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All on course

BCI Minerals 30 October 2019 Update
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BCI Minerals

All on course

FY19, Q120 and DFS progress

Metals & mining

30 October 2019

Price

A$0.18

Market cap

A$72m

A$1.4582/US$

Net cash (A$m) at 30 September 2019

32.3

Shares in issue

397.6m

Free float

63%

Code

BCI

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(14.3)

33.3

Rel (local)

(0.4)

(13.5)

13.2

52-week high/low

A$0.22

A$0.14

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

AGM

27 November 2019

Mardie DFS

Q1 CY20

Mardie investment decision

Q1 CY20

Q220 activities report

End January 2020

Analyst

Charles Gibson

+44 (0)20 3077 5724

BCI Minerals is a research client of Edison Investment Research Limited

In its September quarterly report, BCI reported that the definitive feasibility study (DFS) on the Mardie salt and potash project was 75% complete as at end-September 2019, with the expectation that it will be completed in Q1 CY20. In the meantime, the company is embarking on construction of a large-scale trial pond programme to test the envisaged materials and methods of construction and thereby substantially mitigate future construction risk.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/18

33.0

(16.9)

(4.3)

0.0

N/A

N/A

06/19

54.2

(4.6)

(0.8)

0.0

N/A

N/A

06/20e

85.8

(12.7)

(3.2)

0.0

N/A

N/A

06/21e

55.2

2.8

0.3

0.0

58.8

N/A

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

Approvals, funding and offtake initiatives advancing

At the same time as it is ramping up on-site activity at Mardie, BCI is also progressing its approvals, financing and offtake initiatives. Among other things, these include ongoing negotiations with the Northern Australia Infrastructure Facility (NAIF) to secure preferential debt funding and the signing of a number of additional memoranda of understanding (MoUs) with Asian chemical companies to sell 2.4Mtpa (60%) of Mardie’s planned steady-state output of salt and 10ktpa (10%) of its planned steady-state output of SOP over a period of three years (cf 30% of its planned output of salt as at end-Q419). Finally, BCI expects to release its revised environmental review document (ERD) for public comment in Q4 CY19 with Australian Environmental Protection Authority endorsement targeted for Q2 CY20.

Iron ore price continues to spur Iron Valley in Q1

In addition to updating the market on the progress of the Mardie DFS, BCI confirmed that the strong performance exhibited by its Iron Valley royalty asset at the end of FY19 continued into Q120. Iron Valley shipped 2.0Mt of iron ore in Q120, which resulted in record quarterly cash flow of A$10.7m, although BCI expects that provisionally priced September quarterly shipments will potentially attract a negative price finalisation adjustment of approximately A$3.0m in Q220. Nevertheless, BCI’s September quarter EBITDA of A$7.7m is the second highest since operations began at Iron Valley in 2014 and compares with A$6.2m in Q419.

Valuation: 2x share price, potentially 2.5x

In the wake of its announcement, we value BCI at 34.13c (cf 35.60 previously – although the decline in value may be entirely attributed to the lower BCI share price recently, which increases future assumed equity dilution for the development of Mardie). However, this valuation increases to as much as 44.38c if iron ore prices remain at current levels until the end of the life of operations at Iron Valley. Note that a further 2.43c should be added to all of these valuations to account for the value of BCI’s Buckland iron ore assets.

September quarterly update

BCI released its detailed results for FY19 on 25 October, albeit after having released a preliminary announcement on 23 August. Reported (ie un-normalised) pre-tax profits of A$11.4m were within 3.3% of our prior forecast (see our note Iron ore price continues to power ahead, published on 5 July 2019), while our cash estimate of A$34.0m was within 1.0% of the A$33.7m actually reported.

More significantly, in its September quarterly report (released on 28 October), BCI confirmed that the strong performance exhibited by its Iron Valley royalty asset at the end of FY19 continued into Q120. Iron Valley shipped 2.0Mt of iron ore in Q120 (c 65% fines), which resulted in record quarterly cash flow of A$10.7m during the period, although BCI expects that provisionally priced September quarterly shipments will potentially attract a negative price finalisation adjustment of approximately A$3.0m to be realised in the December quarter (and payable in January 2020) given the decline in iron ore prices since July. Nevertheless, BCI’s September quarter EBITDA of A$7.7m is reported to be the second highest on record since operations at Iron Valley commenced in 2014 and compares with A$6.2m in Q419 (including a positive A$1.4m prior quarter adjustment) from 1.9Mt of shipments.

