings

0

0.00%

0

0

 

0

0.00%

0

0

 

 

Stockpiles

0

0.00%

0

0

 

0

0.00%

0

0

 

 

Total

4,744,000

0.42%

19,925

1,992,480

 

7,896,000

0.45%

35,532

3,553,200

 

78.3%

 

 

 

 

 

 

 

 

 

 

 

 

Resources (inclusive of reserves)

 

 

 

 

 

 

 

 

 

 

 

Measured

0

0.00%

0

0

 

0

0.00%

0

0

 

 

Indicated

5,182,000

0.49%

25,392

2,539,180

 

8,029,000

0.51%

40,948

4,094,790

 

61.3%

Total

5,182,000

0.49%

25,392

2,539,180

 

8,029,000

0.51%

40,948

4,094,790

 

61.3%

 

 

 

 

 

 

 

 

 

 

 

 

Inferred Mineral Resources

 

 

 

 

 

 

 

 

 

 

 

Inferred

52,765,000

0.44%

232,166

23,216,600

 

50,686,000

0.43%

217,950

21,794,980

 

-6.1%

Source: Almonty Industries 26 July announcement. Note: Percentage change worked from tabulated tonnage figures.

Sangdong’s updated reserve estimate is sufficient to extend its mine life by a further five years over the original eight-year mine plan. As such, the extended mine and improved profits that result have now been factored into our model. The following exhibit provides a comparison between the previous grades used and the new lower grades detailed in the updated feasibility study, announced on 6 January 2016. Note: the effect of lowering the grade at Sangdong is mitigated by the extended mine life now envisaged for the project.

Exhibit 5: Change in Almonty’s estimate of Sangdong’s WO3 mined grade

Year

1

2

3

4

5

6

7

8

OLD WO3 grade estimate

0.73

0.68

0.52

0.55

0.56

0.61

0.53

0.48

NEW WO3 grade (6/1/16 updated FS)

0.44

0.49

0.44

0.48

0.45

0.43

0.29

0.33

Change

-39.89%

-28.05%

-15.38%

-13.36%

-20.21%

-29.39%

-45.69%

-30.67%

Source: Technical Report on The Sangdong Project, announced 6 January 2016

We have also adjusted the capex profile of the project, chiefly due to rescheduling of the US$68.4m capex over two years – 2016 (US$32.1m) and 2017 (US$33.5m) – with the remaining working capital amount of US$2.8m to be used in 2018 as production ramps up. Other than for a 1% increase in the recovery factor used, from 80% to 81%, and very minor changes to some operating costs, no other operating factor has been significantly changed.

Mine production profiles

We have retained our production and cost profiles for Los Santos, Wolfram Camp and Valtreixal projects and adjusted the development stage Sangdong for the above FS changes. The main mining assumptions for all Almonty’s mines and projects are given in the following exhibit.

Exhibit 6: Basic mining inputs

Parameter

Unit

Los Santos

Panasqueira

WCM

Valtreixal

Sangdong

Throughput

ktpa

510

750

350

500

640

WO3 grade

%

0.29

0.20

0.21

0.23

0.41

Recovery

%

62.5

79.6

65.0

74.8

81.0

Life of mine

Years

present - 2021

present - 2027

present - 2020

2019 -2027

2018 - 2026

Source: Almonty Industries and Edison Investment Research

The resultant life-of-mine production profile for all these projects is given in the following exhibit.

Exhibit 7: Almonty production profile by project

Source: Edison Investment Research

The development of Sangdong would be transformative for the company, and bring back on line one of the world’s largest tungsten mines. Sangdong has average projected cash costs of C$151/mtu and should achieve an average gross margin around 50% over life of mine. The following exhibit gives a production weighted cash cost figure for Almonty of C$193.1/mtu. The tungsten (APT) price at US$220/mtu currently is therefore moderately above the level at which Almonty breaks even on costs.

Exhibit 8: Production weighted cash cost projections FY16e

Cash cost projections

2016e (C$/mtu)

WO3 production (ktpa)

Mine

 

 

Los Santos

197.4

95.6

Wolfram camp

119.5

3.4

Panasqueira

194.3

123.4

Sangdong (average over LOM 2018 to 2027)

178.8

170.7

 

 

 

Weighted average (excluding Sangdong)

194.5

 

Source: Edison Investment Research

Sangdong will require equity funding to draw down on KDB debt

Management has secured a contingent C$57.9m (KRW50bn) loan with Korea Development Bank. Drawdown on the loan is contingent on Almonty securing the remaining (c C$32m) in capex required to complete the build-out of Sangdong. Construction is due to start following completion of financing. For the purpose of our model, we assume that Almonty will raise the remainder of the capex required via equity at C$0.35 per share. However, it may be that Almonty secures this requirement via equity-linked instruments such as convertible notes. Initial development capex for the project currently stands at US$68.4m (C$90m) spread over 2016 (US$32.1m), 2017 (US$33.5m) and 2018 (US$2.8m).

