Sandfire’s bid undervalues MOD

MOD Resources 22 January 2019 Update
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MOD Resources

Sandfire’s bid undervalues MOD

Placing and bid

Metals & mining

22 January 2019

Price

A$0.33

Market cap

A$82m

£/A$1.79

Net cash (A$m) at 30 September 2018

12.8

Shares in issue

248.6m

Free float

53%

Code

MOD

Primary exchange

ASX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

(6.4)

(42.1)

(66.6)

Rel (local)

(13.0)

(41.2)

(65.7)

52-week high/low

A$0.6

A$0.2

Business description

MOD Resources is an ASX-listed exploration and development company focused on the Kalahari Copper Belt of Botswana. The flagship T3 deposit has a JORC 2012 compliant mineral resource estimate of 60Mt at a grade of 0.98% copper.

Next events

T3 feasibility study

H119

T3 underground scoping study

H119

Analyst

Dr Ryan D. Long

+44 (0)20 3077 5725

MOD Resources is a research client of Edison Investment Research Limited

MOD Resources has raised A$10m through an oversubscribed institutional placing at a price of A$0.30/share (17p/share), a 36% premium to the closing price on 18 January 2019. The company also intends to raise a further A$5m through a fully underwritten rights issue at A$24/share (13p/share). In addition, the company has received an unsolicited, non-binding, indicative all-share offer from Sandfire Resources (SFR:AU) at a price of A$0.38/share (21p/share). The board of MOD believes the Sandfire offer undervalues the company’s assets.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

0

(1.2)

(0.01)

0.00

N/A

N/A

12/17

0

(2.3)

(0.01)

0.00

N/A

N/A

12/18e

0

(5.0)

(0.02)

0.00

N/A

N/A

12/19e

0

(4.2)

(0.01)

0.00

N/A

N/A

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

Proceeds to fully fund 2019 work programme

The funds from the placing and underwritten rights issue will fully fund MOD’s 2019 work programme. This programme is expected to include: 1) completion of the T3 feasibility study, mining licences application and early development work, targeted for H119; 2) funding the acquisition of the farm on which the T3 open pit is located; 3) an infill drill programme to upgrade the part of the T3 JORC 2012 compliant mineral resource estimate to be mined early in the mine’s life, to measured category; 4) advance the underground mining studies at T3 and A4 with required resource drilling; and 5) follow up drilling on the T4 and T23 discoveries.

The Sandfire offer

Sandfire Resources is copper producer that operates the high-grade DeGrussa Copper-Gold Mine, located in Western Australia. The Sandfire offer followed a period of technical due diligence that included a site visit and access to MOD’s data room. This interaction has been under the presumption of a potential assets level joint venture at the T3 Project, together with a potential investment in MOD. It would appear that the recent weakness in MOD’s share price, a 2.5-year low, caused Sandfire to re-evaluate its strategy. The all-share offer is equivalent to one Sandfire share for 17 MOD shares. Sandfire is trading at A$7/share.

Valuation: Increased to A$0.75/share (42p/share)

In our previous forecasts we estimated that MOD Resources would raise A$20m in Q119 at a price of A$0.32/share (18p/share. As a result of the company raising a smaller amount of capital than we forecast, but still enough to fund its 2019 work programme, and due to the reduced overall dilution thanks to the higher prevailing share price (24p/share vs 18p/share) our valuation has increased to A$0.75/share (42p/share), from A$0.64/share (39p/share) at 18 December 2018. The revised valuation represents 76% upside to the current share price (24p) and 112% upside to the Sandfire offer price (21p).

Investment summary

Valuation: A$0.75/42p per share (from A$0.64/39p per share)

In our initiation note we forecast that MOD Resources would raise A$20m in Q119 at a price of A$0.32/share (18p/share). Our updated forecasts and valuation take into account the actual capital raised from the placing (A$10m) and the further A$5m expected from an underwritten rights issue This, and the reduced overall dilution thanks to the higher prevailing share price, has increased our valuation per share to A$0.75/share (42p/share), from A$0.64/share (39p/share) at 18 December 2018. The revised valuation represents 76% upside to the current share price (24p) and 112% upside to the Sandfire offer price (21p). Taking into account the value of the Sandfire offer, less MOD’s estimated net cash position post the placing and underwritten rights issue, we estimate that the Sandfire offer implies A$127/t (£71/t) of attributable contained copper equivalent.

Based on our model, we estimate that the copper price of US$5,000t is required to value MOD at the same level as the Sandfire Resources bid of A$0.38/share; the current LME copper price is US$6,021/t. The Sandfire offer is subject to: completion of due diligence; execution of a merger implementation agreement; unanimous recommendation from the MOD board; binding commitments or statements of intent by MOD shareholders holding 19.9% or more, in support of the transaction; and approval by the board of Sandfire.