Although the price of 58% CFR iron ore (a close proxy to the price received by Iron Valley for its product) has declined by c 29% since its peak of US$106.5/t in mid-July, it has since stabilised and traded within a relatively narrow range of US$77.25/t ±US$4.75/t, with the result that it is tracking relatively close to Edison’s prior expectations for FY20:

Exhibit 1: Price of standard grade 58% CFR iron ore, July 2014 to July 2020e

Source: Refinitiv, Edison Investment Research

Despite the well-documented price falls of both 58% and 62% iron ore, the price of the former has apparently stabilised at an historically modest discount relative to the latter – more akin to market conditions before May 2016 than those experienced during the period between November 2016 and January 2019, prior to Vale’s Brumadinho tailings dam disaster:

Exhibit 2: 62% iron ore price (US$/t) and 58% iron ore price, July 2014 to present

Exhibit 3: Discount of 58% iron ore price to 62% iron ore price, July 2014 to present (%)

Source: Refinitiv

Source: Edison (underlying data: Refinitiv)

Exhibit 2: 62% iron ore price (US$/t) and 58% iron ore price, July 2014 to present

Source: Refinitiv

Exhibit 3: Discount of 58% iron ore price to 62% iron ore price, July 2014 to present (%)

Source: Edison (underlying data: Refinitiv)

At the same time, the operator of the Iron Valley mine, Mineral Resources, has also completed its annual update of Iron Valley mineral resources and ore reserves and determined that (at 30 June 2019) both are almost exactly in line with those that would be expected after allowing for one year’s worth of mining depletion from the resources and reserves reported in June 2018.

As a result, we are leaving our earnings forecasts for FY20 and subsequent years ostensibly unchanged for the moment (with the exception of adjusting for forex and the share price, which affects future assumed equity dilution for the development of Mardie).

Mardie update

A DFS on the Mardie salt and potash project is underway and was reported by BCI to be 75% complete as of end-September 2019, with the expectation that it will be completed in Q1 CY20. Salient features of progress made during the September quarter are summarised below:

Design of key salt and sulphate of potash (SOP) production infrastructure (including the ponds, crystallisers and processing plants) has been completed, or is nearing completion, and the focus is shifting towards development of the DFS production ramp-up schedules, capital and operating cost estimates.

Refinements to the project layout have been completed and detailed designs concluded. A trade-off study relating to the configuration of the port has confirmed the optimal length of the jetty to be 3.1km (cf 7km previously) to maximise the cost benefit between the jetty length and related dredging requirements. The difference will be made up by a 3.5km causeway incorporating both a road and a conveyor belt, while the salt stockpile will be relocated from the plant to the shoreline.

Marine geotechnical drilling has been completed.

The 1:40,000 small-scale trial ponds have been fully constructed and the first raw salt samples crystallised and harvested to be tested for quality and purity. The trial will provide site-specific evaporation data at a range of densities and simulate the full evaporation process at a reduced scale. Similar samples for SOP (which crystallises later in the process) will follow in due course.

In addition to its small-scale evaporation trials, BCI is planning to undertake (and has received environmental approval for) a large-scale trial pond programme that will include construction of a 32ha trial pond (including 2.3km of pond walls and the final seawalls for the project’s Pond 1), a seawater intake facility incorporating one of the proposed six operating pumps, supporting infrastructure, roads and a 36-bed accommodation village. The principal rationale of the large-scale pond trial is to test the envisaged method of constructing the evaporation pond wall and the materials involved (especially the construction time available per day in the inter-tidal area), thereby substantially mitigating future construction risk. In addition, it will validate the permeability of the underlying clay soils over a large area, validate evaporation assumptions over a large area and validate pump rates and capabilities. Design work for the large-scale ponds has now been completed and construction is due to commence imminently at a total expected cost of A$15m – although note that this was already included in our financial forecasts for FY20.