We have included the above financing and equity raise assumption in our model. Raising C$32m at C$0.35 results in dilution of 55% (post-inclusion of ATC shares) through the issue of a further 91m shares. Raising such a level of equity in the current market environment remains a key risk, which could be reduced if the company secures funding via equity-linked instruments such as convertible loan notes. However, securing the remaining capex for Sangdong is key to this project’s development and to realising the full value of our base case valuation.

Valuation adjusted for W price, deals & SD equity raise

On the basis that Almonty achieves its stated objectives (including the 10.3m shares to be issued in connection with completing the takeover of ATC Alloys) and the production profile given in Exhibit 2, and tungsten prices average US$250/mtu over 2016, rally to US$300/mtu by start 2017 and are maintained until 2027 (the last year of our valuation period), we value Almonty’s shares on a fully diluted basis at C$0.77 (previously C$1.26, the main change being due to the equity raise price used for financing Sangdong reducing from a notional C$0.80 in our September note to C$0.35 now, plus the dilution caused by the ATC deal). Our valuation uses a 10% discount rate to reflect general equity risk. For a range of quantitative sensitivity analyses please see the following section.

Our valuation includes interest payments related to Almonty’s existing and forecast debt.

Based on the aforementioned valuation assumptions and production profiles, the theoretical distribution of earnings and ‘dividends’ to investors from 2016 to 2027 is C$0.77 per share, as shown (as the initial data point on the green DDF line and read off the y-axis) in the following exhibit.

Exhibit 9: Edison’s estimate of the theoretical DPS and EPS flow to investors 2016-27e

Source: Edison Investment Research

First-pass valuation of ATC

Until the ATC deal completes and Almonty consolidates the 60% interest it will own in the Vinh Bao plant, we keep our valuation of this asset separate from our base case. We note that at 31 December 2015 ATC Alloys recorded a net loss of A$4.4m and a negative net asset value of A$2.5m. For the purpose of our model, we have included the financial impact as though the acquisition completes at end Q416. We have reviewed third-party unaudited data on the ATC Alloys operation in Vietnam and consider the value derived from these data as relatively neutral to our overall valuation, adding a tentative C$0.05 per Almonty share. This valuation is based on Almonty enforcing stricter control over costs at the Vinh Bao plant in Vietnam and reaching 2,000t of ferro-tungsten (FeW) by 2017 at a US$22,000/t FeW price (equivalent to current spot), rising to US$26,800/t by 2018. The average all-in sustaining costs over the life of mine are stated to be US$23,972/t (A$32,529/t at an A$/US$ forex rate of 1.36). The Vinh Bao plant has a nameplate capacity of 4,000t of FeW, providing further upside to this asset’s valuation.

Sensitivities

Almonty’s current operational and financial performance is crucially linked to the prevailing tungsten price. Cost performance, careful balance sheet management and operational efficiency are key to weathering the current commodity downturn. Keeping costs low and being successful in financing Sangdong are, in our opinion, the two main challenges for Almonty’s management. We do not include the early-stage ATC Alloys valuation in these sensitivity analyses until greater clarity over the assets is announced to the market by Almonty.

Volatility in key resource currencies: C$, A$, US$ and the euro

The following exhibit shows the APT tungsten price (FOB Huangpu Port, China) in the currencies Almonty operates in. Notable is that the price-lows seen at the start of 2016 of c US$170/mtu have since rallied by 30% to a current level of US$220/mtu.