Financials: LOM EBITDA of A$928m over nine years

In our updated forecasts we use an exchange rate of US$/A$1.4 compared to US/A$1.39 in our previous report. As a result, we expect that MOD will generate revenue of A$74.3m (previous forecast A$73.6m) during 2020 as the T3 mine ramps up production levels. Once at full production, expected in 2021, we forecast this to increase to A$226.4m (vs our previous forecast of A$224.2m). Over the initial nine-year mine life, we forecast MOD to generate revenue of A$1.9bn (vs A$1.9bn) and EBITDA of A$973m (vs A$936m). To develop T3 into a mine that produces 23,000t of copper pa, using the base case PFS numbers, and to continue to advance its earlier-stage projects, we forecast that MOD will require additional funding of c A$145m over the next two years, which we envisage will be funded through a mixture of debt and equity. We forecast that the company finished FY18 with a net cash position of A$9.9m.

Company description: Botswanan copper-silver explorer

MOD Resources is a copper-silver exploration and development company with a substantial ground holding in the Kalahari Copper Belt, Botswana. The company has been very successful with its regional exploration concept, which has led to the discovery and drill-out of 60Mt at a grade of 0.98% Cu and 13.9g/t Ag T3 copper-silver deposit and 2.5Mt at a grade of 1.80% Cu and 45g/t Ag T1 copper-silver deposit. Regional drilling in the T3 expansion project has led to two additional discoveries, A1 and A4, while regional drilling at the T20 exploration project has also returned interesting results at T4 and T23. MOD has already completed a pre-feasibility study (PFS) at T3 (announced on 31 January 2018) and is in the process of completing a feasibility study, targeted for H119. The PFS base case was for a 2.5Mtpa plant, and defined a pre-tax NPV8 of US$281m and a pre-tax IRR of 39%, assuming a nine-year life of mine (LOM) and an average copper price of US$6,614/t. A PFS expansion case to 4Mtpa, defined a pre-tax NPV8 of US$402m and a pre-tax IRR of 38% assuming a 12-year LOM. The feasibility study targeted for H119 is expected by management to benefit from a coarser grind size and an increased base case plant size when compared to the PFS base case. MOD is pursuing a dual strategy to advance its T3 deposit into production and prove up potential supplementary sources of mineralisation for the T3 plant in the medium term, while continuing to test and advance the numerous targets for additional regional discoveries in the near term.

Exhibit 1: Financial summary

A$000s

2016

2017

2018e

2019e

2020e

2021e

31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

0.0

0.0

0.0

0.0

74,326.8

226,352.1

Cost of Sales

0.0

0.0

0.0

0.0

(50,686.1)

(121,722.3)

Gross Profit

0.0

0.0

0.0

0.0

23,640.8

104,629.9

EBITDA

 

 

(1,069.3)

(2,511.1)

(5,000.0)

(3,150.0)

20,333.3

101,157.0

Normalised operating profit

 

 

(1,080.6)

(2,551.2)

(5,000.0)

(3,150.0)

9,333.3

61,157.0

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(402.3)

(66.1)

0.0

0.0

0.0

0.0

Share-based payments

(319.2)

(1,074.0)

(5,639.7)

0.0

0.0

(13,422.3)

Reported operating profit

(1,802.1)

(3,691.3)

(10,639.7)

(3,150.0)

9,333.3

47,734.7

Net Interest

(103.7)

222.6

0.0

(1,000.0)

(9,362.2)

(9,490.9)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Profit before tax (norm)

 

 

(1,184.3)

(2,328.5)

(5,000.0)

(4,150.0)

(29.0)

51,666.1

Profit before tax (reported)

 

 

(1,905.8)

(3,468.6)

(10,639.7)

(4,150.0)

(29.0)

38,243.8

Reported tax

0.0

0.0

0.0

0.0

0.0

(8,413.6)

Profit after tax (norm)

(1,184.3)

(2,328.5)

(5,000.0)

(4,150.0)

(29.0)

43,252.5

Profit after tax (reported)

(1,905.8)

(3,468.6)

(10,639.7)

(4,150.0)

(29.0)

29,830.2

Minority interests

(30.5)

(2.7)

0.0

0.0

0.0

0.0

Discontinued operations

(15.0)

(57.2)

0.0

0.0

0.0

0.0

Net income (normalised)

(1,214.8)

(2,331.2)

(5,000.0)

(4,150.0)

(29.0)

43,252.5

Net income (reported)

(1,951.2)

(3,528.6)

(10,639.7)

(4,150.0)

(29.0)

29,830.2

Basic average number of shares outstanding (m)

