Terramin Australia Limited
17 April 2007
Ord Minnett Research
Terramin Australia Limited
TZN : $ 1.86
Great Zinc ! Good BUY.
Recommendation :
TZN is an emerging zinc producer that will start production from its first project
Risk Assessment :
in 2008 Q3 and could be producing about 200kt/yr of zinc in conc. by 2012.
Ord Minnett’s base case valuation is $2.48, giving a projected 12 month return of over 40%.
Ord Minnett’s analysis indicates that the present share price heavily discounts TZN’s projects for the risks inherent in future projects.
However Ord Minnett projects that the zinc market will remain in deficit in 2007 and move into surplus in 2008 and 2009 before heading back into deficit.
There are very few known zinc projects scheduled five years out, when TZN’s production gets into full swing.
TZN also has considerable further upside potential to that included in Ord Minnett’s valuation from known mineralisation.
TZN’s share price moves with the zinc price, so while Ord Minnett rates TZN as a BUY now, it may be even better buying in about two years from now. . Disclosure : the author has an economic interest in TZN Key Financials Year-end December Revenue ($m)
BUY High Materials Sector, Metals and Mining Industry Pieter Bruinstroop Research Analyst Company Name ASX Code 52 week range Market Cap Shares Outstanding Av Daily Turnover ASX 100 ASX 300 Resources NTA FY06 (¢ per share) Net Cash FY06 ($A m)
Terramin Australia TZN $0.93 - $2.50 $173m 91.0m $0.4m 4,796.8 4,392.9 22.5c $ 3.1m
Relative Share Price Performance
FY06 a
FY07 e
FY08 e
FY09 e
$ 1m
$ 0m
$ 15m
$ 91m
EBITDA ($m)
($ 2m)
($ 3m)
($ 4m)
$ 31m
Net profit after tax ($m)
($ 2m)
($ 4m)
($ 10m)
$ 13m
EPS (¢)
(4.3c)
(3.9c)
(11.1c)
14.6 c
P/E (x)
(53.5x)
(48.7x)
(16.9x)
12.9 x
EV/EDITDA
(104x)
(46.6x)
(32.2x)
5.3 x
Dividend (¢)
0c
0c
0c
0c
Net Yield (%)
0.0%
0.0%
0.0%
0.0%
Franking (%)
0%
0%
0%
0%
(339%)
10%
(188%)
231%
Normalised ROE (%)
(12%)
(23%)
(193%)
72%
NPV / share
$2.40
$2.69
$2.84
$2.83
$ 2.50
$ 2.25
$ 2.00
TZN share price ASX Accumulation Index (re-scaled)
$ 1.75
EPS Growth (%)
$ 1.50
$ 1.25
$ 1.00
$ 0.75
$ 0.50
$ 0.25
$ 0.00 Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
Source: Iress
Source: Iress, Terramin Australia, Ord Minnett Estimates
17 April 2007
Page 1
Table of Contents Piet’s Nuggets : Great Zinc ! A Good BUY
3
Zinc Prices : More than One Day in the Sun
9
TZN : A Lot of Experience, but a Short History
14
Angas : 18 months until zinc
16
Geology and Exploration
17
Proposed Operations : Small, not Complex
19
Projected Cashflows are very Good
20
Oued Amizour : The Big One ! Oued Amizour : Much Previous Work
25
Geology and Exploration : A Bit More to Do
26
Oued Amizour : Development Plan
28
Oued Amizour’s Proposed Operations
29
Oued Amizour : Financing is a Real Question
30
Projected Cashflows
31
Menninnie Dam : What Size ?
17 April 2007
24
33
Menninnie Dam : Geology and Exploration
34
Menninnie Dam : Proposed Operations
36
Menninnie Dam : Projected Cashflows
38
TZN : Other Potential Present but not Valued
42
TZN : Three Projects Gives Good Growth
42
TZN Valuation : The Bottom Line
44
Accounting Based Measures
44
Base Case Valuation
45
Sensitivity Analyses
46
Conclusions
54
Appendix 1 : Board and Management
58
Appendix 2 : Financials
61
Page 2
PIET’s NUGGETS : Great Zinc ! Good BUY. Zinc prices are presently high. As shown in Chart 1, in the last two years, zinc prices have trebled from the levels of the previous 12 years, which more than covers the experience of most in the financial markets.
Chart 1 : Zinc prices $ 5,000 /t
$ 4,500 /t
$ 4,000 /t
$ 3,500 /t
$ 3,000 /t
$ 2,500 /t
Zinc prices are high
$ 2,000 /t
$ 1,500 /t
$ 1,000 /t
$ 500 /t
$ 0 /t Oct-92
Oct-93
Oct-94
Oct-95
Oct-96
Oct-97
Oct-98
Oct-99
Oct-00
Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Because
Oct-06
Source : IRESS, Ord Minnett
Stocks are low The recent rise in prices is due to the fall in available zinc stocks, as shown in Chart 2 below.
Because Chart 2 : LME zinc stocks v. zinc prices 1,250,000 t
US 5,000 /t
LME Zinc Stockpiles
US 4,500 /t
1,125,000 t
LME Zinc price, 3m
US 4,000 /t
1,000,000 t
US 3,500 /t
875,000 t
US 3,000 /t
750,000 t
US 2,500 /t
625,000 t
US 2,000 /t
500,000 t
US 1,500 /t
375,000 t
US 1,000 /t
250,000 t
US 500 /t
125,000 t
US 0 /t Jul-94
Mar-95
Dec-95
Sep-96
Jun-97
Mar-98
Dec-98
Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
0t Mar-07
A long period of low prices means little new mining
And
Continuing demand growth in China
Source : IRESS, Ord Minnett
and The low stocks and resulting high prices have resulted from the following three reasons :
Mining production has increased only slowly due to the long period of low prices;
The continuing growth in China’s demand for all commodities, including zinc; and
The continuing growth in zinc demand for galvanising, while other uses have been stable.
17 April 2007
from Galvanising.
Page 3
Zinc stocks have fallen to very low levels, which means that demand has exceeded supply. Ord Minnett projects that 2007 will also have a deficit, while 2008 and 2009 will have small
Ord Minnett projects that 2007 will be fourth consecutive year of deficit in the zinc market
surpluses, before the market returns to deficit again in 2010.
This is shown in Chart 3 below.
Chart 3 : Historical demand and supply for zinc, and Ord Minnett’s projections 800 kt
14,000 kt
Global zinc supply-demand balance Esttmated global zinc supply
600 kt
13,000 kt
Estimated global zinc consumption
400 kt
12,000 kt
200 kt
11,000 kt
0 kt
10,000 kt 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200kt)
9,000 kt
(400kt)
8,000 kt
(600kt)
7,000 kt
(800kt)
6,000 kt
Virtually wiping out available stocks And then only two years of surplus Before returning to deficits.
Source : ILZSG, Brook Hunt, J.P. Morgan, Ord Minnett
Accordingly, Ord Minnett projects that zinc prices will remain firm in 2007, and then ease in 2008 and 2009 before strengthening again. Ord Minnett’s projections are shown in Chart 4 below.
Ord Minnett’s projections for zinc prices are for prices to fall before rising again in 2009.
Chart 4 : Historical zinc prices and Ord Minnett’s projections $ 7,000/t
$ 6,000/t
$ 5,000/t
Historical zinc price, in 2006 US$ /t
Moving average, from 1900
Moving average, from 1921 (nadir)
Ord Minnett's price projections
$ 4,000/t
$ 3,000/t
$ 2,000/t
$ 1,000/t
$ 0/t 1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source : USGS, Ord Minnett estimates
Chart 4 uses historical, real zinc prices. It shows that :
The presently high prices are consistent with historically high prices; and
Ord Minnett’s projected Long-Run (L-R) prices are higher than those that would have
2020
Our Long-Run prices projections are higher than would have been used in the 1990s, but lower than truly long run historical averages.
been used in the 1990s, but lower than suggested by historical averages.
17 April 2007
Page 4
Terramin (TZN) : An Emerging Zinc Producer Terramin Australia (TZN) is an emerging zinc producer with one project currently in development and two more that are expected to begin development within the next three years. These developments are shown in Figure 1 below.
Figure 1 : TZN’s Projects
TZN is currently developing its Angas project
And has two more projects under investigation. Source : Terramin Australia
In total, TZN is expected to become a producer of about 200kt/yr of zinc in concentrate, it own share, from its three projects, the details of which are given in Table 1 below.
Table 1 : TZN’s Projects Angas
Tala Hamza
100%
65%
24%
2008 Q3
2011 Q1
2012 Q1
TZN share Commissioning Contained zinc
Ord Minnett expects TZN to produce at the rate of 200kt/yr during 2012.
Menninnie
190kt
2,750kt
1,590kt
Annual production (payable Zn eq.)
28kt/yr
130kt/yr
170kt/yr
Cash costs, Mine Site
$A 64/t
$A 42/t
$A 30/t
Net cash costs of zinc
59c/lb
57c/lb
57c/lb
Source : Ord Minnett estimates
Base Case Valuation The value in TZN is in developments that have yet to have a F/S completed on them. As such, there is significant risk in the assumed time frames and capital and operating costs.
Table 2 below shows Ord Minnett’s base case valuation fro TZN. It shows that the present share price applies a very heavy discount to TZN’s projects and prospects.
Ord Minnett’s base case valuation, after allowing for developmental risks, is $2.48
Table 2 : Ord Minnett’s valuation of TZN Higher Risk
Base Case Risk
Un-risked
$ 1.72
$ 2.48
$ 3.72
Source : Ord Minnett estimates
17 April 2007
Page 5
Table 3 below shows the detail of Ord Minnett’s valuation of TZN, clearly showing the risks attached to each of the asset valuations.
Table 3 : Detail of Ord Minnett’s valuation of TZN 31 December 2006 100 % Product per share Angas franking credits Oued Amizour Menninnie Dam
13-Apr-07
90 %
$74m
$67m
68c
70 %
$20m
$14m
14c
74c 14c
70 %
$212m
$148m
151c
156c
50 %
$41m
$20m
21c
21c
40 %
$34m
$14m
14c
14c
Administration
100 %
($32m)
($32m)
(33c)
(33c)
Net Debt / Cash
100 %
$5m
$5m
5c
2c
$354m
$236m
240c
248c
91.0m
FPO shares
7.5m
franking credits
TOTAL Shares on Issue Source : Ord Minnett estimates
The present share price reflects a very high risk weighting on TZN’s projects.
options
Risks to Ord Minnett’s Valuation Costs Ord Minnett’s believes that its estimates of capital and operating costs are both highly defendable and also conservative.
The impact on Ord Minnett’s derived valuation of higher operating costs (+5% for Angas and +10% for Tala Hamza and Menninnie Dam) and / or capital costs (+10% for Angas and +25% for Tala Hamza and Menninnie Dam) is shown in Table 4 below.
