Salt plus potash plus iron equals value

BCI Minerals 7 February 2019 Initiation
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BCI Minerals

Salt plus potash plus iron equals value

Initiation of coverage

Metals & mining

7 February 2019

Price

A$0.15

Market cap

A$60m

A$1.4008/US$

Net cash (A$m) at 31 December 2018

36.6

Shares in issue

397.6m

Free float

63%

Code

BCI

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.7

3.7

(6.7)

Rel (local)

(3.4)

1.4

(9.1)

52-week high/low

A$0.17

A$0.13

Business description

BCI Minerals has two major assets in Western Australia, including a 100% interest in the Mardie salt and potash project and a royalty-type interest in the Iron Valley iron ore mine operated by Mineral Resources. It also has exploration tenements in iron ore and other minerals.

Next events

HY19 results

February 2019

Q319 activity report

April 2019

Mardie DFS

Q4 CY19

Mardie investment decision

Q1 CY20

Analyst

Charles Gibson

+44 (0)20 3077 5724

BCI Minerals is a research client of Edison Investment Research Limited

BCI Minerals (BCI) has two major assets in Western Australia, namely its 100%-owned Mardie salt and potash project and a royalty interest in a producing iron ore mine (Iron Valley). Positive cash flow from the latter, in conjunction with c A$37m in cash, is being deployed to develop the former. Notwithstanding tough conditions in the iron ore market, our base case valuation of BCI is more than double its share price.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/17

64.3

6.0

1.9

0.0

7.9

N/A

06/18

33.0

(16.9)

(4.3)

0.0

N/A

N/A

06/19e

52.5

(5.6)

(1.4)

0.0

N/A

N/A

06/20e

57.6

(3.6)

(0.5)

0.0

N/A

N/A

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

Mardie is unique long-life asset

The results of BCI’s Mardie pre-feasibility study (PFS) were published on 1 June, which showed a project internal rate of return of 20% and a pre-tax NPV10 of A$335m. While this implies a prima facie pre-tax valuation of 84 Australian cents per existing BCI share, a fully diluted/risked analysis relative to its PFS stage of development implies an immediate valuation of 5.84–11.15c per share.

Mardie is the key to valuation upside

Despite its relatively low (risked) valuation relative to that of Iron Valley currently (Exhibit 1), Mardie offers by far the greatest upside potential. In general, for mining companies developing projects, the lowest valuations are encountered at the PFS stage. A definitive feasibility study (DFS) with the same conclusions as its PFS should immediately increase Mardie’s valuation to c 18.22c/sh. Optimisation of expanded PFS parameters (page 21) could also add 9.32c per share. Thereafter, the passage of time naturally increases our valuation to as high as 68.46c per share in FY28. In the shorter term it increases to c 60c/sh in the event of either reduced assumed equity funding of the project (page 21) and/or increasing the price at which that funding is assumed to occur. Investors should note that all these calculations treat Mardie as if it were a mining project. In fact, owing to its nature, its characteristics are closer to an agricultural project, with vastly reduced geological, metallurgical and engineering risk, albeit partly offset by increased climactic risk. Notable is management’s track record of value-adding credentials, from the development of Iron Valley in 2014 to the sale of Kumina in 2018.

Valuation: 30.66c per share

Considering its royalty interest in the Iron Valley mine, along with cash and corporate items, we value BCI at 19.51 Australian cents per share, to which should be added an immediate 5.84–11.15c for the value of its Mardie salt and sulphate of potash (SOP) project and a further 2.43c for the value of its Buckland iron ore assets. While funding options for Mardie will be investigated in more detail as part of a DFS, the PFS has confirmed the viability of the project and may well prove a catalyst for partnership discussions.

Investment summary

Company description: Iron, salt and SOP in the Pilbara

BCI Minerals (formerly BC Iron) is an ASX-listed resources company, with interests in salt, potash and iron ore projects in the Pilbara region of Western Australia. After being incorporated in 2006, it entered into the Nullagine joint venture with Fortescue Metals in 2009, which operated for five years and resulted in BCI paying dividends to shareholders in FY12–14. Nullagine was suspended in December 2015. However, during this period, BCI acquired Iron Ore Holdings, including the key assets of Iron Valley, Buckland and Mardie. Three years later, it also acquired a number of under-explored West Pilbara tenements from Mineralogy Pty including Kumina. Iron Valley has since been developed into a mine, operated by Mineral Resources (MIN) and from which BCI derives a royalty-type income stream. After completing a positive PFS on Mardie in June 2018, BCI made the decision to concentrate on its salt assets and commenced a formal divestment process of its iron ore assets, starting with Kumina, which it sold for A$35m in December 2018.

Valuation: Share price approximates Iron Valley valuation alone

A summary of our valuation of the constituent parts of BCI is as follows:

Exhibit 1: Sum-of-the-parts valuation of BCI

Asset

Base case valuation (Australian cents per share)

Iron Valley

12.77

Mardie

11.15

Cash

8.77

Deferred Kumina consideration

1.38

Corporate

-3.40

Sub-total

30.66

Buckland (Bungaroo South)

2.43

Total

33.09

Asset

Iron Valley

Mardie

Cash

Deferred Kumina consideration

Corporate

Sub-total

Buckland (Bungaroo South)

Total

Base case valuation (Australian cents per share)

12.77

11.15

8.77

1.38

-3.40

30.66

2.43

33.09

Source: Edison Investment Research

Financials: Net cash of A$37m and cash-flow positive

BCI reported net cash on its balance sheet of A$36.6m at end-December 2018 after receiving A$27m from the sale of the Kumina assets in December. The next 24 months will be characterised by higher c A$25m investment in Mardie. This will be partly offset by a higher iron ore price (see pages 11–16). Nevertheless, it will be more than sufficient to carry the project to a final investment decision in early CY20. Within this context, we estimate that BCI will finish FY19 with A$27.8m in net cash on its balance sheet.

Sensitivities: Equity component and price key to BCI valuation

Although it is not the largest component of the whole, it is parameters relating to Mardie to which our valuation of BCI is most sensitive. Over the life of the operation, we estimate that adoption of expanded operating parameters at Mardie (see page 21) increases our valuation by 9.32c/sh, while a ±10% change in forex changes the valuation by ±7.20c/sh, ahead of a ±10% change in the salt price, which changes our valuation by ±5.22c/sh and a ±10% change in the SOP price, which changes our valuation by ±1.48c/sh. While the passage of time increases our valuation to as high as 68.46c per share in FY28, in the shorter term it increases to c 60c/share in the event of either reduced assumed equity funding of the Mardie project and/or increasing the price at which that funding is assumed to occur.

Company description: Salt, SOP and iron in the Pilbara

Company history

Incorporated in July 2006, BCI Minerals (formerly BC Iron) is an ASX-listed resources company, with interests in iron ore, salt, potash, gold and base metals projects, concentrated in the Pilbara region in Western Australia. BCI began operations by conducting drill tests in its fully owned Nullagine iron ore project in 2007 and completed a feasibility study in July 2009. Subsequently, in August 2009 BCI entered into the Nullagine joint venture (NJV) with Fortescue Metals Group (FMG), commencing production the following year. The NJV operated successfully for five years and delivered c A$100m in dividends to shareholders before the project was suspended in December 2015 owing to low iron ore prices. Later, in March 2017, BCI’s 75% interest in NJV was sold to FMG in return for a royalty on 75% of all future ore mined from Nullagine.

An important transaction was concluded in 2014, when BCI acquired Iron Ore Holdings (IOH) via an off-market takeover offer. The key assets transferred through this takeover were Iron Valley and Buckland (both being advanced iron ore projects in the Pilbara), Mardie and a selection of other exploration tenements.

In 2016, BCI adopted a new strategy focused on growth and portfolio diversification. As a consequence, in the beginning of 2017, it entered into a JV with Kalium Lakes for the Carnegie Project with the objective of becoming a significant player in the emerging Australian potash industry. BCI secured the rights to earn up to 50% interest in this potash exploration project by funding the exploration and development expenditure required to feasibility study level. At the same time, in July 2017, it announced the results of a scoping study into its 100%-owned Mardie salt project in the Pilbara region. Then, in September 2017, it secured a number of under-explored West Pilbara iron ore tenements from Mineralogy Pty including Kumina.

The 2018 calendar year proved to be a transformational one for BCI. In June, it announced a positive pre-feasibility study on Mardie (now incorporating both salt and SOP production potential), after which it commenced a DFS. The same month, it also completed a maiden JORC mineral resource estimate at Kumina of 115.2Mt at a grade of 58.0% Fe, after which it received expressions of interest from ‘multiple’ parties seeking to acquire assets in the region. In August therefore, BCI announced that it had commenced a formal divestment process for its iron ore asset portfolio, including Iron Valley, Kumina, Bungaroo South, Cape Preston East port rights and a number of other iron ore exploration tenements. Simultaneously, it announced that its primary focus will henceforth be developing a salt and potash business, focusing on Mardie.

In October, BCI announced the sale of Kumina for A$35m (A$27m in cash plus A$4m deferred until the first export of iron ore from the tenements, with a further A$4m deferred for another 12 months thereafter), which equates to 37.4 US cents per tonne of contained iron at Kumina (right at the top of Edison’s potential valuation range, taking into account both grade and potential blue-sky exploration upside), or 8.8 Australian cents per BCI share. The sale completed in December, whereupon BCI duly received its A$27m initial consideration such that its net cash position at that point was c A$37m.

At the current time therefore, BCI is receiving earnings from Iron Valley, while simultaneously advancing its Mardie project and seeking buyers for Buckland.

Strategy

BCI’s stated intent is now to develop a salt and potash business as its primary focus in the near term. Funds realised from the iron ore divestment process will enable BCI to rapidly progress the Mardie DFS and maintain 100% ownership through to a target final investment decision date in early 2020.