Exhibit 10: Tungsten price (FOB Huangpu Port, China) 2015 – present, in US$, A$ and C$ terms

Source: Bloomberg

Foreign exchange rate movements have been less volatile over the last six months, relative to the main period of natural resource currency devaluation (largely) occurring from start 2014 to mid-2015. Peak to trough over this 18-month period, the Canadian and Australian dollars devalued against the greenback by 31% and 37%, respectively. Year-to-date both the Canadian and Australian currencies have, unsurprisingly, reversed the trend, both rallying against the US dollar by c 9%. This strengthening has a negative impact on Almonty as costs denominated in the local currency become relatively more expensive, while sales, which are priced in US dollar terms, receive no benefit from local currency movements against the US dollar. In terms of financial impact, Almonty estimates that, based on Q216, a 5% change in the US dollar relative to the Canadian dollar reduces net income by around C$518,000; a 5% change in the Canadian dollar to the euro changes net income by C$148,000; and a 5% change in the Canadian dollar to the Australian dollar changes net income by around C$102,000. Similarly, for our valuation, the main forex sensitivity is the US$/C$ exchange rate; in Exhibit 11 we assess its impact on our base case valuation.

Exhibit 11: Sensitivity to percentage change in US$/C$ exchange rate

% change in forex (US$/C$)

-15%

-7.5%

0

10%

20%

NPV (C$)

1.04

0.99

0.77

0.64

0.53

Source: Edison Investment Research

Exhibit 12: Sensitivity to APT price

% change to long-term APT price of US$300/mtu

-20%

-10.0%

0

10%

20%

NPV (C$)

0.12

0.44

0.77

1.10

1.44

Source: Edison Investment Research

Financials

Almonty’s Q216 results had many moving parts, with group APT concentrate production up 15.4% q-o-q, driven primarily by Los Santos and Panasqueira. Production at WCM stopped early in Q216, as tungsten prices deteriorated further and management decided to stop ore production until a programme of optimisation at WCM completes. The price of APT decreased during the quarter, reaching a low of c US$165/mtu in late January 2016, but increased production (driven primarily by Panasqueira) resulted in group revenues increasing 27% q-o-q from C$8.2m to C$10.4m. However, APT prices have rallied strongly since, increasing c 33% to US$220/mtu.

Almonty’s second quarter operating costs increased by C$2.5m, which included a C$2.4m charge relating to a revaluation of its WCM inventory on hand, adjusting it for the current tungsten price. Excluding this charge, mine costs rose only 2.2% during the quarter despite a 15.4% increase in concentrate production and reflecting lower production costs resulting from the newly acquired Panasqueira operation (Q116: US$148/t).

Depreciation and amortisation during Q216 were affected by the closure of WCM and offset by the inclusion of amortisation at the Panasqueira mine. This resulted in a depreciation and amortisation charge of C$3.1m in Q216 (C$5.1m in H1).

All in, Almonty reported an H1 net loss of C$9.7m ($0.11 per share). This reflected H116 revenue of C$18.6m, mine production costs of C$19.6m, G&A of C$3.6m and C$1.1m in interest expense (a 110% increase due to increased long-term debt and outstanding convertible debentures). Other income totalled C$0.9m, which included a forex gain on the translation of US dollar revenues to euros and the revaluation of interest-bearing debt and non-interest bearing payables valued in US dollars.

End March 2016 net debt was C$45.1m, up by C$0.2m from end September 2015. Operating cash flow was C$0.3m. Cash outflows were C$5.6m (of which C$4.6m was capex), offset by new debt (C$4.3m net) and equity (C$3.7m).

Since end March, Almonty has announced a further C$1.5m in financing via the placement of 5m new shares at C$0.30, a A$0.5m convertible debenture financing in connection with the ATC takeover and a non-brokered private placement of 5.6m shares at C$0.35 for gross proceeds of C$1.96m. In all, we estimate end-September 2016 net debt of C$67m, rising to C$112.5m by end September 2017 (mainly due to the heavy flow through on 2016/17 of the Sangdong capex). This includes the recent Letter of Commitment with Korean Development Bank (announced on 26 July 2016, relating to C$57.9m [KRW50bn]) in debt for Sangdong’s development. A definitive agreement to confirm these funds is, among other things, dependent on Almonty securing the remaining Sangdong capex requirement as equity or equity-linked instruments. We assume the remaining C$31.4m required will be raised as equity at an Almonty share price of C$0.35. The loan interest rate has not been disclosed; for the purpose of our model, we have assumed that it bears 7.5% pa (the same rate we use to repay all other debts).

Most of the company’s debt is held under instruments with maturities between now and 2019; the first matures in July 2016 and relates to an unsecured C$1.6m loan with Spanish banks.

We noted at end Q116 that if APT prices did not improve from the then prevailing levels of c US$170/mtu, then our FY17 net funding requirement would rise to C$67m. Now with APT prices increasing by upwards of 30% since, our end year net debt forecast is well within the limits of Almonty’s debt servicing facilities. As long as tungsten prices stay at current levels or continue on this upwards trajectory we would not expect Almonty to have to return to market for additional financing other than that associated with project development and the agreed takeover of ATC Alloys.

