Guy on Rocks is a Stockhead series that reviews important resource market events weekly.

Former geologist and seasoned stockbroker Guy Le Page, director and senior executive at Perth-based financial services provider RM Corporate Finance, shares his strong views on the market and “stocks to watch”.

Market discounts

Gold ended at US $ 1,780 / oz, up US $ 15 for the week against the weaker US dollar.

Gold bugs will be interested to know that from June 28, 2021, the Basel III Accord comes into effect (a set of international regulations regarding bank capital adequacy, stress testing and overall market liquidity – figure 1), according to which gold will henceforth be regarded as an illiquid asset for central banks.

Gold must be stored in physical form in the institution’s vaults. The current practice is to rent or borrow gold, a practice which will be less attractive under Basel III.

Thus, the net effect is that central banks will be encouraged to increase their respective physical reserves as gold reaches level 1 asset status.

Figure 1: Pillars of Basel III (Source: regions-plans /, June 16, 2021).

Other precious metals had a good week with platinum up nearly 7% to close at US $ 1,102 / ounce and palladium up over 7% to end the week at US $ 2,572 / ounce.

Copper rebounded 1.5% last week, closing at US $ 4.25 / pound, up 6 cents on Friday, according to speculation about the bipartite US infrastructure deal of $ 1.2 trillion. US dollars spent in the US Senate last week.

Four-month copper futures were back in contango (where the futures price is higher than the spot price), so traders are a bit more bullish on this news.

Interestingly, one of the proposals to pay for the infrastructure package was to sell part of the strategic oil reserve in the order of $ 6 billion, or 0.5 percent of total US reserves. An additional $ 6 trillion has been earmarked for climate change, education, paid holidays and childcare allowances.

Among other signs that countries are trying to mitigate their supply risks, it has been reported that Russia is considering levying an export tax of US $ 2.3 billion on steel products, nickel , aluminum and copper.

The aim is to protect its defense and construction industries against rising commodity prices. This represents a reasonable percentage of their annual production (Table 1).

We have seen taxes used in the past to try to dampen price increases, but these often have had the opposite effect!

Table 1: Russian Base Metals Supply, 2020 Exports (Source: Morgan Stanley Research, June 24, 2021).

Uranium bulls will be delighted to hear that Japan has restarted another reactor (Mihama Reactor No 3 in Fukui Prefecture-1st one in three years) making a total of 10 operating in Japan today compared to 56 in 2011 at the time of the Fukushima incident (no disaster as wrongly reported in the popular press).

Finally, there is some interesting data (Figure 2) on the compound annual growth rate (CAGR) of commodity prices from 1815 to the present day.

It appears that commodity price returns are due to a more sustained rebound, driven by prospects for negative real interest rates and over-leveraged economies that may ultimately see currency devaluation as a last resort to reduce debt.

Figure 2: Commodity Price Index in the United States, 10-year CAGR, 1815-2021 (Source: “In Gold We Trust”, May 27, 2021).

Company News

The long awaited Gray mine (ASX:DEG) The first JORC resource (Table 2, Figure 4) at Hemi (Western Australia) was released last week (ASX announcement, 23 June 2021) with a total inferred and indicated JORC resource of 192.4 meters @ 1.1 g / t Au for 6.8 million ounces (cut-off point of 0.30 g / t gold above 370 meters; Table 2).

Table 2: Hemi Project, JORC Inferred and Indicated Resources (Source: DEG, ASX announcement, 23 June 2021).

While the overall figure was more or less as expected, I was more interested in the potential for higher grade mineralization near the surface that would allow for faster payback of capital and obviously significantly improve the economics of the project. .

I noted that at a higher cut-off grade of 0.7 g / t gold in the top 370 meters, the resource still stands at 114 Mt @ 1.5 g / t gold for 5 , 6 Moz, which is a great result.

Fortunately, the ounces per vertical meter were impressive, with the deposits (Figure 4) remaining open along the strike and dip.

Figure 4: Plan showing the Hemi project, main prospects and mineralized envelopes (Source: DEG, ASX announcement, June 23, 2021).

Given the content and the wide widths, it is no longer possible to see fairly deep open-pit sections beyond 250 meters of vertical depth. Mineralization at Brolga is up to 300 meters wide at surface and has an impressive indicated resource inventory of 28 Mt @ 1.3 g / t gold.

All eyes will be on the September 2021 scoping study, but I believe that an 8 to 10 Mt operation producing around 300 to 350 Koz of gold per year is possible, assuming a recovery of ‘about 90 to 92% based on reserves of about 4 Moz of gold.