Table 4 : Impact on Ord Minnett’s derived valuation of high operating and capital costs Base Case
Higher Cap.Ex
High Op.Ex
Cap.Ex & Op,. Ex
Higher Risk
$ 1.72
$ 1.53
$ 1.42
$ 1.23
Base Case Risk
$ 2.48
$ 2.20
$ 2.06
$ 1.77
Un-risked
$ 3.72
$ 3.27
$ 3.11
$ 2.66
Even with higher costs Ord Minnett’s value for TZN is well above the present share price
Source : Ord Minnett estimates
Table 4 shows that the base case is robust for higher cost estimates.
Commodity Prices Key assumptions concerning commodity prices are :
Only with much lower prices does TZN cease to be good value.
Treatment Charges (TCs) fall as returns to smelters are at historical highs and new smelting capacity is easily constructed;
Lead prices fall steeply from present elevated levels, back to a L-R price of $750/t (or 34c/lb), which is a premium of 13% - 36% over the 1990s views of L-R lead prices; and
17 April 2007
Page 6
Zinc prices fall while the market is in surplus, and then rise again when the market is in deficit, reaching a L-R level of 75c/lb, or a premium of 36% to 50% over 1990s views of the L-R zinc price.
To test the sensitivity of Ord Minnett’s derived valuation, revised scenarios were tested :
TCs fall only a small amount and remain at levels much higher than seen before, despite the ease with which new capacity is being built;
Lead prices fall back to historic L-R levels, despite much higher costs; and Zinc prices fall back to historic L-R levels, despite projected L-R shortages and elevated cost structures.
Table 5 below shows the impact of these revised assumptions.
Table 5 : Impact on TZN’s NPV from revised commodity prices Higher Risk
Base Case Risk
Un-risked
Base Case
$ 1.72
$ 2.48
$ 3.72
Higher TCs
$ 1.54
$ 2.23
$ 3.34
Lower lead prices
$ 1.49
$ 2.16
$ 3.23
Lower zinc prices
($0.83)
($1.00)
($1.23)
Source : Ord Minnett estimates
Table 5 shows that TZN’s valuation is very sensitive to the zinc prices assumed, but not very sensitive to other assumptions.
Ord Minnett expects presently high zinc prices to ease over the next two years,
Zinc Price TZN’s major exposure is the zinc prices. Chart 5 below shows that the TZN share price moves with the zinc price.
Chart 5 : TZN share price v. zinc price $ 2.50
$ 5,500/t
$ 2.25
$ 5,000/t
$ 2.00
$ 4,500/t
TZN share price Zinc price
$ 1.75
$ 4,000/t
$ 1.50
$ 3,500/t
$ 1.25
$ 3,000/t
$ 1.00
$ 2,500/t
$ 0.75
$ 2,000/t
$ 0.50
$ 1,500/t
$ 0.25
$ 1,000/t
$ 0.00 Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
And TZN’s share price follows the zinc price.
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
$ 500/t Mar-07
Source : IRESS, Ord Minnett
17 April 2007
Page 7
The correlation between the TZN share and the zinc price since TZN’s listing has been a very high 97%.
As Ord Minnett [projects the zinc price to ease over the period to about the middle of 2009, there is real risk that the TZN share price will also ease over this period.
However, the TZN share price should be supported by growing production and progress on its projects.
While a weaker zinc price may drag the TZN share price down over the next two years, the TZN share price should be buoyed by getting into production and progress on its projects.
If the TZN share price does ease over the period to the middle of 2009, along with the zinc price, In Ord Minnett’s view, this will make TZN an even better buy.
Final Comments There are risks to Ord Minnett’s derived valuation of TZN. However, Ord Minnett’s analysis shows that the present price of TZN indicates that the market is either very negative on the prospects for zinc, or very cautious on the value of TZN’s developments.
In Ord Minnett’s view, the base case valuation makes an appropriate allowance for the risks involved.
Ord Minnett has not given a value for TZN’s potential from known mineralisation.
There is also considerable resource potential that is not included in Ord Minnett’s valuation :
The Fleurieu tenements, surrounding Angas, are an historic mining area, and TZN has carried out very little regional exploration as it has focused its resources on getting Angas into operation and hence generating a positive cashflow;
The Tala Hamza deposit is not structurally defined and there is considerable further potential along strike and at depth, given that some of the historical drilling ended in mineralization;
At least 22Mt of mineralized deposits have been identified in Oued Amizour, apart from Tala Hamza; and
Menninnie Metals has tenements in the Gawler Craton that are prospective for coppergold.
Accordingly, Ord Minnett initiates coverage of TZN with a BUY rating. Reflecting the risks,
Ord Minnett initiates research on TZN with a BUY Recommendation
Ord Minnett’s risk rating is High.
High Risk rating.
17 April 2007
Page 8
Zinc Prices : More than One Day in the Sun Zinc Prices are High, but not Too High Zinc prices are presently high, as shown in Chart 6 below, which shows daily zinc prices over the last 12 years.
Chart 6 : Daily zinc prices, since January 1995. US 5,000 /t
US 4,000 /t
Zinc prices are higher than anyone would have thought 12 months ago…...
US 3,000 /t
US 2,000 /t
US 1,000 /t
US 0 /t Jan-95
Jan-96
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Source : IRESS, Ord Minnett
However, if taken over a period of more than 100 years, zinc prices are high, but not
But present high prices are not out of line with history.
abnormally so, as shown in Chart 6 below, which shows annual average zinc prices.
Chart 7 : Zinc prices, in real terms, since 1900 $ 7,000/t
$ 6,000/t
$ 5,000/t
Historical zinc price, in 2006 US$ /t $ 4,000/t
$ 3,000/t
$ 2,000/t
$ 1,000/t
$ 0/t 1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Source : United States Geological Service, Bloomberg, Ord Minnett
Reviewing Chart 7 suggests :
Apart from a major price spike from 1988 to 1990, zinc prices have been in a significant downtrend since about 1974; and
Present prices are consistent with previous price spikes.
17 April 2007
Page 9
Present Zinc Prices are Consistent with Low Inventories As shown in Chart 8 below, present zinc prices are high because
Inventory levels are low; and
Prospective inventory levels are low.
Chart 8 : LME zinc stock level v. zinc price US 5,000 /t
1,250,000 t
LME Zinc Stockpiles
US 4,500 /t
1,125,000 t
LME Zinc price, 3m
US 4,000 /t
1,000,000 t
US 3,500 /t
875,000 t
US 3,000 /t
750,000 t
US 2,500 /t
625,000 t
US 2,000 /t
500,000 t
US 1,500 /t
375,000 t
US 1,000 /t
250,000 t
US 500 /t
125,000 t
US 0 /t Jul-94
Mar-95
Dec-95
Sep-96
Jun-97
Mar-98
Dec-98
Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
Present zinc prices are also consistent with low zinc stocks.
0t Mar-07
Source : Bloomberg, IRESS, Ord Minnett
China is One Driver Chart 8 also shows that the recent fall in prices has been associated with a small rise in LME zinc stocks. This rise was caused by a fall in apparent Chinese demand, with China becoming an exporter of zinc metal, though increasing its imports of concentrates, as shown in Chart 9 below.
Chart 9 : China’s imports and exports of zinc 125kt
100kt
China's net imports of zinc in concentrate 75kt
Low zinc stocks at least partly due to China’s change from an exporter to an importer of zinc.
China's net imports of refined zinc China's net imports of zinc
50kt
25kt
Ja n9 6 M ay -9 6 S ep -9 6 Ja n9 7 M ay -9 7 S ep -9 7 Ja n9 8 M ay -9 8 Se p -9 8 Ja n9 9 M ay -9 9 S ep -9 9 Ja n0 0 M ay -0 0 S ep -0 0 Ja n0 1 M ay -0 1 S ep -0 1 Ja n0 2 M ay -0 2 Se p -0 2 Ja n0 3 M ay -0 3 S ep -0 3 Ja n0 4 M ay -0 4 S ep -0 4 Ja n05 M ay -0 5 S ep -0 5 Ja n0 6 M ay -0 6 S ep -0 6 Ja n0 7
0kt
(25kt)
(50kt)
(75kt)
(100kt)
Source : Bloomberg, Ord Minnett
17 April 2007
Page 10
Zinc Demand : The Growing Areas Get Bigger ! China’s growth and galvanising are the key demand drivers for zinc. Chart 10 shows how galvanising demand has grown.
Chart 10 : Growth in galvanised sheet use 1,000 kt
30,000 kt
900 kt
27,000 kt
C A G R = 5.8% 800 kt
24,000 kt
W orld, ex C hina : G alvanised sheet use 700 kt
21,000 kt
600 kt
18,000 kt
500 kt
15,000 kt
400 kt
300 kt
Zinc’s main demand, and the driver of increased demand, has been galvanising.
12,000 kt
C A G R = 19%
9,000 kt
200 kt
6,000 kt
C hina : G alvanised Sheet use 100 kt
0 kt 1997 Q 1
3,000 kt
0 kt 1998 Q 1
1999 Q 1
2000 Q 1
2001 Q 1
2002 Q 1
2003 Q 1
2004 Q 1
2005 Q 1
2006 Q 1
Source : CRU International, China Iron and Steel Association, Ord Minnett
Table 6 below shows that Ord Minnett’s projected growth rates for zinc demand are less than the historical experience, except for the Rest of the World (RoW), where the projected demand is derived by the growth in galvanising demand by the proportion of total demand represented by galvanising (47%),and projecting other demand uses to remain flat, as has been the historical experience.
Table 6 : Historic v projected zinc demand China
Rest of World
Global Total
1997 - 2006, Galvanising
19.2 %
5.6 %
5.8 %
1997 - 2006, Total
18.0 %
1.3 %
3.9 %
2007 - 2015, projected
10.3 %
2.5 %
5.3 %
Mine supply IS responding to higher demand, but struggles to respond quickly enough.
Source : ILZSG, Ord Minnett estimates
Supply v. Demand : Deficit then Surplus then Deficit Zinc supply is responding to the high prices, as Table 7 shows the potential increase in zinc supply from announced projects. In short, mine supply IS coming.
Table 7 : Ord Minnett’s projected increases in mined zinc supply Increase from New Mines Increase from Mine Expansions TOTAL Change Source : various, Ord Minnett
17 April 2007
2006
2007
2008
2009
2010
2011
2012
2013
301kt
414kt
695kt
449kt
366kt
208kt
172kt
108kt
381kt
666kt
239kt
258kt
102kt
220kt
0kt
0kt
10,785kt
11,864kt
12,799kt
13,506kt
13,973kt
14,401kt
14,573kt
14,680kt
6.4 %
10.0 %
7.9 %
5.5 %
3.5 %
3.1 %
1.2 %
0.7 %
Page 11
Ord Minnett’s projections for mine supply could be too optimistic, if projects do not proceed as projected, or too pessimistic if there is significant increase in Chinese mine supply.
Chart 11, below, shows that Ord Minnett projects that zinc will be
In deficit for 2007, to about the extent of available LME stocks,
In surplus in 2008 and 2009; and
In deficit again by 2010.