We assume a successful completion to the ATC Alloys takeover bid (due to complete in Q416), and thus include the related assets and liabilities. We have also included the 10.3m Almonty shares to be issued to ATC shareholders in payment for the company. Additionally, assuming the Sangdong capex (US$68m/C$90m) will be 40% funded by equity, this would add a further 102m shares, bringing our fully diluted forecast number of shares to 218m.

We also include in our full year forecast the fair value at acquisition of Sojitz Tungsten Resources, relating to the Panasqueira mine. This was included in the March 2016 balance sheet, and the acquisition completed on 6 January 2016. Of note is the very large restoration provision (€34.9m) for Panasqueira, which, in the unlikely event of it being realised in the near future, would likely incur considerable financial stress on Almonty, and may affect its ability to manage its existing debt load.

Exhibit 13: Almonty’s balance sheet at September 2015 and March 2016 and ATC Alloys’ balance at 31 December 2015 (C$000s)

Almonty end-September 2015

Almonty end-March 2016

ATC Alloys
31 December 2015

Assets acquired

Cash and cash equivalents

866

3,503

830

Receivables (trade and tax)

2,989

2,636

625

Inventory

4,076

11,349

3,139

Other current assets

612

767

336

Plant and equipment

88,136

120,946

5,460

Deferred tax asset

4,036

4,484

0

Other assets (incl. AII tailings inventory + restricted cash)

16,633

19,955

37

Investments

179

0

276

Total assets

117,527

163,640

10,703

Liabilities assumed

Trade and other payables

(15,453)

(23,054)

(4,065)

Deferred revenue (AII) and other liabilities and accruals (ATC)

(1,697)

(2,164)

(213)

Debt (bank credit lines, current & non-current portions)

(46,229)

(51,869)

0

Restoration provision

(3,228)

(37,918)

0

Financial liabilities

(1,918)

(1,920)

(8,686)

Liabilities directly associated with and classified as held for sale

0

0

(40)

Total liabilities

(68,525)

(116,925)

(13,004)

Net assets

49,002

46,715

(2,301)

Total shareholders’ equity

49,002

49,715

Net debt (excl. bank credit lines)

(44,435)

(49,096)

830

Gearing ratio (debt/(debt+equity)

47.6%

49.7%

N/A

Source: ATC Alloys and Almonty interim company accounts. Note: Proposed acquisition of ATC was announced on 3 June and is expected to complete by end September 2016.

Exhibit 14: Financial summary

C$000's

2014

2015

2016e

2017e

2018e

2019e

Year-end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

29,609

36,142

63,427

111,485

180,940

247,686

Cash cost of Sales

(14,475)

(44,082)

(47,858)

(80,436)

(125,548)

(161,257)

Gross Profit

15,134

(7,940)

15,568

31,049

55,393

86,429

EBITDA

 

15,134

(7,940)

15,568

31,049

55,393

86,429

Operating Profit (before except.)

10,524

(16,485)

10,568

24,304

51,418

85,788

Exceptionals

0

(1,708)

(2,862)

0

0

0

Other

0

0

0

0

0

0

Operating Profit

10,524

(18,193)

7,706

24,304

51,418

85,788

Net Interest

(443)

(1,404)

(4,357)

(4,235)

(7,618)

(6,298)

FX/Other

(188)

(1,313)

0

0

0

0

Profit Before Tax (norm)

 

9,893

(19,202)

6,211

20,069

43,800

79,490

Profit Before Tax (FRS 3)

 

9,893

(20,910)

3,349

20,069

43,800

79,490

Tax

502

618

5,651

10,972

18,520

9,850

Profit After Tax (norm)

9,391

(19,820)

560

9,097

25,280

69,640

Profit After Tax (FRS 3)

10,395

(20,292)

9,001

31,040

62,320

89,339

Minorities

0

747

0

0

0

0

Average Number of Shares Outstanding (m)

37.2

51.8

101.2

213.0

213.0

213.0

EPS - normalised (c)

 

25.3

(36.8)

0.6

4.3

11.9

32.7

EPS - normalised and fully diluted (c)

25.3

(36.8)

0.6

4.3

11.9

32.7

EPS - (IFRS) (c)

 

28.0

(37.7)

8.9

14.6

29.3

41.9

Dividend per share (c)