131

182

224

303

352

401

EPS – basic normalised (c)

 

 

(0.01)

(0.01)

(0.02)

(0.01)

(0.00)

0.11

EPS – diluted normalised (c)

 

 

(0.01)

(0.01)

(0.02)

(0.01)

(0.00)

0.10

EPS – basic reported (c)

 

 

(0.01)

(0.02)

(0.05)

(0.01)

(0.00)

0.07

Dividend (c)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

0.0

0.0

0.0

0.0

100.0

204.5

Gross margin (%)

0.0

0.0

0.0

0.0

31.8

46.2

EBITDA margin (%)

0.0

0.0

0.0

0.0

27.4

44.7

Normalised operating margin (%)

0.0

0.0

0.0

0.0

12.6

27.0

BALANCE SHEET

Fixed assets

 

 

15,806.9

22,205.0

37,205.0

61,446.7

199,969.6

240,563.7

Intangible assets

15,735.5

21,431.2

36,431.2

48,431.2

56,431.2

64,431.2

Tangible assets

71.4

773.8

773.8

13,015.5

143,538.4

176,132.5

Investments & other

0.0

0.0

0.0

0.0

0.0

0.0

Current assets

 

 

5,840.7

14,190.8

14,256.5

11,673.7

21,700.9

44,571.3

Stocks

0.0

0.0

0.0

0.0

2,850.9

8,682.0

Debtors

245.3

644.5

800.0

1,000.0

6,109.1

18,604.3

Cash & cash equivalents

5,546.1

9,997.5

9,907.7

7,161.5

6,377.8

5,090.8

Other

49.3

3,548.8

3,548.8

3,512.3

6,363.2

12,194.3

Current liabilities

 

 

(2,133.7)

(2,580.0)

(7,444.8)

(7,444.8)

(15,773.0)

(30,153.9)

Creditors

(603.2)

(1,935.3)

(2,000.0)

(1,800.0)

(4,166.0)

(10,004.6)

Tax and social security

0.0

0.0

0.0

0.0

0.0

(8,413.6)

Short-term borrowings

(1,500.0)

(565.2)

(65.2)

(65.2)

(65.2)

(65.2)

Other

(30.5)

(79.6)

(5,379.6)

(5,579.6)

(11,541.8)

(11,670.5)

Long-term liabilities

 

 

0.0

(44.4)

0.0

(10,000.0)

(100,000.0)

(100,000.0)

Long-term borrowings

0.0

0.0

0.0

(10,000.0)

(100,000.0)

(100,000.0)

Other long-term liabilities

0.0

(44.4)

0.0

0.0

0.0

0.0

Net assets

 

 

19,513.9

33,771.3

44,016.7

55,675.6

105,897.6

154,981.1

Minority interests

(1,106.5)

(3,124.0)

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

18,407.4

30,647.3

44,016.7

55,675.6

105,897.6

154,981.1

CASH FLOW

Operating cash flow before WC and tax

(1,069.3)

(2,511.1)

(5,000.0)

(3,150.0)

20,333.3

101,157.0

Working capital

(373.8)

237.9

(135.2)

(400.0)

(5,594.0)

(12,487.7)

Exceptional & other

0.0

0.0

0.0

0.0

0.0

0.0

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Net operating cash flow

 

 

(1,443.1)

(2,273.2)

(5,135.2)

(3,550.0)

14,739.3

88,669.3

Capex

(32.4)

(651.4)

0.0

(12,241.7)

(141,523.0)

(72,594.0)

Acquisitions/disposals

26.2

0.0

0.0

0.0

0.0

0.0

Net interest

(237.1)

212.5

0.0

0.0

(1,000.0)

(9,362.2)

Equity financing

10,272.4

14,409.4

17,545.4

15,045.4

45,000.0

0.0

Exploration and Evaluation

(4,311.4)

(8,296.7)

(15,000.0)

(12,000.0)

(8,000.0)

(8,000.0)

Other

1,106.5

2,120.4

3,000.0

0.0

0.0

0.0

Net cash flow

5,381.1

5,521.0

410.2

(12,746.3)

(90,783.7)

(1,287.0)

Opening net debt/(cash)

 

 

1,547.4

(4,046.1)

(9,432.3)

(9,842.5)

2,903.7

93,687.4

FX

94.0

(44.1)

0.0

0.0

0.0

0.0

Other non-cash movements

118.4

(90.7)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(4,046.1)

(9,432.3)

(9,842.5)

2,903.7

93,687.4

94,974.4

Source: Company data, Edison Investment Research


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This report has been commissioned by MOD Resources and prepared and issued by Edison, in consideration of a fee payable by MOD Resources. 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.

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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

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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