Geography

The location of the company’s principal assets is presented in Exhibit 2 below.

Exhibit 2: BCI’s mining assets in Australia

Source: BCI Minerals

BCI’s key mining projects

Mardie Salt and SOP project

The Mardie project is located on the West Pilbara coast, between Dampier (95km north-east of Mardie) and Onslow (90km south-west of Mardie), which is Australia’s major solar salt production and export region, including operations such as Rio Tinto’s Dampier Salt (the world’s largest single salt exporter). BCI intends to develop the project into a long-life operation, producing both salt and SOP via the solar evaporation of seawater.

Exhibit 3: Mardie salt project location

Source: BCI Minerals

The region is favourable for oceanic salt extraction operations because of its access to natural channels that feed seawater to the project area and a low-permeability, flat landscape that is suitable for constructing evaporation ponds. The region’s windy, hot and dry climate is classified as ‘grassland’ by the Bureau of Meteorology, which means it experiences hot weather throughout the year with a summer drought. The Mardie tenements, in particular, comprise extremely flat mudflat topographies behind the coastal mangroves. The project has five granted exploration licences and one exploration licence application, encompassing a total area of 912km2.

A scoping study released in July 2017 by BCI demonstrated positive results for developing a 3–3.5Mtpa operation to produce high-purity, industrial-grade sodium chloride salt from seawater for onward sale to the chlor-alkali industry. The study assessed a 20-year mine life, although the project could potentially operate (effectively) almost indefinitely, given that the input resource is seawater. Capital expenditure was estimated at A$225–255m with an accuracy of ±35%. Operating costs were expected to be c A$19–21/t on a free-on-board (FOB) basis, which generated a pre-tax NPV of A$290–380m over a 20-year life at a 10% discount rate and a pre-tax IRR of 25–27%. The study assumed the export of salt via the Cape Preston East Port. In due course, it was observed that Mardie could also benefit from synergies with BCI’s Carnegie project, which has a similar pond design principle and processing and marketing dynamics.

Mardie PFS

Background and scope

The results of the Mardie PFS were announced in June 2018. As per the July 2017 scoping study, the ultimate aim of the project was presumed to be the production of 3.5Mtpa of high-purity, industrial-grade sodium chloride salt and 75ktpa of SOP from seawater via solar evaporation, crystallisation and purification. The salt was then presumed to be exported via a purpose-built transhipping operation at BCI’s planned Cape Preston East Port (note: SOP, see below, was presumed to be exported from the existing general cargo wharf at Port Dampier). The study was conducted in conjunction with at least 18 external consultants, including Salt Partners, Roskill and Braemar Shipping Services, with the objective of improving the scoping study design footprint, reducing technical and approval risks and evaluating the viability of a SOP processing flowsheet in addition to the salt one. A range of field studies, sampling and test-work programmes and surveys were undertaken regionally and locally to define the project design criteria and operational and capital cost estimates were undertaken to an accuracy of -15% to +25%, qualifying it as equal to, or better than, an AACE Class 4 estimate, as defined under Association for the Advancement of Cost Engineering Recommended Practice Number 18R-97 (ie a pre-feasibility study).

Geotechnical and hydrogeological

The Mardie site has all the natural hydrological, climatic, topographical and geotechnical prerequisites for the production of salt and SOP from solar evaporation. In addition, it is also ideally situated to access Asia’s key growth markets.

Critical geotechnical requirements for the construction of 89km2 of concentrator and crystalliser ponds are:

The presence of a low permeability clay layer that extends across the proposed pond footprint in order to reduce product losses via seepage and eliminate the need for pond liner.

The availability of material suitable for constructing low-permeability walls in order to eliminate the need to source and transport suitable materials to site.

The tests conducted in the context of the PFS have allowed BCI to conclude that a low-permeability layer is extensive across the proposed pond footprint and that construction materials for the pond walls are available.

Similarly, hydrogeological studies have concluded that:

Surface water flows from land to sea are minimal and, such as they are, may be accommodated by three sets of diversion bunds and three diversion channels through the project area to ensure that water flows are managed effectively, without affecting ponds or project infrastructure.

The project is protected from potentially damaging sea to land water movements (eg storm or cyclone-induced surges and waves) by two lines of defence, namely the island archipelago system directly adjacent to the coast and the mangrove swamps lining the coast, and the fact that the ponds will be located 2–3km inland.

Mining and processing

Sodium chloride salt

A seawater pump will extract 132 billion litres (132 x 109 litres or 132Gl – approximately 135.8Mt) of seawater, containing c 5.4Mt of salts (containing c 4.2Mt of sodium chloride and 135kt of SOP equivalent) per year and transfer it to the first of eight concentrator ponds. The seawater will then progress from Pond 1 to Pond 8 over a period of approximately one year (similar to lithium salt extraction from the South American salars), at which point solar evaporation will have reduced it to 12% of its original volume and its specific gravity will have increased to 1.216g/cm3 (ie close to the point of salt crystallisation). From Pond 8, 18Gl of concentrated seawater (augmented by a recycled stream from the SOP production circuit) containing 4.8Mt of sodium chloride per year will be deposited into a series of 12 crystalliser ponds, from where 3.8Mtpa of raw salt will be crystallised at specific gravities of 1.227–1.250g/cm3. At a specific gravity of 1.250g/cm3, the crystallisers are drained and raw sodium chloride salt is dry harvested for treatment in the salt purification plant. The bitterns drained from the crystallisers total 6.0Gl per year and contain 1.0Mt of residual sodium chloride salt and 130kt of SOP equivalent (see below). The dry harvested salt is then hauled to a 700tph purification plant, designed by Salt Partners, using its proprietary HYDROSAL-XP salt purification process to minimise product losses (c 2–3% cf 20% via traditional methods) and maximise contaminant rejection to result in a high product purity of 99.7% on a dry basis. Finally, product is stockpiled at Mardie for up to six months to assist in dewatering and product quality. Total product losses of 7% have been assumed in the study, from harvesting to export, to result in annual saleable production of 3.5Mtpa (note that the DFS is aiming to increase this by 14.3% to 4.0Mtpa).

SOP

The 6.0Gl of bitterns containing 1.0Mt of sodium chloride salt and 130ktpa of SOP equivalent (see above) is pumped to four parallel streams of nine sequential secondary crystallisers. The first four of the nine crystallisers will be primarily employed in precipitating mainly sodium chloride salt (albeit with sufficient contaminants to make it unsuitable for immediate purification), which is then re-dissolved in seawater before being returned to Concentrator Pond 7 (see above). Crystallisers 5 and 6 will crystallise a mixed salt with a low potassium content that is considered waste. Kainite-type mixed salts will then form in Crystallisers 7 and 8, with the final Crystalliser 9 being allowed to hold surplus liquor. The Kainite-type mixed salts are then dry harvested from each crystalliser and hauled to the stockyard and stockpiled separately, whence they are blended to provide a consistent feed for the SOP plant. The SOP plant crushes, screens and re-dissolves the Kainite-type mixed salts and subjects them to a solid/liquid separation process to remove the majority of the sodium chloride (which is returned to the crystallisers) to form a Schoenite mother liquor, which then proceeds to decomposition, washing, concentration and drying to become SOP product at a rate of 75ktpa for the purposes of the PFS, but potentially up to 100ktpa, with less conservative recovery assumptions, which is the aim of the DFS currently underway. SOP destined for overseas markets will then be bulk packaged on site and trucked to the general cargo wharf at Port Dampier for export in sea containers. Sales into the domestic Australian market will occur via road transport and/or coastal shipping.

Waste disposal

Waste, primarily in the form of bitterns and low potassium mixed salts from Crystallisers 5 and 6, will be transferred to a holding pond for dilution in seawater, prior to pumping via pipeline over the tidal flats into deeper water, where the waste liquid will be released through a purpose-designed diffuser.

Logistics

The PFS assumed that the proposed Cape Preston East Port (CPE) will be constructed by BCI subsidiary, Cape Preston Logistics Pty (CPL) and will be expanded for salt export in addition to iron ore export. Within this context, product stockpiles at Mardie were presumed to be connected to CPE via a 19km sealed private project access road, which connects with a 48km section of BCI’s proposed sealed private road. However, management is also pursuing government support for the development of an export jetty at Mardie as an alternative to trucking salt c 70km to CPE. Internally, management expects this initiative to reduce opex costs by c A$4/t (or c 20%) as a result of eliminating haulage, operational simplifications and less process duplication, albeit at the expense of a c A$65m increase in capex. We understand the Mardie export jetty solution will form the basis of the DFS. The economic consequences of such an initiative are considered in the sensitivities section, on pages 20–22, below.

Infrastructure

Critical ancillary infrastructure for the development of the project may be summarised as follows:

A 26km site access road.

Prefabricated, modular administration facilities.

Maintenance workshops (also serving as cyclone protection).

Laboratory.

A village, comprising a nominal 100 accommodation units, mess etc and supporting central infrastructure (eg waste water treatment plant, communications etc).

A precast, concrete boat launching ramp.

Local diesel generation for the seawater pump station.

Mobile fleet, including raw salt harvesters, graders, raw salt haul trucks and product loading equipment.

A desalination plant to provide fresh process and drinking water.

Weighbridge.

A fenced landfill site.

Timing

The project has a five-year development timeline, from the completion of the PFS to first salt production in 2023. BCI plans to optimise the development timeline during the BFS and also to investigate opportunities to accelerate the schedule. To date, however, the project is planned to occur on a ‘just-in-time’ basis, commencing in early 2020. Key scheduled milestones are as follows:

April 2020 to October 2021: concentration ponds completed and transferred into service.