Chart 11 : Historical and Ord Minnett’s projected balance for the zinc market 800 kt
14,000 kt
Global zinc supply-demand balance Esttmated global zinc supply
600 kt
13,000 kt
Estimated global zinc consumption
400 kt
12,000 kt
200 kt
11,000 kt
0 kt
Ord Minnett projects a further deficit in 2007, about the size of available inventory……
10,000 kt 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200kt)
9,000 kt
(400kt)
8,000 kt
(600kt)
7,000 kt
(800kt)
6,000 kt
Source : ILZSG, Brook Hunt, J.P. Morgan, Ord Minnett
then surpluses in 2008 and 2009….
then deficit again in 2010.
Projected Zinc Prices : Strong, Softer then Rebound The features of Ord Minnett’s projected zinc prices, as shown in Chart 12 below, are :
The Long-Run (L-R) price will be much higher than previously thought;
Prices will ease later in 2007 as the market swings into surplus;
Prices will bounce back when the market moves back into deficit.
Chart 12 : Historical zinc prices and Ord Minnett’s projections $ 7,000/t
$ 6,000/t
$ 5,000/t
Historical zinc price, in 2006 US$ /t
Moving average, from 1900
Moving average, from 1921 (nadir)
Ord Minnett's price projections
$ 4,000/t
$ 3,000/t
$ 2,000/t
$ 1,000/t
$ 0/t 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source : USGS, Ord Minnett estimates
17 April 2007
Page 12
In reviewing Copper, Nickel and Coal, Ord Minnett compared the objective data with commonly developed views of the Long-Run prices held through the 1990s and until about 2005 or so. The comparison is shown in Table 8 below.
Table 8 : Revised views of “Long-Run” prices Copper Convention 1995 - 2005 Ord Minnett, 2006
Thermal Coal
Nickel
Zinc
90 c/lb
$A 50/t
$ 3.00/lb
50 c/lb
135 c/lb
US$ 47.5/t
$ 5.00/lb
75 c/lb
50%
27%
67%
50%
Uplift Source : Ord Minnett
Table 9 shows Ord Minnett’s zinc price projections
Table 9 : Zinc prices : historical and Ord Minnett’s projections 2000 H1 H2 2001 H1 H2 2002 H1 H2 2003 H1 H2 2004 H1 H2 2005 H1 H2 2006 H1 H2 2007 H1 H2 2008 H1 H2 2009 H1 H2 2010 H1 H2 2011 H1 H2 2012 H1 H2 2013 H1 H2 2014 H1 H2 2015 H1 H2
Zinc Price
Zinc Price
$ 1,150 /t
52 c/lb
$ 1,126 /t
51 c/lb
$ 991 /t
45 c/lb
$ 817 /t
37 c/lb 37 c/lb
$ 809 /t $ 786 /t
36 c/lb
$ 795 /t
36 c/lb
$ 890 /t
40 c/lb
$ 1,064 /t
48 c/lb
$ 1,063 /t
48 c/lb
$ 1,306 /t
59 c/lb
$ 1,481 /t
67 c/lb
$ 2,745 /t
125 c/lb
$ 3,756 /t
170 c/lb
$ 3,500 /t
159 c/lb
$ 3,000 /t
136 c/lb
$ 2,500 /t
113 c/lb
$ 2,000 /t
91 c/lb
$ 1,750 /t
79 c/lb
$ 2,000 /t
91 c/lb
$ 2,500 /t
113 c/lb
$ 3,000 /t
136 c/lb
$ 3,000 /t
136 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,000 /t
91 c/lb
$ 2,000 /t
91 c/lb
$ 1,650 /t
75 c/lb
$ 1,650 /t
75 c/lb
Ord Minnett believes that the financial markets are too pessimistic on Long-Run zinc prices.
Source : IRESS, Ord Minnett estimates
17 April 2007
Page 13
TZN : A Lot of Experience, but a Short History TZN was incorporated in December 1993, under the name Playford Resources NL to explore for base and precious metals in Northern Territory, Western Australia and Queensland.
Three Development Projects TZN listed in December 2003 with one definite project in Angas and a good prospect in Menninnie Dam.
In 2005, TZN bought 65% of Western Mediterranean Zinc (WMZ), which owns the Oued Amizour lease area.
Each of these three properties has highly prospective Zinc – Lead mineralisation.
Ord Minnett expects that each of these three properties will be developed over the coming years, with :
Angas is expected to be in production by August 2008; Oued Amizour is presently going through a pre-feasibility, though it has already been drilled to suggest 50Mt of mineralisation at 5.5% Zn and 1.4% Pb in a 98m thick, flat lying lens
>
TZN is to pay not less than US$ 6.6m to complete the F/S; and
Menninnie Dam is being farmed into by Zinifex, who must spend $4m by the end of 2010 to gain an effective 76% interest; ZFX has already earned to 59.8% effective.
Figure 2 : The location of TZN’s projects
Source : Terramin Australia
17 April 2007
Page 14
TZN also has some Copper-Gold (Cu-Au) prospects in the Gawler Craton.
A Brief History In 1997, TZN reached agreement with Aberfoyle (ABF) to farm in to ABF’s Fleurieu tenements near Adelaide to 60% by spending $4 million. This amount was subsequently reduced to $2.0 million when the Menninnie Dam title was added to the joint venture assets.
In September 2000, Kevin Moriarty and David Paterson acquired all the shares in TZN in exchange for work they had done on TZN’s projects. Subsequently, private placements raised $0.8m to continue exploration.
ABF was subsequently acquired by Western Metals (WMT)
In June 2003 WMT invited TZN to farm into the Menninnie Dam title (EL2848) with an undertaking that minimum expenditure commitments be met by Terramin. The name of the Fleurieu Exploration Joint Venture was changed to Fleurieu Menninnie Dam Joint Venture (FMDJV).
WMT was later put into administration as it had sold forward more US$ than it generated from its operations due to the commodity price falls after the 1997 Asian Crisis, and the subsequent Russian Rouble and “Tequillla” crises
WMT’s administrators disposed of WMT’s assets, and TZN was able to move to 100% of the FMDJV post its listing on the Australian Stock Exchange in December 2003. Prior to listing Terramin had spent some $1.1 million on the FMDJV. Hence, while TZN has been listed for only just over three years, it :
Has been in operation for over 13 years; and Will become a producer. within 18 months.
While TZN is a young company, each of its Board and senior management, as outlined in Appendix 1, has between 15 years and 35 years of relevant experience.
TZN announced, on 27 February 2005, that the acquisition of 65% of of a newly formed Algerian company, Western Mediterranean Zinc SPA (WMZ). WMZ’s major asset is the Oued Amizour zinc project in Algeria. The other shareholders in WMZ are two entities owned by the Algerian Government.
17 April 2007
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Angas : 18 Months Until Zinc Figure 3 below shows TZN’s Fleurieu tenements, which contain the Angas project. The project is about 60km from the Adelaide CBD. It is centred on Strathalbyn, which was the site of the second base metal mine in Australia, in 1845.
Figure 3 : Location of TZN’s Angas project
Source : Terramin Australia
Figure 3 also shows that that there are many historic mines within the area of TZN’s Fleurieu tenements, and nearby. This suggests that the area is highly prospective.
TZN acquired its initial interest in the Fleurieu tenements in 1997.
Aberfoyle (ABF) had identified the prospect in 1991 and by 1993 ABF had spent $2.6m and identified an Inferred Resources of 1Mt of 10% Zn, 4% Pb, 60g/t Ag and 1g/t Au. A further $0.63m was spent on Fleurieu from 1994 to 1996 by a major company that elected to withdraw, without any retained interest.
Prior to listing, TZN had spent a further $0.9m to double both the tonnes and the grade of Angas. The increase followed a geophysical survey which highlighted significant potential.
TZN listed in 2003 with 60% of the Fleurieu Joint Venture and was able to move to 100% subsequently.
17 April 2007
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Angas : Geology and Exploration Table 10 below compares the initial resource estimate made by ABF in 1991 and the present Indicated Resources from TZN. These are contained within 3 shoots.
Table 10 : ABF’s initial resource estimate v. TZN’s Indicated Resources ABF's Resource estimate, 1991 TZN's Indicated Resources, 2005
Zinc
Lead
Copper
Silver
Gold
930kt
16.0%
5.2%
0.21%
53g/t
0.7g/t
3,040kt
8.0%
3.1%
0.3%
34g/t
0.5g/t
Source : Terramin Australia
The resource estimate includes three distinct lodes :
Garwood;
Hanging Wall; and
Rankine
There is also significant potential in the Rankine Extension and Jettner Anomaly in the Angas area, as well as probably economic mineralisation, grading up to 16% Zn plus 6% Pb, in the area between the Garwood shoot and the Rankine that is not included in Resources.
Figure 4 below shows that there are many areas near the Angas lodes that have further potential.
Figure 4 : Areas near Angas with further potential
Source : Terramin Australia
There are also further areas near the Angas mine with potential, as shown in Figure 5 below, which shows potential identified by geophysical survey.
17 April 2007
Page 17
Figure 5 : The prospectivity of the area near Angas
Source : Terramin Australia
Figure 2 suggested significant near mine potential. There is further potential within the Fleurieu tenements as indicated by the number of historic mines in the area.
These areas have yet to be properly explored as :
TZN’s focus was to get into production, and hence generate positive cashflow, and the Resources were sufficient to do that;
The focus of the drilling that has taken place has been firstly reserve definition and more recently on stope delineation for mine planning; and
Many of the more prospective areas can be better accessed from underground
> >
Much less time and hence cost to access the mineralised areas than from surface; No need to get access or to seek clearance for drilling from underground.
Ord Minnett endorses the commerciality of TZN’s approach; we believe that this approach generates best value for shareholders, especially in a small company
Figure 6 suggests that the Rankine shoot outcrops either under or very near the evaporative ponds, which are part of the Sewerage system for the town of Strathalbyn.
Accordingly, in its mine design, TZN is leaving a 50m crown pillar below the evaporation ponds.
17 April 2007
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Angas : Proposed Operations are Small, not Complex Table 11 shows TZN’s reported Probable Reserves and also the Mining reserve on which the F/S is based. It shows that mining dilution has been allowed for.
Table 11 : TZN’s Angas project : mining reserves Volume
Zinc
Lead
Copper
Silver
Gold
Indicated Resource
3,040kt
8.0%
3.1%
0.3%
34g/t
0.5g/t
Mining Reserve
2,344kt
8.1%
3.1%
0.3%
34g/t
0.5g/t
Source : Terramin Australia
Comparing the Reserves to the Resources shows that there is about 600kt of Mineral Resources that is not included in Ore Reserves.
Figure 6 below shows that the proposed mine is accessed from an abandoned quarry. As a result, it is a very low impact mine.
Figure 6 : Surface expression of the proposed mine plan
Source : Terramin Australia
The mine is about 2km North-East of the town of Strathalbyn, which is 60k south-west of Adelaide.
Figure 7 below shows the mine plan. Each of the colours is a different mining method, with the dark blue requiring cemented fill.
17 April 2007
Page 19
Figure 7 : TZN’s Angas mine
Source : Terramin Australia
The capital cost estimate was increased from $50m for the development alone, in February 2006, to $63m, including contingencies, in April 2006. Some of the increase in capital costs is for higher environmental standards.