Canaccord Genuity suggests a CAPEX of $ 800 million with C3 costs in the range of $ 1,050 / ounce based on a production of 340,000 ounces per year, which, in numbers, should give you a NPV afterwards. taxes.5 (net present value) in the order of $ 1.2 million.

This values ​​the exploration area and residual ounces that are not part of the original mining plan at approximately $ 350 million, which is probably not unreasonable given the increase in exploration and the quality of the resources. JORC.

There has been speculation about the risk associated with using the POX, Albion® and / or BIOX® processes, but it appears that any oxidation under pressure will occur at atmospheric pressures and 30-40% of the ore will relate to a Carbon-In. -Leaching system anyway.

Lots of exploration potential (particularly on the Diucon / Eagle outlook) with 12 rigs in operation and over 100 people on site. Studies on the environment, hydrology, heritage and infrastructure are well advanced.

At an enterprise value of $ 1.57 billion, that implies an EV / ounce of $ 230 / ounce of gold, so the stock is not a cheap game (based on this benchmark measure) .

However, given the proximity to production, using discounted cash flow analyzes (i.e. net present values) gives us a better idea of ​​valuations at or near the start of production. , therefore a NPV5 in the order of $ 1.2 billion implies a 25% premium over current market capitalization.

However, based on net assets (NPV + other assets e.g. residual resources not part of the mine plan) this equates to $ 1.2 billion plus a value of approximately $ 130 / ounce of gold for the residual 2.72 million ounces of gold that was not produced. in the mining study (or $ 350 million) which brings us to around $ 1.55 billion (the current market cap at $ 1.29 per share).

As I suggested – not cheap, but DEG represents a good lever for any rise in the price of gold. Not to mention the potential for a rapid increase in the current inventory of resources. Like they say, you get what you pay for.

New ideas

Continuing the theme of our battery metals, one to put on the radar is Arafura Resources (ASX:ARU) which ended the week a bit sluggish at 14 cents (Figure 5) after raising $ 40 million at 12 cents through Sydney-based institutional broker Petra Capital.

Figure 5: 12-month ARU share price (Source: CMC Markets, June 25, 2021).

The funds are to be allocated to the engineering and design activities of their neodymium-praseodymium project located in the Northern Territory (Figure 6) as the demand for NdFeB magnets increases.

Figure 6: ARU Nolan Project (Source: ARU ASX Announcement, June 24, 2021).

Logistics are excellent with the Stuart Highway 10 km to the east, water 25 km to the southwest and the Alice Springs train station in Darwin.

The project (May 2021 DFS) posts a NPV of $ 1.4 billion8 with a CAPEX of approximately $ 1 billion and generates an annual EBITDA of approximately $ 354 million over a 38-year lifespan, producing 4,440 tonnes of NdPr oxide per year (or 5-10% of the global supply forecast).

Operating costs are estimated at US $ 24.75 for NdPr oxide. The Internal Rate of Return (IRR) is a bit meager at just over 18%, but the recent strength in rare earth prices (and bullish outlook – Figure 7) and further optimization of the existing process pattern has the potential. improve the economy project.

Figure 7

It should be noted that Chinese rare earth ore imports increased 174% in March 2021, with the average import price increasing 23.1%.

Chinese stocks also fell by 60% in 2020. The average price of NdPr oxide in 2021 is US $ 79 / kg3, up> 105% compared to 2020 (Figure 8).

Figure 8: NdPr supply-demand and price outlook (Source: Lynas Corporation, Bainfo and Asian Metals).

Discussions on the levy are underway with a wide range of international actors, as are discussions on project funding.

The price tag is followed by a “b” which means that there is a significant funding risk associated with the project. The challenge is to keep the project as much as possible in production. About 20-30% would be a good result from here.

It’s hard to assess rather exotic, high-CAPEX unfunded projects like this, but at an enterprise value of around $ 120 million and short-term funding put in place, I think it There will be business opportunities as a tight supply of REE approaches in the coming years.

At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives ranging from mergers and acquisitions, IPOs and valuations, to consulting and corporate advisory roles.

He was head of research at Morgan Stockbroking Limited (Perth) before joining Tolhurst Noall as a corporate advisor in July 1998. Prior to entering the stock exchange industry he spent 10 years as a geologist exploration and mining operations in Australia, Canada and the United States. States. The views, information or opinions expressed in the interview for this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for the advice on financial products contained in this article.

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