June 2021: first primary crystallisers ready for service and nominal 400mm salt floors to be prepared over the following 12–18 months to December 2022, before the first raw salt harvest six months later in June 2023.

H2 CY23: Completion of the salt purification plant.

2023: Secondary crystallisers for SOP production constructed and salt floors prepared over the following year, ready for feed into the SOP plant in H1 CY25.

Environmental and permitting

Key features of the Mardie project are that it is set back from the coast, thereby avoiding coastal vegetation as well as affording protection from cyclone-induced storm surges. The final environmental surveys relating to the project are currently underway. During the course of the Mardie PFS, at least 14 environmental studies were conducted, which resulted in the following modifications to the project compared with its original scope:

A substantial reduction in the size of the project area via the surrender of a tenement to avoid mangroves in the Robe River delta.

A further 3,000 hectare (29%) reduction in the project area to avoid algal mats.

Minimisation of clearing, dredging and other maritime disturbance.

Relocation of the western pond walls landward, with a 300m buffer between these walls and the mangrove algal mats, in order to minimise direct and secondary, indirect effects on the ecosystem.

Relocation of the western pond walls to allow algal mats to migrate landwards towards the seawall and along corridors in response to predicted sea level rises over the life of the project.

Installation of drainage corridors, designed to maintain hinterland and tidal creek flows (as much of nutrients as water) and connectivity.

Otherwise, a number of approvals will be required from a range of both State and Federal government departments, including the Department of the Environment & Energy (DOTEE), the Department of Water & Environmental Regulation (DWER), the Department of Mines, Industry Regulation & Safety and the Department of Planning, Lands & Heritage. Significantly, during the December 2018 quarter, the Environmental Protection Authority (EPA) approved the Mardie project’s environmental scoping document, which sets out the scope and content of the environmental review document (ERD) required to be submitted as part of the approval process. On the basis that the ERD is submitted by April 2019, the EPA endorsed a timeline whereby the EPA’s assessment report is released by the end of 2019, allowing full Ministerial approval by early 2020.

Social

The licences comprising the Mardie project are covered by the claim areas of the Yaburara Mardudhunera and Kuruma Marthudunera native title claim groups. BCI has longstanding and strong relationships with both groups and existing land access deeds. In addition, it has completed a detailed heritage survey during the course of its PFS, in order to ensure the minimum disruption of sacred sites.

During the December 2018 quarter, BCI completed a positive heritage survey with the Yaburara and Mardudhunera people that covers approximately 90% of the project footprint. The result of the survey is that BCI has now received the required heritage-related consents to proceed with construction and operation activity in these areas, subject to relocation of some artefacts and preservation of a heritage site, which does not affect the planned project footprint. The company plans to complete a further heritage survey with the Kuruma Marthudunera people in the March 2019 quarter to cover the remaining 10% of the project’s footprint area.

Competitive advantages

Mardie has four important competitive advantages over its rivals:

A key barrier to entry for all solar evaporation salt projects is location. In this particular case, Mardie has secured a rare combination of a low-permeability, flat landscape in a hot and dry climate, close to existing infrastructure.

Current cost estimates derived from the pre-feasibility study suggest that, including SOP as a by-product, Mardie will be at the bottom of the global cost curve for salt production.

On the coast of Western Australia, Mardie is projected to have a US$15/t freight cost advantage over Mexico (the world’s eighth largest producer) in shipping to Asia.

Mardie will have a competitive advantage over domestic SOP producers that are typically located 800–1,000km from ports.

Iron Valley

Iron Valley is an operating mine located in the Central Pilbara region that has been in production since October 2014. It has a relatively simple deposit geometry with a low waste to ore stripping ratio and produces both lump and fines that are transported to Port Hedland by trains and exported via Utah Point. At June 2018, it had reserves and resources capable of supporting a simple direct shipment operation with a life of c 13 years at current production rates of c 7.5Mtpa.

Exhibit 4: Iron Valley mineral resource estimate

Classification

Cut-off (% Fe)

Mt

Fe (%)

Ca Fe (%)

AI2O2 (%)

SiO2 (%)

P (%)

LOI (%)

Measured

50

92.0

57.8

62.6

3.2

5.4

0.2

7.7

Indicated

50

79.6

58.4

62.9

3.3

5.2

0.17

7.1

Inferred

50

26.1

57.8

61.3

3.9

6.6

0.14

5.6

Total as at 30 June 2018

50

197.8

58.1

62.6

3.3

5.4

0.17

7.2

Total as at 30 June 2017

50

229.9

58.4

62.8

3.2

5.2

0.17

7.0

Source: BCI Minerals. Note: 100% BC Iron, subject to sale agreement with MIN.

Exhibit 5: Iron Valley ore reserve estimate

Classification

Cut-off (% Fe)

Mt

Fe (%)

Ca Fe (%)

AI2O2 (%)

SiO2 (%)

P (%)

LOI (%)

Stockpiles (Proven)

54

5.2

56.1

60.1

3.7

8.3

0.14

6.6

Proven

54

56.6

58.4

63.3

3.1

4.6

0.19

7.7

Probable

54

33.6

58.6

63.1

3.2

5.0

0.16

7.2

Total as at 30 June 2018

54

95.4

58.4

63.1

3.1

5.0

0.18

7.4

Total as at 30 June 2017

54

113.0

58.7

63.3

3.0

4.8

0.18

7.3

Source: BCI Minerals. Note: 100% BC Iron, subject to sale agreement with MIN.

Until August 2014, Iron Valley was a part of IOH and had a mine gate sale arrangement with MIN whereby the latter bore the operating expenses and purchased Iron Valley product at prices linked to MIN’s realised sale price – an arrangement that BCI retained after its acquisition of IOH in October 2014 (albeit with minor amendments). Note that BCI retains ownership of the tenements and certain statutory obligations, including payment of government, state and third-party royalties. The arrangement with MIN effectively means that BCI receives a royalty-type income stream from Iron Valley. Sales and earnings figures attributable to BCI from Iron Valley since 2014 have been as follows:

Exhibit 6: Iron Valley production and sales

Iron Valley  

FY15

FY16

FY17

FY18

Production per year (wmt*, millons)

2.83

6.5

8.0

6.1

Revenue from Iron Valley to BCI (A$m)

18.8

39.9

63.5

33.0

EBITDA** from Iron Valley to BCI (A$m)

4.1

10.2

16.0

7.9

Source: BCI Minerals. Note: *wmt denotes wet metric tonnes; **company calculated.

Until recently, BCI’s received royalty was based on MIN’s received price for Iron Valley iron ore, whereas its paid royalty to the State Government, in particular, was based on an indexed price – a mechanism that gave rise to apparent anomalies and subsequent adjustments to BCI’s net income from Iron Valley. To correct this income volatility, BCI management engaged with State Government in the June quarter of 2018 and negotiated an agreement to alter the calculation of its paid royalties from an indexed price to a received price basis – with the result that net income from Iron Valley to BCI in recent quarters appears much smoother than in previous quarters and to approach an A$1/t approximation relative to wet metric tonne production.

Logistics upside

MIN is seeking to implement an enhanced logistics solution for Iron Valley known as the Pilbara Infrastructure Project, which comprises an innovative 330km lightweight, narrow gauge rail transport system connecting to automated port infrastructure at Port Hedland with fully autonomous c 120t payload shuttles. Once operational, potential gains would include lower operating expenses and doubled production rates to 15Mtpa, leading to a direct benefit to BCI in the form of a corresponding increase in royalty payments as well as an indirect benefit in the form of Iron Valley’s becoming a more economically efficient operation.

Once appropriate state approvals have been received, construction of the project is likely to take 18 months before the system becomes operational. Note that for the purposes of our sensitivities’ sections on pages 20–22, in which we consider the valuation implications of a doubling of the sales rate at Iron Valley, we assume that construction of the Pilbara Infrastructure Project would be complete at the end of FY20, that commissioning and ramp-up would occur in FY21 and that full capacity will be reached in FY22.

Terminal market background

The salt market

Sodium chloride

According to the US Geological Survey, Australia was the seventh largest producer of salt in the world, in 2015, after China, USA, India, Germany, Canada and Chile. In crude terms, China accounts for 25.9% of global production of c 270Mtpa, followed by the USA with 16.7%. The next six largest producers (including Australia) produce c 4–7% each of global production. Within this context, Mardie’s proposed output of up to 4.0Mtpa accounts for approximately 1.5% of global output, or a more material 36.4% of existing Australian capacity.

Salt is commonly associated with the food (9% of total demand) and de-icing (12%) industries, of which it forms an important component. Its largest use, however, is industrial (54% of demand) primarily as an input into the chlor-alkali process, whereby high-purity brine solution is electrolysed to form chlorine, caustic soda and hydrogen. These, in turn, become inputs into the PVC, plastics and paper industries, among others. As with other commodities, therefore, there is a causative association between global economic growth (and especially that in the developing world and Asia in the form of an increasingly large and increasingly prosperous middle class) and salt demand. According to consultants Roskill (quoted in BCI’s Mardie PFS announcement on 1 June 2018), demand for salt in 2017 was 339Mt, of which approximately 46% was accounted for by Asia, which is forecast to increase by 37.4%, or 58Mt, over the 10 years to 213Mt in 2027 (ie a compound rate of growth of 3.2% per year). During the same period, supply is anticipated to increase by 32Mtpa – impaired, among other things, by pressure on land in Asia for solar evaporation projects – creating a 26Mtpa supply-side shortfall and driving prices from below US$40/t currently (CIF) to c US$50/t (cf ‘a realistic average longer-term freight rate of US$13/t’).

Exhibit 7: Asian salt market dynamics

Source: Roskill 2017 Salt market report, BCI Analysis

SOP

In contrast to common salt, SOP is a premium fertiliser that is used as a source of potassium for high-value crops that are intolerant to the chlorine contained in fertilisers such as muriate of potash (KCl, or potassium chloride). SOP also has the benefit of contributing sulphur (another key macro-ingredient) to the plant.