In their 18 April 2006 announcement, TZN advised Life of Mine average operating costs of $A 79/t for mining, milling, transport and mine administration. TZN’s September 2007 presentation indicated (slide 41) Life of Mine (LoM) average cost of $A 84//t of ore mined.
In modelling, Ord Minnett has assumed costs around $A 85/t.
The Angas project is advantaged by the coarse grained, Broken Hill style, ore. This means that optimum liberation is achieved with a coarse grind to 106µ. The mill circuit is very simple with NO recirculation as about 85% of the lead and 88% of the zinc are liberated on the first pass. Further passes increase the iron content more than that of the desired metal.
Angas : Projected Cashflows are Very Good The Angas development is expected to cost $67.2m, which includes start-up costs. It is being financed by two tranches of debt :
$10m is being provided by Sempra Metals and Concentrates $56.5m is being organised by Investec.
TZN raised $11m in a placement in November 2006, some of which was used to finance some infrastructure and some long lead time items at Angas.
17 April 2007
Page 20
However, as the project is debt financed, there is some hedging involved. The extent of hedging required is an issue being worked through. The indicative financing terms require that TZN inject $7m to $12m in equity to develop Angas, as reported in the December 2006 quarterly report.
The Angas operations are expected to produce a
Zinc concentrate, grading about 52% zinc with 8.5% iron, hence attracting a small penalty as its iron level is above the standard;
>
this will be trucked about 70km to Port Adelaide for export;
Lead-Copper concentrate which is expected to grade about 48% lead, 4% copper, 400g/t silver and 7g/t gold.
>
Ord Minnett assumes that this will be trucked 300km to the Pt. Pirie smelter.
Chart 13 below shows Ord Minnett’s projected cashflows for TZN’s Angas operations.
Chart 13 : Ord Minnett’s projected cashflows for Angas $A 120m
payable copper payable gold $A 100m
payable silver payable lead
$A 80m
payable zinc Cash costs
$A 60m
$A 40m
$A 20m
$A 0m 2007
2008
2009
2010
2011
2012
2013
2014
Source : Terramin Australia, Ord Minnett
Chart 13 uses payable metal as the revenue basis to shows the impact of the by-products, especially gold and copper. It shows that the projected revenue stream is overwhelmingly zinc.
The data in Table 12 below, which shows the details of Ord Minnett’s projections for TZN’s Angas operations, uses gross revenue (ie. metal in concentrate by the metal price) and adds the non-payable metal to the cash costs, along with the Treatment Changes, net of byproduct credits.
17 April 2007
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Table 12 : TZN’s Angas operations Ore Mined
2008
2009
2010
2011
2012
2013
2014 260kt
90kt
390kt
400kt
400kt
400kt
400kt
Zn grade
6.4%
9.0%
8.3%
7.0%
8.3%
8.3%
8.3%
Pb grade
2.0%
3.0%
3.2%
2.8%
3.3%
3.3%
3.3%
Cu grade
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
Ag grade
23g/t
38g/t
30g/t
32g/t
34g/t
34g/t
34g/t
Au grade
0.5g/t
0.5g/t
0.5g/t
0.5g/t
0.5g/t
0.5g/t
0.5g/t
Recovery : Zn
84%
90%
90%
90%
90%
90%
90%
Recovery : Pb
80%
85%
85%
85%
85%
85%
85%
Recovery : Cu
75%
75%
75%
75%
75%
75%
75%
Recovery : Ag
65%
65%
65%
65%
65%
65%
65%
Recovery : Au
75%
80%
80%
80%
80%
80%
80%
Zinc in Conc
4,853t
31,428t
29,700t
25,110t
29,873t
29,873t
19,418t
Zn Conc Produced
9,332t
60,438t
57,115t
48,288t
57,448t
57,448t
37,342t
52%
52%
52%
52%
52%
52%
52%
Pb-Cu Conc Produced
2,984t
20,807t
22,313t
19,833t
23,515t
23,515t
15,285t
Pb in Conc
1,432t
9,988t
10,710t
9,520t
11,287t
11,287t
7,337t
Cu in Conc
203t
878t
900t
900t
900t
900t
585t
Ag in Conc
1,346kg
9,555kg
7,800kg
8,320kg
8,744kg
8,744kg
5,684kg
Au in Conc
34kg
156kg
160kg
160kg
160kg
160kg
104kg
Pb grade
48%
48%
48%
48%
48%
48%
48%
Cu grade
6.8%
4.2%
4.0%
4.5%
3.8%
3.8%
3.8%
Ag grade
451g/t
459g/t
350g/t
419g/t
372g/t
372g/t
372g/t
Au grade
11.3g/t
7.5g/t
7.2g/t
8.1g/t
6.8g/t
6.8g/t
6.8g/t
Zn grade
Source : Terramin Australia, Ord Minnett estimates
Table 12 shows that Angas has a project life of only six years. Ord Minnett expects that Angas will operate for many more years than this, but we do not give any value for this in our base case.
Ord Minnett assumes that TZN’s Pb-Cu concentrate will be trucked about 300km to Zinfiex’s (ZFX’s) Pt Pirie lead smelter. Ord Minnett estimates that the cost to TZN / Sempra, which has the role of placing the product from Angas, of trucking the concentrate to Pt Pirie will be about US$ 30/t less than the cost of shipping to an overseas smelter.
However, ZFX is currently working on a deal to pool its smelting interests with a major European smelter, Unicore, and float the combined entity. This takes priority negotiations on concentrate off-take for any particular smelter.
While Ord Minnett expects that TZN will delineate further resources and reserve to extend the mine life at Angas, this is not part of our base case valuation.
Table 13 below shows Ord Minnett’s estimates for the operations at Angas, including its cash costs. Features shown in Table 13 include :
The major cost is the zinc TC, which is about half of the total;
17 April 2007
Page 22
The treatment charge (TC) for lead is estimated to be negative at times due to the high value of the by-product credits from copper, silver and gold;
Sites costs at Angas are estimated to be about $85/t.
Table 13 : Ord Minnett’s projected operating parameters for TZN’s Angas project. 2008
2009
2010
2011
2012
2013
2014
0.770
0.760
0.750
0.750
0.750
0.750
0.750
Zinc
$2,250/t
$1,875/t
$2,750/t
$2,750/t
$1,650/t
$1,650/t
$1,650/t
Lead
$1,250/t
$1,000/t
$800/t
$750/t
$750/t
$750/t
$750/t
AUD / USD
Copper, US$ /t
$4,625/t
$3,238/t
$2,976/t
$2,976/t
$2,976/t
$2,976/t
$2,976/t
Silver - US$/oz
$10.50/oz
$8.50/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
Gold - US$/oz
$550/oz
$550/oz
$500/oz
$500/oz
$500/oz
$500/oz
$500/oz
4,853t
31,428t
29,700t
25,110t
29,873t
29,873t
19,418t $ 42.7m
Zinc Sales Gross Zinc Revenue
$ 14.2m
$ 77.5m
$ 108.9m
$ 92.1m
$ 65.7m
$ 65.7m
Lead Sales
1,432t
9,988t
10,710t
9,520t
11,287t
11,287t
7,337t
Gross Lead revenue
$ 2.3m
$ 13.1m
$ 11.4m
$ 9.5m
$ 11.3m
$ 11.3m
$ 7.3m
$ 4.8m
$ 12.9m
$ 12.9m
$ 12.9m
$ 12.9m
$ 12.9m
$ 9.6m
$ 53/t
$ 33/t
$ 32/t
$ 32/t
$ 32/t
$ 32/t
$ 37/t
Processing
$ 2.2m
$ 6.6m
$ 6.7m
$ 6.7m
$ 6.7m
$ 6.7m
$ 4.8m
$ 25/t
$ 17/t
$ 17/t
$ 17/t
$ 17/t
$ 17/t
$ 19/t
Mine Admin
$ 2.7m
$ 7.1m
$ 7.1m
$ 7.1m
$ 7.1m
$ 7.1m
$ 5.3m
$ 30/t
$ 18/t
$ 18/t
$ 18/t
$ 18/t
$ 18/t
$ 20/t
Transport
$ 1.0m
$ 6.4m
$ 6.4m
$ 5.4m
$ 6.5m
$ 6.5m
$ 4.2m
Royalties
$ 0.2m
$ 0.8m
$ 1.1m
$ 1.0m
$ 0.6m
$ 1.5m
$ 0.9m
TOTAL
$ 120/t
$ 87/t
$ 86/t
$ 83/t
$ 85/t
$ 87/t
$ 96/t
Treatment Charge - Zinc
$ 5.4m
$ 31.9m
$ 37.9m
$ 32.1m
$ 28.8m
$ 28.8m
$ 18.7m
Treatment Charge - Lead
($0.5m)
($0.7m)
$ 0.1m
($0.9m)
$ 0.0m
$ 0.0m
$ 0.0m
96c/lb
57c/lb
70c/lb
74c/lb
59c/lb
59c/lb
64c/lb
Cash Costs Mining
Net Zinc Cash Costs Source : Ord Minnett estimates
Table 14 below shows Ord Minnett’s projected cashflows to TZN shareholders.
Table 14 :Ord Minnett’s projected cashflows from TZN’s Angas project 2006
2007
2008
2009
2010
2011
2012
2013
2014
Revenue
$ 0.0m
$ 16.5m
$ 90.7m
$ 120m
$ 102m
$ 77.0m
$ 77.0m
$ 50.1m
Cash Costs
$ 0.0m
($15.7m)
($65.1m)
($72.3m)
($64.3m)
($62.7m)
($63.5m)
($43.7m)
Dep'cn & Amotr'sn
$ 0.0m
$ 3.2m
$ 13.8m
$ 14.2m
$ 14.2m
$ 14.2m
$ 14.2m
$ 9.2m
EBIT
$ 0.0m
($2.4m)
$ 11.8m
$ 33.9m
$ 23.1m
$ 0.2m
($0.7m)
($2.9m)
($16.8m)
($50.4m)
$ 0.0m
$ 0.0m
$ 0.0m
$ 0.0m
$ 0.0m
$ 0.0m ($1.1m)
Project Cap.Ex
($15.7m)
Sus.Cap.Ex
$ 0.0m
Interest Expense Taxes paid
$ 0.0m
$ 0.0m
Debt Principal Repaid
($0.5m)
($1.5m)
($1.5m)
($1.5m)
($1.5m)
($1.5m)
($1.6m)
($1.5m)
($1.2m)
($0.9m)
($0.5m)
($0.2m)
$ 0.0m
$ 0.0m
$ 0.0m
($4.8m)
($6.1m)
$ 0.0m
$ 0.0m
$ 0.0m
($2.9m)
($3.0m)
($3.3m)
($3.6m)
($3.9m)
($1.9m)
$ 0.0m
Corporate Expenses
($1.8m)
($1.8m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
Net Cashflow to s/h
($17.5m)
($1.8m)
($6.0m)
$ 17.7m
$ 35.4m
$ 23.3m
$ 6.5m
$ 8.1m
$ 3.4m
Source : Ord Minnett estimates
17 April 2007
Page 23
The data in Table 14 reflects the cashflows to shareholders, after the debt providers; in other words, the $67m for the project capital is not a cashflow from shareholders, but the repayments of that debt are.