BCI submitted a draft environmental review document (ERD) for the Mardie project to the Western Australian Environmental Protection Authority (EPA) in April 2019. Since then, it has revised the draft to incorporate refinements to the project layout and feedback from the EPA and other government departments and agencies and now expects to release the document for public comment in Q4 CY19 with EPA endorsement targeted for Q2 CY20.

Additional memoranda of understanding (MoUs) were agreed with Asian chemical companies and traders during the quarter. As a result, BCI now has six MoUs that cover 2.4Mtpa (60%) of Mardie’s planned steady-state salt output and 10ktpa (10%) of its planned steady-state SOP output over a period of three years. This compares with MoUs covering 30% of Mardie’s planned steady-state salt production over three years at the end of the June quarter. Note that BCI reports that positive discussions are ongoing with a number of other salt and SOP end-users and traders and that BCI is aiming to secure additional salt MoUs by the end of the calendar year.

Finally, in respect of funding, securing long tenor debt is an important part of Mardie’s strategy, to which end it is progressing discussions with the Federal Government’s Northern Australia Infrastructure Facility (NAIF). It has also started engaging with commercial banks for the provision of project finance debt to complement any NAIF debt facilities.

Valuation and sensitivities

As stated previously, the only other of our assumptions to change are BCI’s share price (which has fallen from 19.5c at the time of our last note to 18c currently) and the A$/US$ rate (which has fallen to A$1.4582/US$). The remainder of our assumptions remain unchanged with the result that our long-term estimates of BCI’s earnings, (maximum potential) dividends per share and valuation trajectory are also substantially unchanged as follows:

Exhibit 4: BCI EPS and (maximum potential) DPS forecasts, FY18–83e (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 our customary discount rate of 10% per year, the (fully diluted) value of these cash flows to shareholders is 34.13 Australian cents at 1 July 2019. This compares with a valuation of 35.60c previously although the reduction may be entirely attributed to the recent decline in BCI’s share price (which increases future assumed equity dilution). If the share price was unchanged, the updated valuation of BCI would instead be 36.13c.

To this should then be added a further 2.43c for BCI’s Buckland iron ore assets to take the total to 36.56c.

Sensitivities

All other things being equal, our earnings forecasts will be affected by the extent to which iron ore prices either remain at current levels or decline as shown in Exhibit 1. As can be seen in Exhibit 5, we calculate that, if iron ore prices remain at current levels (58% CFR at US$76/t) and all other things remain equal, BCI’s valuation will rise by 14.0%, from 34.13c/share to 38.91c/share. Alternatively, if the company takes the opportunity to reduce future equity funding as a result of a higher iron ore price, the valuation instead increases by 30.0% to 44.38c/share:

Exhibit 5: BCI Minerals valuation sensitivity to future Iron Valley iron ore pricing scenarios

Scenario

Valuation (Australian cents per share)

Incremental change (cps)

Incremental change (%)

Maximum net debt funding requirement (A$m)

Maximum leverage* (%)

Base case

34.13

272.2

50.0

Iron ore price remains at current level until end of life of mine

38.91

+4.78

+14.0

217.8

39.8

Ditto with reduced future equity funding requirement

44.38

+10.25

+30.0

273.7

50.0

Source: Edison Investment Research. Note: *Defined as (net debt)/(net debt+equity).

Exhibit 6: Financial summary

A$'000s

2015

2016

2017

2018

2019

2020e

2021e

June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

281,211

151,279

64,324

33,029

54,170

85,774

55,225

Cost of Sales

(278,465)

(158,210)

(55,190)

(47,442)

(56,781)

(96,404)

(50,022)

Gross Profit

2,746

(6,931)

9,134

(14,413)

(2,611)

(10,630)

5,203

EBITDA

 

 

2,746

(6,931)

9,134

(14,413)

(2,611)

(10,630)

5,203

Operating Profit (before amort. and except.)