SOP is typically manufactured by one of three methods: the Mannheim process (c 50% of supply), solar evaporation (30% of supply) and other (20% of supply). In contrast to solar evaporation, the Mannheim process reacts sulphuric acid with potassium chloride to produce sodium sulphate and hydrogen chloride, which is driven off in a furnace in gaseous form. Owing to its greater chemical intensity, the Mannheim process is almost invariably more expensive than comparable processes, with the purchase of chemicals accounting for approximately 80% of costs and fuel accounting for an additional 10%. In consequence, the Mardie solar evaporation method of SOP production is expected to result in its being placed well within the lowest cost quartile of SOP producers globally.

The total potash market in 2016 was estimated to be approximately 68Mt, of which muriate of potash (MOP) accounted for 85%, SOP 10% and other products 4%. In common with salt, the major drivers of SOP demand are the increasing, and increasingly prosperous, Asian middle class in addition to the consideration that increasing crop yields are required from remaining cultivatable land, after urbanisation. The 7.1Mtpa SOP market, in particular, is forecast by Integer Research (quoted by BCI on 1 June 2018) to expand by 11.3%, to 7.9Mtpa in 2027 (a compound annual growth rate of 1.0% per year over 11 years), with South Asia – primarily India – accounting for substantially all of the growth, coupled with an increasing trend of substituting SOP for MOP. BCI proposes to market its Mardie SOP both domestically and regionally, to South-East Asia, and adopted a price of US$500/t (FOB Dampier) for the purposes of its PFS.

Iron ore

China dominates both the global steel market and the global iron ore market. However, while it is prima facie the world’s largest domestic producer of iron ore, mine production for China is based on crude ore, rather than usable ore. Moreover, Chinese iron ore is of an inferior grade compared to other major producers around the world, with an iron content of around 17–20%, cf a 62% standard worldwide. As a result, China is also the world’s largest importer of iron ore, with imports of c 1bn tonnes per year accounting for approximately half of global supply and two-thirds of the world’s export trade. In turn, it accounts for c 50% of global steel production.

In recent months, the export price for iron ore has been caught between the expectation that Chinese steelmaking capacity will be cut at the same time as iron ore capacity is being brought on stream, and the reality that actual steel output has continued to prove stubbornly resilient.

Expectations of a cut in steelmaking capacity in particular have been driven by both a suite of smog restrictions imposed by Beijing, which is expected to result in the closure of ageing, high-polluting steel mills and induction furnaces, and a perceived desire to curb overcapacity in the sector. As a result, in April 2018, the country’s top steelmaking city of Tangshan ordered steel mills to cut 50% of their sintering capacity over and above the existing output restrictions in place until November, as a bout of pollution was expected to blanket the city and the surrounding Beijing-Tianjin-Hebei region. Emergency measures in Tangshan were effective from 15 April and it is reported that the authorities are considering an extension of the output restrictions by six months after the earlier curbs appeared to have little effect on pollution.

One explanation for the absence of obvious capacity reductions may be that downstream demand remained buoyed by strong demand at construction sites in the south and east in H118. Since then, there has been evidence of a weakening property market in China (which accounts for c 40% of demand) in conjunction with a slowdown in more general economic conditions. This has been somewhat offset by efforts by China’s central bank to stimulate activity. However, it has also led to speculation that enforcement of the production restrictions may be less robust than officially sanctioned.

Simultaneously however, there have also been disruptions to supply – including the most recent tailings dam disaster in Brazil. Partly as a result (and generally against analysts’ expectations), the iron ore price has demonstrated remarkable resilience, rising by 31.2% since Q316 and being the fifth best performing of 17 (common) metals and minerals over the period:

Exhibit 8: Iron ore price performance vs 16 other metals and minerals, Q316-present (factor)

Source: Refinitiv, Edison Investment Research. Note: The order of the lines in the legend corresponds to the finishing position of the lines in the graph.

In conclusion, Rio Tinto has stated that it expects the global iron ore market to stay balanced throughout 2019 despite ‘a likely moderation in steel demand growth in China’, but with a market bias towards high-grade ores, as Chinese steelmakers focus on higher unit productivity and lower emissions per tonne of steel produced. This was an assessment that has largely been echoed by BHP, citing the discount applied to lower-grade ores relative to higher-grade ores as evidence for the change in market dynamics (see Exhibit 10). However, it had been contradicted by Fortescue Metals, which reports that mills have indicated that they will instead seek to source cheaper raw materials in a bid to remain competitive. At the same time, Fabio Schvartsman, the CEO of the world’s largest producer of iron ore, Vale, has indicated that the Brazilian producer would be prepared to withhold capacity in the event of low prices in the market (eg 62% iron ore approaching the US$60/t level) and to supply into high prices (eg 62% iron ore approaching the US$100/t level). Notwithstanding the Australian government’s official position that it expects the price of iron ore to fall in CY19 as Chinese imports level off and new mines, including Vale’s S11D, come online, metals consultant Wood Mackenzie has echoed Vale’s comparatively optimistic outlook, saying it expects the 62% benchmark iron ore price to remain comfortably above US$60/t over the long term. These assessments appear to be largely echoed by financial analysts who are generally forecasting prices in the range US$57–70/t in the period CY19–20 (cf an average price of US$70.13/t recorded for 62% iron ore in CY18).

Finally, within the context of the iron ore market, it would be remiss not to note that, US initiatives last year to impose import duties of 25% on steel products (among other things) on 1 March. The proposal is comparable to a tariff imposed by Mr Trump’s Republican presidential predecessor, George W. Bush in 2002, when the US imposed heavy tariffs on steel imports, but withdrew them again 18 months later after they were perceived as largely ineffectual, or even harmful, to the US economy. By common consent, the initiative was aimed at China and, at the time, President Trump temporarily excluded six countries and the European Union from the duties. However, on 1 June, the move was extended to the European Union, Canada, and Mexico as well, such that the only countries to remain exempted are Australia and Argentina.

In retaliation, China initiated a WTO complaint against the US on 9 April and the EU followed suit on 1 June. Shortly thereafter – and not least in the face of Chinese threats to retaliate – the US and China released a joint statement agreeing to put tariffs on hold. Despite a 90-day armistice, in which the two countries agreed to suspend tariff hikes and work toward a resolution, the arrest of Huawei Technologies’ chief financial officer by Canadian authorities at the behest of the US Justice Department has reignited tensions.

An appreciation of current conditions in the iron ore market may be gained by an analysis of the following graphs:

Exhibit 9: Graph of 62% iron ore price (US$/t) vs 58% iron ore price and oil price (US$/bbl), Dec 11-present

Exhibit 10: Graph of discount of 58% iron ore price vs 62% iron ore price, Dec 11-present (% and US$/t)

Source: Refinitiv, Edison Investment Research

Source: Refinitiv, Edison Investment Research

Exhibit 9: Graph of 62% iron ore price (US$/t) vs 58% iron ore price and oil price (US$/bbl), Dec 11-present

Source: Refinitiv, Edison Investment Research

Exhibit 10: Graph of discount of 58% iron ore price vs 62% iron ore price, Dec 11-present (% and US$/t)

Source: Refinitiv, Edison Investment Research

A number of features of these graphs are noteworthy:

The close correlation between both the price of 62% iron ore and 58% iron ore with the price of oil – the Pearson product-moment (correlation) coefficient between each to oil being 0.87 and 0.85, respectively.

The sharp increase in the price discount of 58% iron ore relative to 62% iron ore from April 2016 (in percentage terms) and from November 2016 (in US$/t terms). Prior to April 2016 the average discount was 14.1% or US$13.94/t; after December 2016, the discount widened to 39.8% or US$27.92/t.

The current price of 58% iron ore is US$49/t (see Assumptions, below). The current price of 62% iron ore is US$74.80/t.

Assuming that it remains at US$49/t for the remainder of FY19, the likely average price for 58% iron ore for BCI’s financial year ending June 2019 is US$45.59/t. Assuming that it remains at US$74.80/t for the remainder of FY19, the likely average price for 62% iron ore for BCI’s financial year ending June 2019 is US$71.89/t (see Assumptions, below).

Iron ore market analysis

The following is a scattergram of the discount of the price of 58% iron ore relative to 62% iron ore in percentage terms plotted against the price of 62% iron ore.

Exhibit 11: Graph of 62% iron ore price (US$/t) vs 58% iron ore price discount to 62% iron ore price (%), December 2011 to present

Source: Edison Investment Research, underlying data Refinitiv

A number of features are noteworthy:

The cluster of more recently dated points to the bottom left of the chart (circled), relative to the remainder of the points, which suggests that there has indeed been a change in market dynamics since December 2016.

Whereas, prior to April 2016, the discount of the price of 58% iron ore relative to 62% iron ore was near constant at 14.1% irrespective of the price of 62% iron ore, since December 2016 there is evidence that the level of the discount is dependent on the price of 62% iron ore, ie there is now a degree of cyclicality in the size of the discount and that higher 62% iron ore prices correspond to lower discounts in percentage terms.

Iron ore assumptions

Although BCI has stated that Iron Valley is potentially part of its iron ore divestment process, in formulating our valuation of the company, on account of its cash-generating status, we have chosen to make this asset the core of our initial valuation ‘base case’ scenario and then to build the Mardie project onto that, rather than vice-versa. The implicit assumption therefore is that Iron Valley is worth either its discounted dividend flow valuation to BCI or the cash equivalent if it were to be sold to a third party.