Corporate costs are also included in the cashflows in Table 5.
Ord Minnett’s projected financial returns for Angas are :
IRR = 40%;
NPV, using 10% real discount is :
> >
$53m on the after-tax cashflows; or $60m on the after-tax cashflows, if franking credits are valued at 80%.
Oued Amizour : The Big One ! On 27 February 2006, TZN announced that it had reached agreement with the Algerian Government to purchase 65% of Western Mediterranean Zinc (WMC), which owns the Oued Amizour prospect.
Figure 8, below, shows that the project is located near the Mediterranean coast of Algeria.
Figure 8 : Oued Amizour project, in Algeria
Source : Terramin Australia
17 April 2007
Page 24
TZN is to spend at least US$ 6.6m to reach a decision to mine.
TZN also has the first right of refusal on the 35% of the project that the Algerian Government will retain.
TZN was lucky to secure the opportunity; Breakwater, a Canadian zinc company, was in discussion with the Algerian Government in 1999 and 2000, but the Government then decided not to deal. TZN was there at the right time.
Oued Amizour : Much Previous Work Oued Amizour is a mineralised area of 126km2 that has been defined by ORGM (Office National de Recherche Géologique et Minière), which is the Algerian Government’s Geological Survey Office.
Figure 9 below shows that the Tala Hamza deposit within the Oued Amizour project area.
Figure 9 : Tal Hamza within Oued Amizour
Source : Terramin Australia
In the 1970s, the Oued Amizour massif was mapped at a 1:50,000 scale and covered by an airborne geophysical survey. In the 1980s, geological, geophysical and geochemical surveys were carried out by ORGM.
The base metal mineralization was discovered in 1989 after three years of detailed exploration. The Tala Hamza deposit was delineated from 1990 to 1994 with 40 diamond drill holes.
17 April 2007
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In addition to Tala Hamza, ORGM defined three other deposits totalling about 22Mt of ore. However, Tala Hamza is the largest and so it is the focus of the current work.
Oued Amizour : Geology and Exploration : A Bit More to Do A resource has been defined for Tala Hamza by ORGM :
30Mt at 5.5% Zn and 1.4% Pb, using a 6% zinc equivalent (Zn.eq) cut-off;
11Mt at 10.9% Zn and 3% Pb in the high grade core.
TZN has used the drill results from ORGM in the Vulcan geological modelling package which has determined a 50Mt Resource using a 2% Zn.eq cut-off. Figure 10 below shows the grade – tonnes trade-off curve plotted by TZN based on the drill results by ORGM.
Figure 10 : TZN’s grade – tonnes trade-off curve for Tala Hamza
Source : Terramin Australia
The overall deposit is as shown in Figure 11 below. Figure 11 shows :
The Tala Hamza deposit is described as a dipping orebody;
The deposit dips from East to West, while the topography rises from North to South;
ORGM’s drilling was done with vertical holes so little information was gained on the structural controls of the deposit; and
ORGM’s drilling only went to a depth of 500m, and there were drill holes that ended in mineralisation.
The overall deposit has a thickness of 98m, while the high grade core is 49m thick. On 15 March 2007, TZN announced that the drill hole, TH003, had intersected 158m of mineralisation, though the angle of the drill hole and consequently True Width, is not given.
17 April 2007
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Figure 11 : TZN’s Tala Hamza deposit – Mineralised shell generated by Vulcan software
Source : Terramin Australia
The Resource defined by ORGM is not able to be directly compared to JORC as the systems for Quality Control and Quality Assurance were not pre-defined and able to be subsequently audited. However, the data is supported by the results of
39 diamond drill holes in the Tala Hamza deposit;
Thousands of analyses and detailed geological logging; and
Interpretation by well trained geologists.
The ORGM core was left in the open, not in sheds, in wooden trays, so it cannot be used for metallurgical testwork.
Of the drill holes defining the Tala Hamza resource:
All are vertical, diamond drill holes, HQ and NQ, forming a grid approximately 100120m x 100-120m;
Eight holes intersected high grade mineralisation;
Four holes were abandoned due to poor ground and drilling conditions (alternating soft and hard rock conditions); and
Five holes were stopped short in mineralisation.
To date, the results achieved have supported the work of ORGM. The December 2006 Quarterly reported that a core, from drill-hole TH002, was prepared from the mineralised horizon, from 321m to 509m below surface, which is 188m in thickness compared with 98m noted above. .
17 April 2007
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The assays showed
184m of mineralisation grading 6.58% Zn + Pb, within which was
64m section assaying 10.69% Zn and 2.25% Pb, including a
13.75m intercept assaying 24.26% Zn and 4.14% Pb.
Ord Minnett also assumes that the Mining Inventory is as shown in Table 15 below.
Table 15 : Ord Minnett’s assumed mining inventory for Tala Hamza Ore
Zinc
50,000kt 5.5% Source : Terramin Australia, Ord Minnett
Lead 1.4%
Ord Minnett assumes a larger mining inventory than that indicated by ORGM, but consistent with that produced by the Vulcan model and consistent with Figure 10 above.
Ord Minnett believes that there is considerable upside potential from ORGM’s 30Mt estimate as ORGM did not drill deeper than 500m from surface and drill holes ended in mineralisation.
Oued Amizour : Development Plan In March 2006, when TZN announced its initial agreement, the indicative plan was :
Confirmatory drilling (ie. effectively twin the ORGM holes) to define an Inferred Resource;
>
this should also provides some samples for preliminary metallurgical testing;
The Scoping Study would take about two months more and involve defining the preferred mining method and the scale of the operation; :
Infill drilling, of about 25 holes, to define a JORC compliant Indicated Resource with a target of at least 50Mt
>
this would take a further four to six months from the time of publication of the Inferred Resource;
The Pre-Feasibility Study (pre F/S), with cost estimates to +/- 20%, would take about three months after the publication of the Indicated Resource;
To complete the F/S, to Bankable (BFS) standard will take eight to nine more months
>
This will define a Probable Reserve, with costs to +/- 15%;
Complete preliminary design; and
Commissioning stage is expected to be 30 to 36 months after BFS.
During the time of the F/S, TZN will also look for extensions to the known orebody.
17 April 2007
Page 28
Progress to date has been slower than expected at that time, partly due to the lack of availability of powerful drill rigs which were finally sourced from Turkey.
TZN has engaged Golder Associates to review the first phase of TZN’;s drilling programme and then determine whether the confirmatory programme (ie. twinning holes previously drilled by ORGM) is sufficient to define an Inferred resource, or whether more drilling will be required.
If Golder Associates believes that TZN’s confirmatory programme allows an Inferred Resource to be calculated on the basis of ORGM’s data, then the Inferred Resource could be published in April or May 2007.
Commissioning then could be in 2011.
Oued Amizour : Proposed Operations Ord Minnett assumes that the first shipment of concentrate will be in 2011 Q1.
In their September 2006 presentation, TZN showed a summary presentation given to the Algerian Government that gave options for the mining rate of 1.2Mt/yr and 3.0Mt/yr.
Due to the thickness of the orebody and the probably size of the overall deposit, Ord Minnett expects that the operations will start at about 1.5Mt/yr and build up to 5.0Mt/yr of ore.
Table 16 below shows Ord Minnett’s understanding of Tala Hamza’s proposed operations.
Table 16 : Ord Minnett’s understanding of TZN’s Tala Hamza operations 2011
2012
2013
2014
2015
2016
2017
1,050kt
1,500kt
1,763kt
3,075kt
4,475kt
5,000kt
5,000kt
Zn grade
10.9%
10.9%
10.0%
6.7%
4.6%
4.3%
4.3%
Pb grade
3.0%
3.0%
2.7%
1.9%
1.2%
1.0%
1.0%
Recovery : Zn
80%
85%
85%
85%
85%
85%
85%
Recovery : Pb
80%
85%
85%
85%
85%
85%
85%
Zinc in Conc
91kt
139kt
149kt
176kt
174kt
181kt
181kt
180kt
267kt
287kt
338kt
335kt
349kt
349kt
51%
52%
52%
52%
52%
52%
52%
Lead in Conc
25.1kt
38.3kt
41.1kt
48.4kt
46.4kt
42.3kt
42.3kt
Pb Conc Produced
39.6kt
58.8kt
63.2kt
74.5kt
71.5kt
65.1kt
65.1kt
63%
65%
65%
65%
65%
65%
65%
Ore Mined
Zn Conc Produced Zn grade
Pb grade
Source : Terramin Australia, Ord Minnett
17 April 2007
Page 29
Table 16 shows :
Production starts in early 2011;
Production gets to the 1.5Mt/yr rate after about 12 months and then pauses as extra resources are put into capital development and then the production rate creeps up to the 5.0Mt/yr rate progressively;
The zinc concentrate grades58% Zn and low in iron;
The lead concentrate grades 65% Pb, but has no payable silver;
Mininhg starts in the reported high grade area so the grades drop over time
TZN has not given any cost guidance, so cost estimates are based on comparables. For capital costs, Ord Minnett assumes an underground mine :
US$ 175m for the first 1.5Mt/yr stage
>
TZN, in their March 2007 presentation, at slide 3, estimated US$ 150m for 1.2Mt/yr; plus
US$ 150m to raise production to 5.0Mt/yr
>
TZN, in their March 2007 presentation, at slide 3, estimated an additional US$ 40m to get to 3.0Mt/yr.
For operating costs, Ord Minnett assumes that there are significant cost advantages from the very thick orebody. Table 17 below shows Ord Minnett’s cost assumptions.
Table 17 : Ord Minnett’s estimates of Tala Hamza’s operating costs 1.5 Mt/yr
5.0 Mt/yr
Mining
US 19/t
US 13/t
Processing
US 16/t
US 12/t
Administration
US 11/t
US 6.6/t
Land transport
US 11/t
US 11/t
Sea transport
US 30/t
US 30/t
Total (US$/t ore)
US 54/t
US 36/t
Source : Ord Minnett
The costs in Table 17 are given in terms of US$/t of ore for on-site costs and US$/t of concentrate for transport, which is why the total is not the simple addition of the amounts above.
Oued Amizour : Financing is a Real Question Oued Amizour is a very large project, especially for a small company like TZN. Ord Minnett expects that while Angas will be generating cash when the major capital is required for Oued Amizour, the cash generated will be :
Directed to the debt providers for Angas; and
Not large enough for the needs of the Tala Hamza development.
17 April 2007
Page 30
TZN hopes to secure some form of project financing, probably from a trader that will be able to place the concentrate produced.
In Ord Minnett’s view, some equity raising is likely to be required, especially if the Algerian Government declines to contribute further, as has been indicated.
Oued Amizour : Projected Cashflows Chart 15 below shows Ord Minnett’s projections, in $A, of TZN’s 65% economic interest in Tala Hamza. It shows that Tala Hamza’s projected cashflows are dominated by zinc.