2.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

51.1

-22.0

24.5

27.9

30.6

34.9

EBITDA Margin (%)

51.1

-22.0

24.5

27.9

30.6

34.9

Operating Margin (before except.) (%)

35.5

-45.6

16.7

21.8

28.4

34.6

BALANCE SHEET

Fixed Assets

 

62,452

108,984

218,094

280,259

311,782

318,782

Mine development

43,128

88,136

185,349

242,152

268,296

269,900

PP&E

0

0

0

0

0

0

Deferred tax asset

3,569

4,036

4,271

4,271

4,271

4,271

Tailings inventory

14,514

15,410

26,304

31,666

37,045

42,440

Other

1,241

1,402

2,171

2,171

2,171

2,171

Current Assets

 

24,095

8,543

48,142

9,454

13,101

37,167

Inventories

6,648

4,076

13,468

3,716

6,031

8,256

Receivables

1,980

2,989

4,753

4,287

5,619

6,899

Cash

14,847

866

28,471

0

0

20,561

Other

620

612

1,451

1,451

1,451

1,451

Current Liabilities

 

(17,230)

(32,578)

(50,757)

(63,467)

(63,774)

(39,356)

Payables

(9,654)

(15,453)

(24,245)

(6,159)

(9,908)

(12,843)

Short term borrowings

(6,465)

(15,428)

(24,604)

(55,399)

(51,957)

(24,604)

Other

(1,111)

(1,697)

(1,909)

(1,909)

(1,909)

(1,909)

Long Term Liabilities

 

(22,262)

(35,947)

(127,662)

(113,506)

(99,350)

(85,193)

Long term borrowings

(21,000)

(30,801)

(71,303)

(57,147)

(42,991)

(28,835)

Other

(1,262)

(5,146)

(56,359)

(56,359)

(56,359)

(56,359)

Net Assets

 

47,055

49,002

87,817

112,740

161,759

231,399

CASH FLOW

Operating Cash Flow

 

8,592

798

(2,515)

18,439

47,717

64,315

Capex

(7,252)

(16,116)

(44,810)

(63,549)

(30,118)

(2,245)

Acquisitions/disposals

0

0

0

0

0

0

Equity financing

(246)

(197)

35,209

0

0

0

Dividends

(1,001)

0

0

0

0

0

Other

69

610

0

0

0

0

Net Cash Flow

162

(14,905)

(12,116)

(45,109)

17,598

62,070

Opening net debt/(cash)

 

12,780

12,618

45,363

67,436

112,546

94,948

Other

0

(17,840)

(9,957)

0

0

0

Closing net debt/(cash)

 

12,618

45,363

67,436

112,546

94,948

32,878

Source: Almonty Industries accounts, Edison Investment Research. Note: For illustrative purposes, FY16 includes the 26 July KDB debt financing of C$57.9m with the remainder of the c C$90m Sangdong capex raised in equity at C$0.35 per share.

Contact details

Revenue by geography

100 King Street West
Suite 5700
Toronto, M5X 1C7
Canada
+1 647 438 9766

www.almonty.com

Contact details

100 King Street West
Suite 5700
Toronto, M5X 1C7
Canada
+1 647 438 9766

www.almonty.com

Revenue by geography

Management team

CEO: Lewis Black

CFO: Dennis Logan

Lewis has spent more than 10 years in the tungsten mining industry. He is a former chairman and CEO of Primary Metals as well as the former VP of the International Tungsten Industry Association (ITIA).

Dennis has more than 16 years of experience in corporate finance and M&A at a number of Canadian investment banks. He is a chartered accountant and a member of the Institute of Chartered Accountants of Ontario.

Management team

CEO: Lewis Black

Lewis has spent more than 10 years in the tungsten mining industry. He is a former chairman and CEO of Primary Metals as well as the former VP of the International Tungsten Industry Association (ITIA).

CFO: Dennis Logan

Dennis has more than 16 years of experience in corporate finance and M&A at a number of Canadian investment banks. He is a chartered accountant and a member of the Institute of Chartered Accountants of Ontario.

Principal shareholders

(%)

Almonty Partners

13.9

Deutsche Rohstoff

13.2

Heemskirk Consolidated

5.5

Fidelity Investments (Multiple portfolios)

3.5

D’Amato, D.G.

1.8

First State Investments

1.1

Black, L.

1.0

Companies named in this report

ATC Alloys (ASX: ATA), POSCO

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Wellington +64 (0)48 948 555

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

SCISYS — Update 16 August 2016

SCISYS

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