Assumptions we have made relating to BCI’s Iron Valley asset in consideration of this methodology are as follows:

Shipments of iron ore from Iron Valley will be 7.5Mtpa from FY19 onwards (note that it achieved 8.0Mtpa in FY17), in which case its reserves are sufficient to support mining operations for 13 years until FY31.

That the price of iron ore will be US$71.89/t and US$45.59/t for 62% and 58% iron ore in FY19 respectively, and that it will be US$74.80/t and US$49.00/t in FY20, respectively. The long-term price of iron ore will be determined by the close correlation of the price of 62% iron ore with the crude oil price, according to the following graph:

Exhibit 12: Scattergram of 62% iron ore price (US$/t) vs crude oil price (US$/bbl)

Source: Edison Investment Research, underlying data Refinitiv

Our long-term crude oil price, as determined by our oil & gas team, is stipulated to be US$70/bbl, in which case – in strictly empirical terms – the corresponding long-term price of 62% iron ore should be US$88.52/t (vs a spot price at the time of writing of US$74.80/t – ie a variance of 18.3%). Note that US$88.52/t is very close to the average price of US$89.32/t in the period from December 2011 to the present (as shown in Exhibit 9). However, while we believe this to be an appropriate analysis, in recognition of the fact that the current, long-term consensus among analysts is materially lower than the price implied by the oil correlation, for the moment, we are conducting our base case valuation of BCI on the basis of a long-term 62% iron ore price of US$67.50/t (as indicated by the orange oval in Exhibit 12 but which ‘should’ otherwise correspond to a long-term oil price of US$58.03/bbl).

The discount of 58% iron ore (approximately the price received by Iron Valley for its fines product) at a 62% iron ore price of US$67.50/t is predicted to be 41.0% (see Exhibit 11), in which case the price of 58% iron ore should be US$39.84/t (a discount of US$27.66/t). However, note that Iron Valley’s lump product commands an US$8–10/t premium over the price of its fines product and that MIN is prioritising the production and export of lump from Iron Valley for this reason.

After achieving an average level of US$49.00/t in FY20, the price of 58% iron ore will then decrease to its long-term price of US$39.84/t in equal increments over a period of three years to FY23.

BCI’s revenue will reflect a royalty of 10.5–13.5% on the value of tonnages shipped, with the actual rate being directly proportional to the price received by Iron Valley for its product.

BCI will incur costs – predominantly government, state and third-party royalties – equivalent to 9% of the value of tonnages shipped.

Administration expenses continue at a long-term average rate of A$2.0m per year.

Profits are taxed at the standard rate of corporate income tax (CIT) in Australia, namely 30%, after utilisation of A$76.0m in unrecognised deferred tax assets and A$5.7m in research & development offsets. For accounting purposes, readers should note that BCI recognises deferred tax assets relating to carried forward tax losses to the extent they can be utilised. The utilisation of the tax losses depends on the ability of the entities to generate sufficient future taxable profits. As at 30 June 2018, the company had unrecognised deferred tax assets relating to tax losses of A$76.0m. It also has an R&D off-set available of A$5.7m.

Other assumptions include debtor days (assumed to be 90), stock turnover (assumed to be 730, ie 0.5 stock days) and creditor days (assumed to be 90) in line with recent accounts. Note that variations from the principal assumptions detailed here are considered in the Sensitivities section, below.

Valuation of principal BCI iron assets (Iron Valley)

Iron Valley

Given the assumptions outlined above, our long-term estimates of BCI’s earnings, (maximum potential) dividends per share and valuation trajectory are as follows:

Exhibit 13: BCI EPS and (maximum potential) DPS forecasts, FY17–31 (cents) Iron Valley

Source: Edison Investment Research. Note: Income derived from Iron Valley only; no contribution assumed from either Buckland or Mardie.

Discounting at 10% per year, the value of these cash flows to shareholders is 19.51 Australian cents per share as at 1 July 2018. Readers should note the disproportionately large maximum potential dividend payable in FY19, reflecting not only cash-flow from Iron Valley but also the potential distribution of the cash earned by BCI as a result of its sale of its Kumina assets earlier in the year. A summary of the proportion of this valuation attributable to Iron Valley, individually, as well as cash, the value of the Kumina sale and centralised corporate costs (excluding exploration) is as follows:

Exhibit 14: BCI valuation, by component (excluding Mardie), Australian cents

Asset

Valuation

(Australian cents per share)

Iron Valley plus corporate overheads

12.76

Cash

8.77

Deferred Kumina consideration

1.38

Corporate costs

-3.40

Total

19.51

Asset

Iron Valley plus corporate overheads

Cash

Deferred Kumina consideration

Corporate costs

Total

Valuation

(Australian cents per share)

12.76

8.77

1.38

-3.40

19.51

Source: Edison Investment Research

Valuation of principal BCI salt and potash assets (Mardie)

Mardie assumptions

Capex

BCI’s contracting strategy is designed to ensure that it has adequate control over key production processes, but that non-production activities (eg road haulage, accommodation, power supply and transhipment) are contracted out. Consequently, these are excluded from Mardie’s capital cost estimate, but are included in its opex estimate. Within this context, the total capex estimate for the Mardie project is A$335m, comprising A$248m for the salt production circuit and A$87m for the SOP production circuit, as follows:

Exhibit 15: Mardie capex estimate by project component

Description

Salt capex
(A$m)

Percent of total (%)

SOP capex
(A$m)

Percent of total (%)

Total capex
(A$m)

Percent of total (%)

Concentrator and crystalliser ponds

62

25.0

15

17.2

77

23.0

Processing

25

10.1

46

52.9

71

21.2

Supporting infrastructure

14

5.6

4

4.6

18

5.4

Accommodation village

1

0.4

0

0.0

1

0.3

CPE Port

73

29.4

0

0.0

73

21.8

Temporary construction services

10

4.0

4

4.6

15

4.5

Project management

14

5.6

7

8.0

21

6.3

Owner’s costs

28

11.3

4

4.6

32

9.6

Contingency

21

8.5

7

8.0

28

8.4

Total

248

100.0

87

100.0

335

100.0

Source: BCI, Edison Investment Research. Note: Totals may not add up owing to rounding.

Opex

Operating cost estimates have been calculated on an FOB basis, assuming production of 3.5Mtpa salt and 75ktpa SOP:

Exhibit 16: Mardie salt and SOP opex estimates (A$m and A$/t)

Salt

Potash

Description

Annual opex
(A$m)

Unit opex
(A$/t)

Annual opex
(A$m)

Unit opex
(A$/t)

Production (Mardie site)

20.4

5.8

12.9

171.4

Haulage

11.5

3.3

0.5

7.1

Port handling & transhipment

18.5

5.3

1.5

20.0

Corporate & overheads

6.7

1.9

0.0

0.0

Contingency

5.7

1.6

1.5

19.9

C1 cash costs (FOB)

62.8

17.9

16.4

218.4

Marketing (2% of revenue)

2.8

0.8

1.0

12.8

State government royalty

2.6*

0.7*

1.2**

16.0**

Native title royalty (0.5% of revenue)

0.7

0.2

0.2

3.2

Cash costs (FOB)

68.8

19.7

18.8

250.4

Sustaining capex

0.9

0.3

0.8

10.0

All in sustaining costs (AISC)

69.7

19.9

19.5

260.4

Source: BCI. Note: *A$0.73/t for salt and **2.5% of revenue for SOP; totals may not add up owing to rounding.

Mardie valuation

On the basis of the above assumptions and that salt and SOP prices are US$30/t and US$500/t (as per the Mardie PFS), and that the first full years of production for each are FY24 and FY26, respectively, we estimate the following valuations for the project (assuming a 30% standard rate of corporate tax in Australia):

Exhibit 17: Mardie valuation, Edison vs PFS study

Item

Mardie PFS

Edison

A$/US$

1.3333

1.4008

Project life (years)

30

30

Steady-state annual EBITDA (A$m)

102

111.7

Pre-tax NPV10 (A$m)

335

*396.0

Pre-tax NPV10 per existing BCI share (Australian cents)

84

99.6

Pre-tax IRR (%)

20

20.7

Payback

5

5

Post-tax NPV10 (A$m)

N/D

*234.3

Post-tax NPV10 per existing BCI share (Australian cents)

N/D

58.9

Source: BCI, Edison Investment Research. Note: *Discounted back to the start of capex.

Note that the extent by which Edison’s pre-tax NPV10 exceeds that of the Mardie PFS can be entirely explained by the effect of the (weaker) forex rate prevailing currently compared with that used in the PFS.

In our report, Gold stars and Black holes: Analysing the discount: From resource to sanction, published in January 2019, we observed that, excluding outliers, the maximum and minimum valuations for companies with projects at different stages of development are as follows (Exhibits 166 and 173 of the original report):

Exhibit 18: Company EV as percent of attributable project NPV (%), by study type, ordinarily valued companies, excluding statistical outliers

Percent

Scoping study/PEA

PFS

BFS

Maximum

50.7

51.3

133.5

Mean

11.7

9.9

30.9

Minimum

-4.8

-15.4

-10.1

Source: Edison Investment Research

In addition, we were able to show that the valuations of companies with projects at PFS stage have a statistically significant correlation with the projects’ IRRs:

Exhibit 19: Company EV as percent of attributable project NPV (%) vs project IRR (%) for companies at PFS stage, August 2018

Source: Edison Investment Research

Assuming a post-tax NPV of 70% of pre-tax NPV of A$335m (as per its PFS), an average valuation for BCI of 9.9% of Mardie’s NPV (excluding its other assets) would be A$23.2m, or 5.84 Australian cents per BCI share. If the DFS on Mardie is completed on approximately the same terms, however, we would expect this valuation to increase more than threefold, to c 30.9% of NPV, or 18.22c per share. Within this context, it is worth noting that our report, Gold stars and Black holes: Analysing the discount: From resource to sanction, found that, within the evolution of a mining project through its various stages of development, the lowest valuation is encountered at PFS stage:

Exhibit 20: Company EV as a percentage of attributable NPV (%), by study type

Source: Edison Investment Research, Refinitiv, company sources

BCI has stated that it will advance development funding options and ownership structures for the project in detail during the preparation of the Mardie DFS. Currently, project development capex of A$335m is ‘likely to be funded from a combination of project debt, equity, product offtake pre-commitments and via build-own-operate (or similar) models where feasible.’ However, it has also said that it ‘will consider all feasible funding structures for the equity component including raising equity in BCI for investment into the project, or raising direct equity into the project.’