Chart 15 : Ord Minnett’s projections for TZN’s interest in Tala Hamza $A 350m
payable zinc
payable lead
Cash costs
$A 300m
$A 250m
$A 200m
$A 150m
$A 100m
$A 50m
$A 0m 2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source : Ord Minnett estimates
Table 18 below shows the operating parameters from Ord Minnett’s indicative analysis of TZN’s Tala Hamza project. Note that this data is in US$, on a 100% basis.
Table 18 shows that Ord Minnett projects that :
The Tala Hamza project produces its first concentrate in 2011 and the 50Mt resource is mined out in 2013
>
Ord Minnett does not expect that operations will cease then, but that other areas within Oued Amizour will be exploited, though at this time, with 15 years to prove up other resources, we cannot evaluate them;
While efficiencies and operating rates are high, the economics of Tala Hamza suffer from its lack of silver by-product credits;
Algeria does not presently have a royalty, but Ord Minnett has assumed one, as the alternative is some form of subsidised Government equity in the project.
17 April 2007
Page 31
Table 18 : Ord Minnett’s estimates of the operating parameters for TZN’s Tala Hamza project Zinc
2011
2012
2013
2014
2015
2016
2017
2023
$ 2,750/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
86.9kt
138.3kt
149.3kt
175.9kt
188.9kt
208.1kt
208.1kt
130.6kt
US 239m
US 228m
US 246m
US 290m
US 312m
US 343m
US 343m
US 215m
37.8kt
58.6kt
63.2kt
74.5kt
74.8kt
79.0kt
79.0kt
49.6kt
US 18m
US 29m
US 31m
US 36m
US 36m
US 39m
US 39m
US 24m
US 21.7m
US 27.4m
US 33.2m
US 49.1m
US 61.6m
US 65.0m
US 65.0m
US 52.7m
US 20.6/t
US 18.3/t
US 18.8/t
US 16.0/t
US 13.8/t
US 13.0/t
US 13.0/t
US 16.8/t
US 18.1m
US 24.0m
US 29.0m
US 44.7m
US 58.1m
US 62.1m
US 62.1m
US 47.9m
US 17.2/t
US 16.0/t
US 16.5/t
US 14.6/t
US 13.0/t
US 12.4/t
US 12.4/t
US 15.3/t
US 12.8m
US 16.0m
US 19.9m
US 27.9m
US 32.5m
US 33.1m
US 33.1m
US 29.7m
Lead Zinc Sales Gross Zinc Revenue Lead Sales Gross Lead revenue Cash Costs Mining Processing Mine Admin
US 12.2/t
US 10.7/t
US 11.3/t
US 9.1/t
US 7.3/t
US 6.6/t
US 6.6/t
US 9.5/t
Transport
US 7.9m
US 12.3m
US 13.3m
US 15.7m
US 16.6m
US 18.2m
US 18.2m
US 11.4m
Royalties
US 6.2m
US 5.8m
US 6.3m
US 7.4m
US 7.9m
US 8.7m
US 8.7m
US 5.4m
TOTAL
US 67m
US 86m
US 102m
US 145m
US 177m
US 187m
US 187m
US 147m
US 63/t
US 57/t
US 58/t
US 47/t
US 39/t
US 37/t
US 37/t
US 47/t
T.C. - Zinc
US 67m
US 69m
US 75m
US 88m
US 95m
US 104m
US 104m
US 65m
T.C. - Lead
US 5.7m
US 8.8m
US 9.5m
US 11.2m
US 11.2m
US 11.9m
US 11.9m
US 7.4m
63c/lb
44c/lb
47c/lb
54c/lb
59c/lb
58c/lb
58c/lb
68c/lb
Net Zinc Cash Costs Source : Ord Minnett
Table 19 below shows Ord Minnett’s financial projections for TZN’s Tala Hamza project, in terms of Australian dollars for TZN shareholders.
Table 19 : Ord Minnett’s financial projections for TZN’s share of Tala Hamza 2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Revenue
$ 223m
$ 324m
$ 350m
$ 336m
$ 302m
$ 331m
$ 331m
$ 331m
$ 331m
$ 331m
Cash Costs
$ 118m
$ 167m
$ 187m
$ 220m
$ 238m
$ 256m
$ 256m
$ 256m
$ 256m
$ 256m
Dep'cn & Amotr'sn
$ 6.7m
$ 8.0m
$ 15.8m
$ 22.7m
$ 30.7m
$ 34.3m
$ 34.7m
$ 35.3m
$ 36.1m
$ 37.3m
EBIT
$ 98m
$ 150m
$ 147m
$ 93m
$ 32.8m
$ 40.3m
$ 39.8m
$ 39.2m
$ 38.4m
$ 37.3m
Interest Expense
$ 0.0m
$ 9.7m
$ 8.6m
$ 16.3m
$ 14.1m
$ 11.6m
$ 9.0m
$ 6.2m
$ 3.1m
$ 1.6m
$ 19.5m
$ 42.0m
$ 41.7m
$ 23.1m
$ 5.6m
$ 8.6m
$ 9.2m
$ 9.9m
$ 10.6m
$ 10.7m
$ 78m
$ 98m
$ 97m
$ 54m
$ 13.1m
$ 20.0m
$ 21.6m
$ 23.1m
$ 24.8m
$ 25.0m
($ 159m)
($ 43.3m) ($ 10.7m)
($ 43.3m) ($ 11.5m)
($ 43.3m) ($ 13.6m)
$ 0.0m ($ 14.4m)
$ 0.0m ($ 38.5m)
$ 0.0m ($ 15.7m)
$ 0.0m ($ 15.7m)
$ 0.0m ($ 54.7m)
$ 0.0m ($ 15.7m)
($ 12.6m)
($ 13.6m)
($ 26.3m)
($ 28.5m)
($ 30.9m)
($ 33.5m)
($ 36.4m)
($ 17.3m)
($ 18.7m)
$ 39.5m
$ 44.6m
($ 6.5m)
$ 1.0m
($ 15.1m)
$ 7.0m
$ 6.3m
($ 11.1m)
$ 27.8m
Taxes paid NPAT Project Cap.Ex Sus.Cap.Ex Debt Repaid Net to s/h
$ 0.0m
Source : Ord Minnett
There are many assumptions underlying the data in Table 19 :
Lead and zinc metal prices as shown in Table 16 above;
TNZ’s share is assumed to be 65%
>
We assume that the Algerian Government does not contribute further, but that TZN involves other parties (eg. a trader who will place the concentrate and possibly also a listing on the local stock exchange for about 15% as a form of political risk insurance);
17 April 2007
Page 32
The development is project financed, with TZN’s required equity contribution being funded by the other parties TZN invites to participate in the development;
>
The return on TZN’s equity invested is very high due to very small amount of equity invested by TZN
The last year in which there is debt to be repaid is 2020, so the net cashflows jump to about $A 48m for 2021 and 2022, while 2023 is the final year of operation in the model;
The surge in sustaining capital in 2019 is due to our assumption that the mobile fleet will require replacement after 6 years of service.
While Ord Minnett’s model has the operation being finished in 2023, we expect that the mine will continue to operate for many years after this, fed by potential resource extensions to Tala Hamza as well as other mineralised areas within Oued Amizour.
Menninnie Dam : What Size ? Figure 12 below shows that Menninnie Dam project is about 100km W-NW of Whyalla, or 160km from the Pt Pirie lead smelter.
Figure 12 : TZN’s Menninnie project
Source : Terramin Australia
TZN farmed in to 60% of Menninnie by funding the required expenditure to retain the tenement and later acquired the other 40% from the administrators of WMT
TZN’s interest is held through a subsidiary company, Menninnie Metals Limited (MML). MML is owned 80% by TZN and 20% by Zinifex (ZFX). MML holds, at present, 51% of the Menninnie Dam prospect and also other prospects in the Gawler Craton. ZFX has earned to 49% of he Menninnie Dam tenement.
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ZFX is able to farm into 70% of the Menninnie Dam prospect, by funding $8m of exploration. ZFX had spent $5m by 31 December 2006, giving them a direct 49% interest and a total effective interest of 59.2%. The structure is shown in Figure 13 below.
Figure 13 : Menninnie Dam interests Terramin TZN
Zinifex ZFX
80%
20% Menninnie Metals MML 100%
Gawler Craton
51% from Jan 2007, but farming down to 30%
EL2969, EL3039, EL2987
Zinifex ZFX
Farmed in to 49% Can get to 70%
Menninnie Dam Prospect EL 3640
Source : Terramin Australia, Ord Minnett
Zinifex’s farm-in was announced on 16 May 2005. The schedule at that time was for Zinifex to earn into Menninnie Dam by spending :
$2m by 31 December 2006, which gives ZFX no entitlement;
$3m more by 31December 2008, which gives ZFX a 49% interest in the EL; and
A further $3m by 31 December 2010 to earn 70%.
TZN manages the exploration programme which ZFX is funding.
There was an intensive phase of drilling which ended, as planned, in December 2006, as the weather gets too hot. It had been expected that assays would be available from this drilling to be able to plant the next phase of drilling, which is to commence in May 2007, but the turnaround from assay labs has been very slow due to the volume of work with assays labs as a result of the drilling from Olympic Dam.
We should expect to see some results by late April or May.
Menninnie : Geology and Exploration Menninnie was discovered in 1981 by Selection Trust. After drilling 6 RAB and 16 cored holes, an Inferred Resource was published of 1.7Mt at 8% Zn, 5% Pb and 100g/t Ag for an area 3km by 1km.
17 April 2007
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ABF farmed into the prospect in 1988. A further 18 cored holes and 25 RC and RAB holes were drilled, which extended to strike of significant grade mineralisation. However, it was felt that sufficient continuity had not been established for a Resources estimate to be published.
Prior to TZN acquiring an interest, about $5m had been spent.
On 16 May 2005, when announcing ZFX’s agreement to farm-in, TZN stated : “Substantial drill intersections have already confirmed the significance of this mineralisation, estimated to have a 20 million tonne envelope in central area alone”.
Further, TZN’s web-site states : “For example, at a cut-off grade of 7% Zn equivalent (where ZnE = Zn% + Pb%/1.3) there are a total of 73 continuous intercepts in 16 core holes and 2 percussion holes outlining some 20 million tonnes of mineralisation. Length-weighted average grades, over an aggregate 96 m, are 9.3% Zn, 7.1% Pb, and 58 ppm Ag.”
Figure 14 below shows that the Menninnie Dam central area, which is established as a 400m trend of mineralisation, open at both ends, is only a small part of the potential mineralised area at Menninnie.
Figure 14 : Menninnie’s potential
Source : Terramin Australia
17 April 2007
Page 35
The potential at Menninnie is :
3km long by 1km wide zone of Zn-Pb-Cu calcrete anomaly, within an EL 8km by 13km;
Over 6km of drill intersections; and
3.5km long trend, only 400m of which is well established.
TZN explains in their December 2006 Annual Report that the mineralised horizons are a subparallel set of east dipping fracture zones, and that earlier explorers oriented their drill holes sub-parallel to these mineralised zones. Hence, earlier explorers were unable to recognise the geometry and establish the continuity of the mineralised zones along 3.5km of strike.