(26,090)

(12,622)

5,665

(17,330)

(5,234)

(13,253)

2,580

Intangible Amortisation

0

0

0

0

0

0

0

Exceptionals

(170,881)

(40,108)

(302)

0

15,991

0

0

Other

(2,935)

812

(5)

0

0

0

0

Operating Profit

(199,906)

(51,918)

5,358

(17,330)

10,757

(13,253)

2,580

Net Interest

(3,505)

(951)

311

420

630

506

254

Profit Before Tax (norm)

 

 

(29,595)

(13,573)

5,976

(16,910)

(4,604)

(12,748)

2,834

Profit Before Tax (FRS 3)

 

 

(203,411)

(52,869)

5,669

(16,910)

11,387

(12,748)

2,834

Tax

44,912

(27,086)

0

0

1,510

0

0

Profit After Tax (norm)

12,382

(39,847)

5,971

(16,910)

(3,094)

(12,748)

2,834

Profit After Tax (FRS 3)

(158,499)

(79,955)

5,669

(16,910)

12,897

(12,748)

2,834

Average Number of Shares Outstanding (m)

174.8

196.2

316.7

394.6

397.2

397.6

925.7

EPS - normalised (c)

 

 

7.1

(20.3)

1.9

(4.3)

(0.8)

(3.2)

0.3

EPS - normalised and fully diluted (c)

 

7.1

(19.5)

1.9

(4.3)

(0.8)

(3.1)

0.3

EPS - (IFRS) (c)

 

 

(90.7)

(40.8)

1.8

(4.3)

3.2

(3.2)

0.3

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

1.0

-4.6

14.2

-43.6

-4.8

-12.4

9.4

EBITDA Margin (%)

1.0

-4.6

14.2

-43.6

-4.8

-12.4

9.4

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

-9.3

-8.3

8.8

-52.5

-9.7

-15.5

4.7

BALANCE SHEET

Fixed Assets

 

 

154,904

86,546

78,059

85,768

74,075

81,452

184,389

Intangible Assets

60,237

33,618

33,063

43,615

34,392

44,392

40,392

Tangible Assets

94,667

52,928

44,996

42,153

39,683

37,060

143,997

Investments

0

0

0

0

0

0

0

Current Assets

 

 

102,374

23,204

46,429

20,270

56,293

35,436

109,747

Stocks

9,886

61

0

0

0

117

76

Debtors

24,427

13,694

10,053

7,213

22,251

18,068

13,617

Cash

67,671

9,449

36,376

13,057

33,702

16,911

95,715

Other

390

0

0

0

340

340

340

Current Liabilities

 

 

(77,222)

(21,769)

(12,107)

(9,373)

(18,092)

(17,360)

(11,151)

Creditors

(70,947)

(19,749)

(12,107)

(9,373)

(18,092)

(17,360)

(11,151)

Short term borrowings

(6,275)

(2,020)

0

0

0

0

0

Long Term Liabilities

 

 

(20,773)

(11,307)

(5,225)

(6,054)

(8,664)

(8,664)

(8,664)

Long term borrowings

0

0

0

0

0

0

0

Other long term liabilities

(20,773)

(11,307)

(5,225)

(6,054)

(8,664)

(8,664)

(8,664)

Net Assets

 

 

159,283

76,674

107,156

90,611

103,612

90,864

274,321

CASH FLOW

Operating Cash Flow

 

 

(77,686)

(19,721)

11,860

(11,957)

(7,663)

(7,297)

3,487

Net Interest

(1,120)

0

0

0

0

506

254

Tax

44,912

(27,086)

0

0

1,510

0

0

Capex

(10,987)

(8,075)

(2,220)

(10,074)

(496)

(10,000)

(109,560)

Acquisitions/disposals

24,338

0

(5,151)

(1,288)

27,294

0

4,000

Financing

6,118

1,510

24,403

0

0

0

180,623

Dividends

(18,652)

0

0

0

0

0

0

Net Cash Flow

(33,077)

(53,372)

28,892

(23,319)

20,645

(16,791)

78,804

Opening net debt/(cash)

 

 

(94,473)

(61,396)

(7,429)

(36,376)

(13,057)

(33,702)

(16,911)

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

(595)

55

0

0

0

0

Closing net debt/(cash)

 

 

(61,396)

(7,429)

(36,376)

(13,057)

(33,702)

(16,911)

(95,715)

Source: Company sources, Edison Investment Research


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 research department of Edison 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.

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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 research department of Edison 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.

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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.

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Australia

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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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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.

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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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