Assuming that BCI were to fund Mardie via equity into the company, we estimate that it would have to raise A$91.6m in FY20 in order to maintain a maximum leverage ratio (net debt/[net debt+equity]) of no more than 50% in FY23 when net debt to fund the project would peak at A$191.9m (some of the equity having been provided by retained earnings from income from Iron Valley). Conducted at the current share price, this would involve the issue of an additional c 678.6m shares, in which case Edison’s long-term estimates of BCI’s earnings, (maximum potential) dividends per share and valuation trajectory are as follows (cf Exhibit 13 for Iron Valley base case valuation only):

Exhibit 21: BCI EPS and (maximum potential) DPS forecasts, FY18–53 (cents)

Source: Edison Investment Research. Note: Income derived from Iron Valley and Mardie, combined; no contribution assumed from Buckland or any other assets.

Discounting at Edison’s customary discount rate of 10% per year, the value of these cash flows to shareholders is 30.66 Australian cents (fully diluted) at 1 July 2018 cf 19.51 Australian cents per share for Iron Valley, cash and corporate costs only (see Exhibits 13 and 14) – implying a Mardie component of the valuation of 11.15 Australian cents:

Exhibit 22: BCI discounted dividend valuation, by component

Component

Valuation (Australian cents per fully diluted share)

Iron Valley, cash and corporate

19.51

Mardie

11.15

Total

30.66

Component

Iron Valley, cash and corporate

Mardie

Total

Valuation (Australian cents per fully diluted share)

19.51

11.15

30.66

Source: Edison Investment Research

Note that our valuation, on this basis, peaks at 68.46 Australian cents in FY28 (see Exhibit 21), when EPS would be 5.26 Australian cents – therefore putting it on a contemporary P/E ratio of 13.0x.

BCI iron asset valuation sensitivities

The principal sensitivities to which BCI is exposed from an empirical perspective are the price of iron ore received for its output at Iron Valley and the rate of sales at Iron Valley.

Valuation sensitivity to the iron ore price

Three scenarios were considered in this analysis: 1) a ±20% move in the price of iron ore from those assumed; 2) the permanent high discount of 39.7% for the price of 58% iron ore vs 62% iron ore; and 3) a reversion to the low discounts of 14.1% between the prices of 62% and 58% iron ore prevailing before April 2016.

In the event that the price which BCI receives for its Iron Valley iron ore moves by 20% from that assumed in our base case scenario, the effect on our base case valuation of BCI is as follows:

Exhibit 23: BCI valuation sensitivity to a ±20% move in the price of Iron Valley iron ore

Iron Valley iron ore price change (%)

-20%

-10%

0%

+10%

+20%

Valuation (Australian cents per share)

29.27

29.82

30.66

31.81

33.09

Percentage change (%)

-4.5

-2.7

u/c

+3.8

+7.9

Source: Edison Investment Research

In the event that the high price discount of 39.7% for the price of 58% iron ore vs 62% iron ore becomes permanent and unchanging, we estimate that the long-term price of 58% iron ore will reduce to US$40.73/t, in which case our valuation of BCI is barely changed at 30.82c/share, an increase of 0.5% relative to our base case scenario.

By contrast, in the event that the iron ore market reverts to the low price discount of 14.1% that prevailed before April 2016 for the price of 58% iron ore vs 62% iron ore, we estimate that the long-term price of 58% iron ore will increase to US$57.97/t, in which case our valuation of BCI increases to 34.77c/share, an increase of 13.4% relative to our base case scenario.

Valuation sensitivity to the sales rate at Iron Valley

Lastly, our BCI valuation sensitivity to the sales rate achieved at Iron Valley is as follows:

Exhibit 24: BCI valuation sensitivity to Iron Valley sales rates

Sales rate change vs base case (%)

-20.0

-6.7

0.0

+6.7

+100.0

Sales rate (Mtpa)

6.0

7.0

7.5

8.0

*15.0

Valuation (Australian cents per share)

30.13

30.49

30.66

30.81

32.33

Percentage change (%)

-1.7

-0.6

u/c

+0.5

+5.4

Source: Edison Investment Research. Note: *See section on Iron Valley Logistics upside on page 10.

Note the asymmetry of this analysis, as higher throughput rates shorten the life of operations at Iron Valley (all other things being equal), with the result that a greater proportion of output is sold at higher prices (near-term prices being higher than Edison’s long-term price estimate). By contrast, lower throughput rates lengthen the life of operations, meaning that a higher proportion of aggregate sales occur at lower prices and, at the same time, earnings and dividends are deferred to later years, where they have less net present value to shareholders.

Mardie valuation sensitivities

In quantitative terms, the principal risks (and valuation sensitivities) to which the Mardie project is subject are to the salt price, opex and foreign exchange rates. BCI’s valuation sensitivity to each of these is provided below (including Iron Valley):

Exhibit 25: BCI valuation sensitivity relative to salt price

Salt price (US$/t)

24

27

30

33

36

Salt price change (%)

-20

-10

u/c

+10

+20

BCI valuation (Australian cents per share)

20.22

25.44

30.66

35.87

41.07

Percent change (%)

-34.1

-17.0

u/c

+17.0

+34.0

Source: Edison Investment Research

Exhibit 26: BCI valuation sensitivity relative to SOP price

SOP price (US$/t)

400

450

500

550

600

SOP price change (%)

-20

-10

u/c

+10

+20

BCI valuation (Australian cents per share)

27.71

29.18

30.66

32.13

33.60

Percent change (%)

-9.6

-4.8

u/c

+4.8

+9.6

Source: Edison Investment Research

Exhibit 27: BCI valuation sensitivity relative to changes in Mardie unit costs

Unit cost change (%)

+20

+10

u/c

-10

-20

BCI valuation (Australian cents per share)

25.13

27.89

30.66

33.42

36.18

Percent change (%)

-18.0

-9.0

u/c

+9.0

+18.0

Source: Edison Investment Research

Exhibit 28: BCI valuation sensitivity relative to A$/US$ rate

A$/US$

1.1206

1.2607

1.4008

1.5409

1.6810

Change (%)

-20

-10

u/c

+10

+20

BCI valuation (Australian cents per share)

16.04

23.46

30.66

37.85

45.02

Percent change (%)

-47.7

-23.5

u/c

+23.5

+46.8

Source: Edison Investment Research

Two other variables are of critical importance to Mardie’s valuation contribution to BCI, namely the amount of equity financing raised to fund the project and the price at which it is raised:

Exhibit 29: BCI valuation sensitivity relative to maximum leverage ratio (%)

Equity funding raised (A$m)

0.0

27.0

59.3

91.6

123.9

156.2

191.0

226.3

262.9

Maximum leverage ratio (%)*

79.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0

BCI valuation (Australian cents per share)

63.17

46.37

36.33

30.66

27.01

24.46

22.35

20.72

19.36

Percent change (%)

+106.0

+51.2

+18.5

u/c

-11.9

-20.2

-27.1

-32.4

-36.9

Source: Edison Investment Research. Note: *Leverage ratio defined as (net debt/[net debt+equity]).

Exhibit 30: BCI valuation sensitivity relative to equity financing price (Australian cents)

Equity financing price (cps)

8

9

10

13.5

15

20

25

30

35

40

45

50

55

60

BCI valuation (Australian cents per share)

21.50

23.41

25.20

30.66

32.68

38.38

42.86

46.49

49.47

51.98

54.11

55.94

57.54

58.94

Percent change (%)

-29.9

-23.6

-17.8

u/c

+6.6

+25.2

+39.8

+51.6

+61.4

+69.5

+76.5

+82.5

+87.7

+92.2

Source: Edison Investment Research

Improvements vs the PFS

Three improvements of the actual project relative to that envisaged in the PFS have been identified by management:

An incremental increase in production of salt, from 3.5Mtpa to 4.0Mtpa and an incremental increase in production of SOP, from 75ktpa to 100ktpa.

As an alternative to exporting via Cape Preston East port, management has begun to actively look at developing an export jetty at Mardie to avoid trucking salt c 70km to CPE. Internally, this initiative is expected by management to reduce opex costs by c A$4/t (or c 20%), albeit at the expense of a c A$65m increase in capex.

Use of gas as a power source. There are c four to five gas pipelines that run through BCI’s tenements. The PFS assumed the use of diesel as a power source for Mardie. However, the project could equally well be designed around gas as a power source.

While the effect of the last of these potential initiatives is difficult to quantify at the current time, we estimate that implementation of the other two, at the parameters indicated, increases the current value of BCI to shareholders by 30.4%, from 30.66c per share to 39.98c per share.