Figure 15 below shows the results of a recently completed geophysical survey of Menninnie Dam, and drilling done. The core is clearly shown. Figure 15 : Mineralisation at Menninnie
Source : Terramin Australia
TZN hopes that when it receives the assays from the drill programme that was suspended in December 2006, it will have more definitive information on Menninnie’s mineralisation.
Menninnie : Development Potential We have, at best, poor information on the size, grade and depth of the orebody :
Size : 20Mt or larger
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Depth : oxidised material extends to about 150m below surface and there is at least one shoot of mineralisation into the oxide layer; Figure 15 shows that the best mineralisation is around 250m to 350m from surface.
Grade : SelTrust (1981) gave 1.7Mt at 8% Zn, 5% Pb and 100g/t Ag
> >
it should be assumed that a larger ore-body will have a lower grade; the grades of the intercepts shown in Figure 15 are all quite good, but a likely reserve will need to incorporate mining dilution
Figure 16 below shows some drill results for Menninnie announced by TZN in July 2006. It shows many good intersections of mineralisation and some very economic intersections.
Figure 16 : TZN’s July 2006 drill results for Menninnie
To get some indication, Ord Minnett assumes :
The mineralogy is simple with coarse grain size, which suggests good recovery.
Source : Terramin Australia
17 April 2007
Page 37
As yet, TZN does not understand whether Menninnie Dam will be mined as a single large Open Cut or as a series of smaller pits. It is hoped that the assay results from the recent drill campaign will help resolve these issues.
As such, any attempt to project cashflows is fraught with considerable error.
Size is the most critical variable; ZFX is seeking ore-bodies of 30Mt or more. Hence, the greatest value for TZN may be if Menninnie proves to be only 20Mt, as then ZFX may either walk away or sell its interest back to TZN.
For this analysis, Ord Minnett will assume a 30Mt ore-body, which is about the lowest value outcome for TZN.
For this indicative analysis, Ord Minnett assumes a mining inventory for Menninnie as shown in Table 20 below.
Table 20 : Ord Minnett’s guess of the Menninnie mining inventory Ore
Zinc
Lead
Silver
30,000kt
5.3%
2.5%
20g/t
Source : Ord Minnett estimates
For indicative costs, we use the date provided by Oxiana (OXR) for their recently announced Prominent Hill development and adjust it for :
The small deposit size at Menninnie; and
Menninnie should be lower costs as it is not as remote as Prominent Hill, though both are in S.A.
Table 21 shows the relevant parameters. Table 21 : Ord Minnett’s guesses for Menninnie v. OXR’s Prominent Hill project Size
Rate
Cap.Ex
Prominent Hill
79.2 Mt
8.0 Mt/yr
$ 829m
Op. Ex $A 29/t
Menninnie Dam
30.0 Mt
3.0 Mt/yr
$ 300m
$A 35/t
Source : Ord Minnett estimates
For comparison :
Prominent Hill is planned to be a 480m deep pit, with a surface area 1.4km by 1.2km;
The average Strip Ratio (S/R) for Prominent Hill is 7.2, with material being mined at the rate of 69Mt/yr in the first 6 years then 20Mt/yr for the 4 subsequent years;
The capital costs for Prominent Hill includes $54m spent prior to commitment on exploration, evaluation and feasibility assessment and $176m for the 15 month prestrip of 100m of sedimentary cover.
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Page 38
Menninnie : Proposed Operations Ord Minnett assumes the following timetable for Menninnie
June 2008 : Inferred Resource :
>
Ord Minnett assumes that a further round of drilling is required, from May to November 2007, and then assay results and Resource calculation;
June 2009 : Indicated Resource published and scoping study completed;
December 2010 : Bankable Feasibility Study competed;
December 2012 : commence commissioning.
Table 22 below shows Ord Minnett’s estimates for the operations at Menninnie Dam.
Table 22 : Estimated operations for Menninnie Dam Ore Mined
2013
2014
2015
2016
2017
2018
2022
2023
1,988kt
3,000kt
3,000kt
3,000kt
3,000kt
3,000kt
3,000kt
1,013kt
Zn grade
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
Pb grade
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
Ag grade
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
Recovery : Zn
86 %
88 %
88 %
88 %
88 %
88 %
88 %
88 %
Recovery : Pb
88 %
90 %
90 %
90 %
90 %
90 %
90 %
90 %
Recovery : Ag
63 %
65 %
65 %
65 %
65 %
65 %
65 %
65 %
Zinc in Conc Zn Conc Produced Zn grade Lead in Conc Pb Conc Produced Silver in Conc
90,336t
139,920t
139,920t
139,920t
139,920t
139,920t
139,920t
47,223t
168,616t
263,132t
263,132t
263,132t
263,132t
263,132t
263,132t
88,807t
54 %
53 %
53 %
53 %
53 %
53 %
53 %
53 %
43,580t
67,500t
67,500t
67,500t
67,500t
67,500t
67,500t
22,781t
67,578t
103,846t
103,846t
103,846t
103,846t
103,846t
103,846t
35,048t
37,769kg
58,500kg
58,500kg
58,500kg
58,500kg
58,500kg
58,500kg
19,744kg
Pb grade
56 %
65 %
65 %
65 %
65 %
65 %
65 %
65 %
Ag grade
559 g/t
563 g/t
563 g/t
563 g/t
563 g/t
563 g/t
563 g/t
563 g/t
Source : Ord Minnett estimates
Menninnie : Projected Cashflows Table 23 below compares the published costs for Prominent Hill with the costs modelled by Ord Minnett for Menninnie Dam.
Table 23 : Costs : Prominent Hill v. Menninnie Dam Prominent Hill Mining & Geology Milling & Processing
Menninnie Dam
$A 16/t
$A 15/t
$A 7/t
$A 13/t
Mine Admin, transport
$A 4/t
$A 4/t
Royalties
$A 2/t
$A 3/t
$A 29/t
$A 35/t
TOTAL
Source : Oxiana Resources, Ord Minnett estimates
17 April 2007
Page 39
A key assumption in Table 21 is that Menninnie Dam is assumed to have a S/R of 5.0.
Otherwise it should be expected that :
Menninnie’s costs should be lower as the site is much less remote and staff can be bussed in from Kimba Town, Whyalla and Pt Augusta, rather than flow in;
Other transport costs for Menninnie Dam should also be lower;
Prominent Hill is a larger operation so will have some advantages, especially in milling and processing, from economies of scale.
Chart 16 below shows Ord Minnett’s projected cashflows for Menninnie Dam.
Chart 16 : Ord Minnett’s projected cashflows for Menninnie Dam. $A 105m
payable zinc
payable lead
payable silver
Cash costs
$A 90m
$A 75m
$A 60m
$A 45m
$A 30m
$A 15m
$A 0m 2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source : Ord Minnett estimates
Note that the data in Chart 16 is for TZN’s effective 24% interest in Menninnie Dam. TZN is expected to be diluted down to an effective 24% holding (80% of Menninnie Metals which is being farmed down to 30% of the Menninnie Dam project).
In valuing the project, Ord Minnett assumes that TZN changes its effective interest into a direct interest of 24%.
Table 24 below shows Ord Minnett’s estimates for the possible operations at Menninnie Dam. Note that the costs given in Table 24 are not directly comparable with those in Table 23 as Ord Minnett has :
Included geology in mine administration, along with O, H, S & E and general administration; and
Included total transport costs, including sea freight, in transport as an item separate from mine administration.
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Table 24 : Ord Minnett’s estimates of the operating parameters for Menninnie Dam Zinc
2013
2014
2015
2016
2017
2018
2019
2023 $ 1,650/t
$ 2,500/t
$ 2,000/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
Lead
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
Silver
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
Zinc Sales
90.3kt
139.9kt
139.9kt
139.9kt
139.9kt
139.9kt
139.9kt
47.2kt
$ 301m
$ 373m
$ 308m
$ 308m
$ 308m
$ 308m
$ 308m
$ 104m
Lead Sales
67.6kt
103.8kt
103.8kt
103.8kt
103.8kt
103.8kt
103.8kt
35.0kt
Gross Lead revenue
$ 44m
$ 68m
$ 68m
$ 68m
$ 68m
$ 68m
$ 68m
$ 23m
Mining
$ 21.5m
$ 33.3m
$ 34.7m
$ 36.0m
$ 37.3m
$ 38.6m
$ 39.9m
$ 15.8m
$ 10.8/t
$ 11.1/t
$ 11.6/t
$ 12.0/t
$ 12.4/t
$ 12.9/t
$ 13.3/t
$ 15.6/t
Processing
$ 28.1m
$ 38.7m
$ 38.7m
$ 38.7m
$ 38.7m
$ 38.7m
$ 38.7m
$ 14.9m
$ 14.1/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 14.8/t
Mine Admin
$ 18.8m
$ 29.3m
$ 29.3m
$ 29.3m
$ 29.3m
$ 29.3m
$ 29.3m
$ 9.9m
$ 9.5/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t $ 7.8m
Gross Zinc Revenue
Cash Costs
Transport
$ 11.1m
$ 13.9m
$ 13.9m
$ 13.9m
$ 13.9m
$ 13.9m
$ 13.9m
Royalties
$ 8.1m
$ 10.0m
$ 8.3m
$ 8.3m
$ 8.3m
$ 8.3m
$ 8.3m
$ 2.8m
TOTAL T. C. - Zinc T. C. - Lead Net Zinc Cash Costs
$ 88m
$ 125m
$ 125m
$ 126m
$ 127m
$ 129m
$ 130m
$ 51.3m
$ 44.1/t
$ 41.7/t
$ 41.6/t
$ 42.0/t
$ 42.5/t
$ 42.9/t
$ 43.4/t
$ 50.6/t
$ 92m $ 3.2m
$ 121m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 35.5m
52c/lb
45c/lb
41c/lb
41c/lb
41c/lb
42c/lb
42c/lb
47c/lb
$ 1.6m
Source : Ord Minnett estimates
Table 25 below shows Ord Minnett’s projected cashflows for TZN’s share of Menninnie Dam. Ord Minnett’s projections assume that the mining fleet is owned by the operator (as Zinfex, the 76% holder, has significant cash reserves), and hence there is an allowance to replace the fleet after five years.