Risk and risk mitigation

Given that it is already in production, Iron Valley is already substantially de-risked. Those risks that remain may be summarised as sovereign, commercial, commodity price, foreign exchange and global economic risks with limited technical risk (much the same as an agricultural operation). These may be encapsulated in the discount rate applied to future dividends payable be the company to shareholders. Edison customarily uses a 10% discount rate to apply to future dividends. However, variations from this assumption for BCI are as follows:

Exhibit 31: BCI valuation sensitivity to discount rate

Discount rate

0%

5%

10%

15%

20%

25%

30%

BCI valuation, Australian cents

191.18

70.36

30.66

15.14

8.18

4.71

2.85

Source: Edison Investment Research

In qualitative terms, the principal risks to which the Mardie project is immediately exposed include geographical/sovereign risk, engineering risk, financing risk and management risk. Unlike most mining projects however, there is only minimal geological and metallurgical risk (there being a virtual certainty that seawater contains sodium chloride and SOP and that it crystallises out on evaporation). To some extent, these have been partially replaced by climatic risk in the form of high rainfall disrupting the evaporation process. Otherwise, in general terms, these risks may be summarised as execution risk, ie management’s ability to bring the project to account within its geographical jurisdiction and the required technical parameters. In the case of Mardie, however, many of these risks are also substantially mitigated:

Mardie (and Iron Valley) are both located in Western Australia, which is a well understood and respected historical destination for mining investment that ranks fifth out of 91 in the most recent Fraser Institute index of (mining) Investment Attractiveness:

Exhibit 32: Fraser Institute index of (mining) Investment Attractiveness, 2017 survey

Source: Fraser Institute

As discussed previously, unlike conventional mining operations, there is much reduced geological and metallurgical risk associated with Mardie, given that it is a virtual certainty that seawater contains salt and SOP and that it crystallises out on evaporation.

At the same time, mining risk is similarly reduced by the fact that the salt is artificially precipitated in (and harvested from) pre-designed ponds and not via a natural process, with all of the topographical and chemical uncertainties that the latter entails.

To some extent, the three typical early stage technical mining risks (geological, metallurgical and engineering) have been partially replaced by climatic risk in the form of high rainfall disrupting the evaporation process. In the course of a normal year’s weather, this is not a problem as unusually high rainfall results in fresh water accumulations that simply sit atop the concentrating brines and evaporate away again quickly. However, there is a potential risk from either very large cyclones (of a 1 in 20 or 1 in 50-year nature), sustained cyclones or multiple cyclones that could disrupt and/or delay the general evaporation process. The other risk from cyclones is the extent to which a very large event could degrade the infrastructure of the operation – although this can be mitigated via the choice of appropriate design criteria for the infrastructure in question.

The other main risk is management. In this case however, management have a discernible track record of achievement, from a commercial perspective, in the form of the sale of Kumina for A$35m, having acquired it a matter of months beforehand for a consideration of A$9m (albeit with some interim investment in the form of exploration expenditure). In addition, there has been a recent shuffling of the board as long-standing ‘iron ore’ directors have moved aside to make way for salt specialists.

Like Iron Valley however, once in production, these risks at Mardie will be perceived to diminish and be superseded by others, such as commercial, commodity price, foreign exchange and global economic risks.

Financials

BCI reported net cash on its balance sheet of A$13.1m as at 30 June 2018 (cf A$17.5m as end-March, A$18.9m as at end-December 2017 and A$36.4m as at end-June 2017). Expenditure in Q119 (three months to end-September 2018) was reported to be A$3.8m, as the company continued to invest in value-adding exploration and study activities, partially offset by cash inflows of A$1.8m relating to Iron Valley (including a refund of excess State Government royalties previously paid).

On 22 October, BCI announced that it had sold its Kumina tenements for a total consideration of A$35m, of which A$27m was received in Q219 (ie the three months to end-December), such that its net cash position at end December 2018 was c A$37m, with an additional A$4m in consideration deferred until the first export of iron ore from the tenements (expected FY21) and a further A$4m deferred for another 12 months beyond that, in FY22.

The next 18 months will be characterised by higher c A$25m investment (capex and opex) in Mardie. This will be partly offset by a higher iron ore price (see pages 11–16). Nevertheless, it will be more than sufficient to carry the project to a final investment decision in early CY20. Within this context, we estimate that BCI will finish FY19 with A$27.8m in net cash on its balance sheet.

Other assets

In addition to those described above, BCI has a number of early-stage exploration projects in the Pilbara and Murchison regions of Western Australia, known as the Buckland, Marble Bar, Black Hills and Peak Hill projects, which are prospective for iron ore, gold (both shear-hosted and conglomerate-hosted paleoplacer), lithium, zinc and copper, but which it is nevertheless seeking to sell to concentrate on its Mardie salt and potash asset.

Buckland

Buckland is an iron ore development project based in Western Australia’s West Pilbara region. The project consists of Bungaroo South and a proposed road and port logistics solution in the form of the Cape Preston East port. Bungaroo South is located c 45km south-east of Pannawonica and 35km from Robe rail infrastructure.

Exhibit 33: Buckland project’s mining operations

Source: BCI Minerals

The project was started in 2012, when IOH initiated the development of a supply chain solution for the Bungaroo South deposit. In June 2014, IOH entered into a port lease agreement with Dampier Port Authority (now the Pilbara Ports Authority) for the development of a port facility at Cape Preston East to support an independent export supply chain solution for Buckland and a feasibility study was completed on an 8Mtpa operation hauling ore via a private road to the new port the same year. The project was considered to be viable at the time of the study, but was subsequently reinterpreted to require a higher quality ore and a higher trucking rate of 15.0Mtpa in order to provide adequate returns to stakeholders. In the wake of its acquisition of IOH in August 2014, BCI evaluated options to determine the optimal development and financing path for Buckland (although this has obviously now been superseded by the company’s decision to divest itself of its iron ore assets to concentrate on Mardie).

Bungaroo South’s mining lease includes the Western Pit, two Eastern pits and the Dragon pit, which are located within a range of c 7km from each other.

Exhibit 34: Bungaroo South mine pit layout

Source: BCI Minerals

According to the conclusions of its feasibility study, Bungaroo South has an estimated life of more than 15 years, a waste to ore stripping ratio of 1:1 and an estimated pre-tax IRR of 24%. As at 30 June 2018, resources and reserves at Bungaroo South were as follows:

Exhibit 35: Bungaroo South mineral resource estimate (100% BC Iron)

Classification

Cut-off
(% Fe)

Mt

Fe (%)

Ca Fe (%)

AI2O3 (%)

SiO2 (%)

P (%)

LOI (%)

Bungaroo South Area

 

 

 

 

 

 

 

 

Measured

50

30.9

57.4

62.1

3.0

6.7

0.15

7.6

Indicated

50

224.0

56.6

61.6

2.4

7.8

0.15

8.1

Inferred

50

3.4

54.7

59.4

3.0

10.2

0.13

7.9

Regional Satellite Deposits 

Indicated

50

11.1

55.4

59.5

4.0

8.8

0.11

6.9

Inferred

50

13.8

54.8

59.9

4.2

7.8

0.11

8.6

Total as at 30/06/2018

50

283.3

56.5

61.4

2.7

7.8

0.14

8.1

Total as at 30/06/2017

50

283.3

56.5

61.4

2.7

7.8

0.14

8.1

Source: BCI Minerals. Note: Bungaroo South Area is Bungaroo South and Dragon. Regional Satellite Deposits are Rabbit, Rooster and Snake.

Exhibit 36: Bungaroo South ore reserve estimate (100% BC Iron)

Classification

Cut off
(% Fe)

Mt

Fe (%)

Ca Fe (%)

AI2O3 (%)

SiO2 (%)

P (%)

LOI (%)

Proven

54

23.2

58.3

62.9

2.9

5.8

0.15

7.4

Probable

54

111.1

57.5

62.6

2.3

6.6

0.15

8.1

Total as at 30/06/2018

54

134.3

57.6

62.6

2.4

6.5

0.15

8.0

Total as at 30/06/2017

54

134.3

57.6

62.6

2.4

6.5

0.15

8.0

Source: BCI Minerals

Bungaroo South is a channel iron deposit (CID) with a phosphorus grade of 0.14% (cf a maximum desired grade of 0.12%) and, as such, it is an ore that would benefit from blending. In early 2018, BCI signed a Memorandum of Understanding (MoU) with Sinosteel Australia Pty, to further support the development of the Buckland project. The MoU sets a framework for potential binding agreements relating to marketing and offtake, engineering services, funding and joint venture structures.

Bungaroo South potential valuation

In our report, Gold stars and Black holes: Analysing the discount: From resource to sanction, published in January 2019, we calculated an average value of iron ore resources at the exploration stage of 4.3 US cents per tonne of contained iron, distinguished by category as follows: measured (4.4c), indicated (6.0c) and inferred (2.1c). On this basis, our immediate valuation of Bungaroo South is as follows:

Exhibit 37: In-situ value estimate of Bungaroo South

Category

Cut-off grade (%)

Tonnage (Mt)

Grade (% Fe)

Resource multiple (US$/t Fe)

Resource value (US$m)

Resource value (A$m)

Resource value per BCI share (Australian cents)

Measured

50

30.9

57.4

0.044

0.8

1.1

0.27

Indicated

50

235.1

56.5

0.060

8.0

11.2

2.81

Inferred

50

17.2

54.8

0.021

0.2

0.3

0.07

Total

50

283.3

56.5

0.043

6.9

9.6

2.43

Source: Edison Investment Research, BCI Minerals

In this case, the valuation of Bungaroo South, at global average in-situ values, lies between US$6.9m, or 2.43 Australian cents per share (with all categories of resources treated equally) and US$9.0m, or 3.15c/share (with differentiated values applied to each category of resources). Factors favouring the higher valuation include the fact that the deposit is in Western Australia, where there is an established iron ore mining industry, the legal basis for mining is well respected and understood and there is good access to infrastructure. Factors militating against this include the slightly higher phosphorus content (Exhibits 35 and 36).

Other assets

Also of note is Maitland River, which is located in the Pilbara region of Western Australia and plays host to a large (albeit magnetite) iron ore resource, as shown below.

Exhibit 38: In-situ value estimate of Maitland River

Category

Cut-off grade (%)

Tonnage (Mt)

Grade (% Fe)

Measured

N/A

0.0

0.0

Indicated

N/A

0.0

0.0

Inferred

26

1,106.0

30.4

Total

26

1,106.0

30.4

Source: BCI Minerals

Exhibit 39: Financial summary

A$'000s

2015

2016

2017

2018

2019e

2020e

June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

281,211

151,279

64,324

33,029

52,529

57,560

Cost of Sales

(278,465)

(158,210)

(55,190)

(47,442)

(55,402)

(58,629)

Gross Profit

2,746

(6,931)

9,134

(14,413)

(2,873)

(1,069)

EBITDA

 

 

2,746

(6,931)

9,134

(14,413)

(2,873)

(1,069)

Operating Profit (before amort. and except.)

(26,090)

(12,622)

5,665

(17,330)

(5,790)

(3,986)

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

(170,881)

(40,108)

(302)

0

17,000

0

Other

(2,935)

812

(5)

0

0

1

Operating Profit

(199,906)

(51,918)

5,358

(17,330)

11,210

(3,985)

Net Interest

(3,505)

(951)

311

420

196

417

Profit Before Tax (norm)

 

 

(29,595)

(13,573)

5,976

(16,910)

(5,594)

(3,569)

Profit Before Tax (FRS 3)

 

 

(203,411)

(52,869)

5,669

(16,910)

11,406

(3,568)

Tax

44,912

(27,086)

0

0

0

0

Profit After Tax (norm)

12,382

(39,847)

5,971

(16,910)

(5,594)

(3,569)

Profit After Tax (FRS 3)

(158,499)

(79,955)

5,669

(16,910)

11,406

(3,568)

Average Number of Shares Outstanding (m)

174.8

196.2

316.7

394.6

396.1

736.9

EPS - normalised (c)

 

 

7.1

(20.3)

1.9

(4.3)

(1.4)

(0.5)

EPS - normalised and fully diluted (c)

 

7.1

(19.5)

1.9

(4.3)

(1.3)

(0.5)

EPS - (IFRS) (c)

 

 

(90.7)

(40.8)

1.8

(4.3)

2.9

(0.5)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

1.0

-4.6

14.2

-43.6

-5.5

-1.9

EBITDA Margin (%)

1.0

-4.6

14.2

-43.6

-5.5

-1.9

Operating Margin (before GW and except.) (%)

-9.3

-8.3

8.8

-52.5

-11.0

-6.9

BALANCE SHEET

Fixed Assets

 

 

154,904

86,546

78,059

85,768

77,851

153,634

Intangible Assets

60,237

33,618

33,063

43,615

38,615

43,615

Tangible Assets

94,667

52,928

44,996

42,153

39,236

110,019

Investments

0

0

0

0

0

0

Current Assets

 

 

102,374

23,204

46,429

20,270

40,848

49,326

Stocks

9,886

61

0

0

72

79

Debtors

24,427

13,694

10,053

7,213

12,952

14,193

Cash

67,671

9,449

36,376

13,057

27,824

35,054

Other

390

0

0

0

0

0

Current Liabilities

 

 

(77,222)

(21,769)

(12,107)

(9,373)

(10,628)

(11,424)

Creditors

(70,947)

(19,749)

(12,107)

(9,373)

(10,628)

(11,424)

Short term borrowings

(6,275)

(2,020)

0

0

0

0

Long Term Liabilities

 

 

(20,773)

(11,307)

(5,225)

(6,054)

(6,054)

(6,054)

Long term borrowings

0

0

0

0

0

0

Other long term liabilities

(20,773)

(11,307)

(5,225)

(6,054)

(6,054)

(6,054)

Net Assets

 

 

159,283

76,674

107,156

90,611

102,017

185,482

CASH FLOW

Operating Cash Flow

 

 

(77,686)

(19,721)

11,860

(11,957)

(7,429)

(1,521)

Net Interest

(1,120)

0

0

0

196

417

Tax

44,912

(27,086)

0

0

0

0

Capex

(10,987)

(8,075)

(2,220)

(10,074)

(5,000)

(78,700)

Acquisitions/disposals

24,338

0

(5,151)

(1,288)

27,000

0

Financing

6,118

1,510

24,403

0

0

87,034

Dividends

(18,652)

0

0

0

0

0

Net Cash Flow

(33,077)

(53,372)

28,892

(23,319)

14,767

7,230

Opening net debt/(cash)

 

 

(94,473)

(61,396)

(7,429)

(36,376)

(13,057)

(27,824)

HP finance leases initiated

0

0

0

0

0

0

Other

0

(595)

55

0

0

0

Closing net debt/(cash)

 

 

(61,396)

(7,429)

(36,376)

(13,057)

(27,824)

(35,054)

Source: Company sources, Edison Investment Research. Note: Balance sheet excludes unrecognised deferred tax assets of A$76.0m.

Contact details

Revenue by geography

Level 1
15 Rheola Street
West Perth – WA 6005
Australia
+61 8 6311 3400
bciminerals.com.au

Contact details

Level 1
15 Rheola Street
West Perth – WA 6005
Australia
+61 8 6311 3400
bciminerals.com.au

Revenue by geography

Board & Management team

Non-executive chairman: Brian Francis O'Donnell

Managing director: Alwyn Vorster

Mr O’Donnell has 31 years’ experience in the finance and investment industry. He is director of finance and investments for the Australian Capital Equity group, which includes the company’s largest shareholder, Wroxby Pty. He is a director of a number of other ACE group companies, including companies active in the agricultural, advertising and investment sectors in Australia and China, and also a non-executive director of ASX-listed Capilano Honey and The Guide Dog Foundation Pty (WA). He is a former director of Iron Ore Holdings, Coates Group Holdings Pty, WesTrac Pty, Landis & Gyr, Fremantle Football Club and YMCA of Perth. He is a Fellow of the Institute of Chartered Accountants.

Mr Vorster has more than 25 years' experience with numerous mining houses in technical and commercial management roles covering the total supply chain from mine to market for iron ore, coal and other minerals. He started as CEO of BCI in May 2016 and was appointed MD in September 2016. Before that, he was group executive of mining at Australian Capital Equity. Other recent roles include CEO of API Management (the company responsible for developing the multi-billion-dollar West Pilbara Project), and CEO and MD of Iron Ore Holdings.

CFO: Simon Hodge

Non-executive director: Michael Blakiston

Mr Hodge has more than 25 years’ experience in senior executive, corporate advisory and equity research roles. Most recently, he was corporate and commercial advisor to BCI, before starting formally as CFO on 1 February 2017. Prior to that, he was CFO and COO for Quickflix and has held senior positions in corporate advisory with Poynton & Partners, JP Morgan (London) and a major Australian stockbroker. He has a Bachelor of Commerce (first-class honours in accounting and finance) from the University of Western Australia.

Mr Blakiston has over 30 years’ experience gained across a range of jurisdictions and advises in relation to acquisitions and disposals, project structuring, joint ventures, strategic alliances, development agreements, project commercialisation and capital raisings. He has served on the boards of a number of ASX-listed companies and not-for-profit organisations and is currently the chairman of the Precision Opportunities Fund as well as being a partner in Gilbert+Tobin’s Energy & Resources group.

Board & Management team

Non-executive chairman: Brian Francis O'Donnell

Mr O’Donnell has 31 years’ experience in the finance and investment industry. He is director of finance and investments for the Australian Capital Equity group, which includes the company’s largest shareholder, Wroxby Pty. He is a director of a number of other ACE group companies, including companies active in the agricultural, advertising and investment sectors in Australia and China, and also a non-executive director of ASX-listed Capilano Honey and The Guide Dog Foundation Pty (WA). He is a former director of Iron Ore Holdings, Coates Group Holdings Pty, WesTrac Pty, Landis & Gyr, Fremantle Football Club and YMCA of Perth. He is a Fellow of the Institute of Chartered Accountants.

Managing director: Alwyn Vorster

Mr Vorster has more than 25 years' experience with numerous mining houses in technical and commercial management roles covering the total supply chain from mine to market for iron ore, coal and other minerals. He started as CEO of BCI in May 2016 and was appointed MD in September 2016. Before that, he was group executive of mining at Australian Capital Equity. Other recent roles include CEO of API Management (the company responsible for developing the multi-billion-dollar West Pilbara Project), and CEO and MD of Iron Ore Holdings.

CFO: Simon Hodge

Mr Hodge has more than 25 years’ experience in senior executive, corporate advisory and equity research roles. Most recently, he was corporate and commercial advisor to BCI, before starting formally as CFO on 1 February 2017. Prior to that, he was CFO and COO for Quickflix and has held senior positions in corporate advisory with Poynton & Partners, JP Morgan (London) and a major Australian stockbroker. He has a Bachelor of Commerce (first-class honours in accounting and finance) from the University of Western Australia.

Non-executive director: Michael Blakiston

Mr Blakiston has over 30 years’ experience gained across a range of jurisdictions and advises in relation to acquisitions and disposals, project structuring, joint ventures, strategic alliances, development agreements, project commercialisation and capital raisings. He has served on the boards of a number of ASX-listed companies and not-for-profit organisations and is currently the chairman of the Precision Opportunities Fund as well as being a partner in Gilbert+Tobin’s Energy & Resources group.

Principal shareholders

(%)

Wroxby Pty

27.56

Citicorp Nominees

4.52

JP Morgan Nominees Australia

3.97

National Nominees Ltd

2.23

One Managed Invt Funds Ltd

1.81

Mineralogy Pty Ltd

1.53

A. P. Vorster Esq

1.00

Companies named in this report

BCI Minerals


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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by BCI Minerals and prepared and issued by Edison, in consideration of a fee payable by BCI Minerals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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