Table 25 : Ord Minnett’s projected cashflows for TZN from Menninnie Dam. 2012
2013
2014
2015
2018
2019
2022
2023
Revenue
$ 0.0m
$ 82.7m
$ 105.7m
$ 90.1m
$ 90.1m
$ 90.1m
$ 90.1m
$ 30.4m
Cash Costs
$ 0.0m
$ 43.8m
$ 60.2m
$ 56.4m
$ 57.3m
$ 57.6m
$ 58.6m
$ 21.2m
Dep'cn & Amotr'sn
$ 0.0m
$ 7.8m
$ 9.6m
$ 9.6m
$ 9.6m
$ 9.6m
$ 9.6m
$ 1.8m
EBIT
$ 0.0m
$ 31.1m
$ 36.0m
$ 24.1m
$ 23.2m
$ 22.9m
$ 21.9m
$ 7.4m
Zinc produced
0.0kt
21.7kt
33.6kt
33.6kt
33.6kt
33.6kt
33.6kt
11.3kt
Lead produced
0.0kt
16.2kt
24.9kt
24.9kt
24.9kt
24.9kt
24.9kt
8.4kt
($74.4m)
$ 0.0m
$ 0.0m
$ 0.0m
($21.6m)
$ 0.0m
$ 0.0m
$ 0.0m
Project Capital Sustaining Capital Net Cashflow
$ 0.0m
($0.6m)
($1.2m)
($1.2m)
($1.2m)
($1.2m)
($1.2m)
($0.6m)
($74.4m)
$ 38.3m
$ 44.4m
$ 32.5m
$ 10.0m
$ 31.3m
$ 30.3m
$ 8.6m
Source : Ord Minnett estimates
While Table 25 shows TZN spending its share of capital in 2012, the model assumes that this spend takes place over the period from 2008 onwards (assuming that ZFX has competed its earn-in to 75% during 2007).
17 April 2007
Page 41
Other Potential : Present but not Valued As well as the Angas development, the Tala Hamza project and the potential of Menninnie Dam, TZN has further potential :
Near Angas, TZN has significant holding in a historic mining area, but has not explored this as it has focussed on getting Angas into operation and hence generating a positive cashflow;
While there is still upside to the Tala Hamza deposit, there is also a further 22Mt of identified mineralisation in the Oued Amizour area;
In addition to Menninnie Dam, Menninnie Metals has three ELs in the area near Prominent Hill.
While Ord Minnett believes there is further potential to TZN, we have not attempted to value this potential as it is too uncertain and too far off in the future.
TZN : Three Projects gives Huge Growth Chart 17 shows Ord Minnett’s projections for TZN’s cashflows. It clearly shows the steep growth in projected cashflows as three projects are brought into operation over a period of about seven years.
Chart 17 : Ord Minnett’s projections for TNZ’s operating cashflows. $A 500m
$A 450m
$A 400m
$A 350m
$A 300m
$A 250m
$A 200m
$A 150m
$A 100m
Angas Zinc
Angas Lead / Silver/ etc.
Tala Hamza Zinc
Tala Hamza Lead
Menninie Zinc
Menninnie Lead / Silver
Total Cash Costs $A 50m
$A 0m 2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source : Ord Minnett estimates
17 April 2007
Page 42
Chart 18 below shows similar information, this time in terms of TZN’s share of net payable zinc equivalent (1t Zn = 2.0t Pb = 0.55t Cu = 3oz Au = 200oz Ag).
Chart 18 : TZN’’s projected production, net share of zinc equivalent 200kt
175kt
Menninnie Dam 150kt
Tala Hamza Angas
125kt
100kt
75kt
50kt
25kt
0kt 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Source : Ord Minnett estimates
Chart 18 clearly shows that TZN’s major asset is its 65% of the Tala Hamza deposit, though comparing Tables 12, 15 and 21 shows that Tala Hamza’s costs are about the same as Angas and much higher than Menninnie.
Table 26 below shows Ord Minnett’s projections for TZN’s reported accounting data.
Table 26 : Ord Minnett’s projected reported accounting data for TZN 2007 $A / US$ Zinc
2008
2009
2010
2011
2012
2013
2014
2015
0.780
0.770
0.760
0.750
0.750
0.750
0.750
0.750
0.750
$3,250/t
$2,250/t
$1,875/t
$2,750/t
$2,750/t
$2,500/t
$2,500/t
$2,000/t
$1,650/t
Lead
$1,500/t
$1,250/t
$1,000/t
$800/t
$750/t
$750/t
$750/t
$750/t
$750/t
Silver
$12.5/oz
$10.5/oz
$8.50/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
Zinc
0.0kt
4.9kt
31.4kt
29.7kt
179kt
268kt
378kt
463kt
466kt
Lead
0.0kt
1.3kt
9.4kt
10.1kt
33kt
49kt
95kt
123kt
116kt
Silver
0.0koz
47.9koz
340koz
278koz
296koz
311koz
1,526koz
2,083koz
1,881koz
Reported Revenue
$ 0.2m
$ 14.8m
$ 91m
$ 127m
$ 422m
$ 609m
$ 732m
$ 657m
$ 538m
Cash Costs
$ 3.6m
$ 18.5m
$ 59m
$ 68m
$ 241m
$ 322m
$ 396m
$ 440m
$ 427m
EBITDA
($3.4m)
($3.7m)
$ 31m
$ 59m
$ 181m
$ 287m
$ 336m
$ 217m
$ 111m
Dep'cn & Amort'sn
$ 0.0m
$ 3.2m
$ 13.8m
$ 14m
$ 25m
$ 27m
$ 45m
$ 47m
$ 43m
Interest
$ 0.2m
$ 3.4m
$ 4.3m
($2m)
($9m)
($17m)
($24m)
($24m)
($22m)
Taxes
$ 0.0m
$ 0.0m
$ 0.0m
$ 10m
$ 50m
$ 83m
$ 94m
$ 58m
$ 27m
Minorities
$ 0.0m
$ 0.0m
$ 0.0m
$ 0m
($61m)
($105m)
($104m)
($59m)
($22m)
($3.6m)
($10.3m)
$ 13.1m
$ 37m
$ 55m
$ 89m
$ 117m
$ 77m
$ 41m
(4.0c) 0c
(11.4c) 0c
15c 0c
41c 0c
61c 6c
99c 20c
130c 20c
86c 30c
46c 30c
Total TZN production
NPAT e.p.s. d.p.ds
Source : Ord Minnett estimates
17 April 2007
Page 43
The basis of the above data is :
TZN has 100% of Angas;
TZN consolidates 100% of Western Mediterranean Zinc, but the 355 of WMZ that is not owned by TZN is reported in “:Minorities”; and
TZN’s interest in Menninnie is assumed to be a 24% share of an unincorporated Joint Venture, so that TZN reports its direct 24% interest.
TZN has debt financing in place for the development of Angas.
Ord Minnett assumes that the development of Tala Hamza will be able to be financed by :
Some equity from TZN from the cashflows from Angas;
Some further equity for the project from the sell down and inducting of new partners into the project for the 35% that is presently owned by the Algerian Government; and
The balance is sourced as project finance.
As such, TZN may not need to raise further equity.
Table 24 clearly shows very strong earnings five to seven years from now, when Ord Minnett assumes :
TZN’s zinc production is at peak levels; while
Zinc prices are still elevated.
TZN : Valuation – The Bottom Line Accounting Based Measures Table 27 below shows a range of accounting based valuation measures for TZN.
Table 27 : Accounting based valuation measures for TZN 2006
2007
2008
2009
2010
2011
e.p.s.
(4.3c)
(4.0c)
(11.4c)
14.6c
41c
d.p.ds
0c
0c
0c
0c
0c
(40x)
(43x)
(15x)
11.6x
4.1x
P/E Multiple Dividend Yield
2012
2013
2014
2015
61c
99c
130c
86c
46c
6c
20c
20c
30c
30c
2.8x
1.7x
1.3x
2.0x
3.7x
0%
0%
0%
0%
0%
4%
12%
12%
18%
18%
(216x) 36c
(43x) 45c
(22x) 102c
6.1x 103c
3.2x 108c
2.1x 78c
1.4x 91c
1.0x 191c
1.3x 240c
2.0x 252c
P / Book
4.8 x
3.8x
1.7x
1.7x
1.6x
2.2x
1.9x
0.9x
0.7x
0.7x
R. O. E.
(4%)
(23%)
(204%)
72%
67%
53%
51%
43%
24%
12%
(7%) Source : Ord Minnett estimates
(8%)
(7%)
17%
43%
206%
295%
157%
73%
28%
P / GCFPS BV / share
R. O. A.
17 April 2007
Page 44
Table 27 shows that Ord Minnett projects that TZN will have some very appealing investment parameters from about 2009, and outstanding measures from 2011 onwards.
This is consistent with mine development, where there is a lean period before significant cashflows arrive.
TZN currently has 87,952,608 shares on issue, following the recent placement. TZN has a Share Purchase Plan under way. Ord Minnett assumes that a further 3.03m shares are issued pursuant to the SPP.
Base Case Valuation Table 26 above gave Ord Minnett’s projected cashflows for TZN. To derive the NPV, the discount rate needs to be determined.
Discount Rate The text-book method to estimate the appropriate discount rate is to use the Weighted Average Cost of Capital (WACC), which is estimated using the following formula : WACC = D / A * (1-t) * Kd + (1 – D / A) * [Rf + β * (Rm – Rf)] where :
D / A is the Debt / Asset ratio (ie. how much of the asset base is debt);
β is the co-variance risk (ie. the degree to which the stock moves more or less than the market) for that particular stock.
(1-t) * Kd is the after-tax cost of debt; Rf is the risk-free rate (ie. about 6%) (Rm – Rf) is the equity risk premium, or the expected market return less the risk-free rate. For Australia, Bloomberg estimates this to be 6.25%; and
There are many practical difficulties with this formulation. In Ord Minnett’s view, the most significant are :
The value used for β is estimated from historical trading data and is assumed to be relatively constant over time;
Because it is a formula, it gives a precise answer and is used for this reason in ignorance of the many underlying assumptions; and
In Ord Minnett’s experience, this formula tends to give valuations that are higher than the market prices.
According to Bloomberg data, the β for TZN is 1.39, which gives a cost of equity (Ke) of 13.53%, or a WACC of 13.36% in what is effectively an un-geared company.
17 April 2007
Page 45
TZN has been listed only for a relatively short time and it has hugely out-performed the market in that that time, which gives it a higher β.
In previous reports, Ord Minnett has shown that similar companies can have different costs of capital, when the standard calculation is used. Ord Minnett uses a discount rate of 10%, real, on the after-tax cashflows of the companies, with some value given for franking credits.
Derived Value Table 28 below shows the detail of Ord Minnett’s derived valuation for TZN of $2.48.
Table 28 : Detail of Ord Minnett’s derived valuation for TZN 31 December 2006 100 % Product per share Angas
13-Apr-07
90 %
$74m
$67m
68c
74c
70 %
$20m
$14m
14c
14c
Oued Amizour
70 %
$212m
$148m
151c
156c
Menninnie Dam
50 %
$41m
$20m
21c
21c
40 %
$34m
$14m
14c
14c
Administration
100 %
($32m)
($32m)
(33c)
(33c)
Net Debt / Cash
100 %
franking credits
franking credits
TOTAL Shares on Issue Source : Ord Minnett estimates
$5m
$5m
5c
2c
$354m
$236m
240c
248c
91.0m
FPO shares
7.5m
options
In this valuation, Ord Minnett has assumed that TZN’s options are exercised when they fall due and the present value of the resulting cash is adding to TZN’s cash balance.
The present share price reflects a very high risk weighting on TZN’s projects.
In effect, the number of shares on issue is assumed to be 97.2m.
As Oued Amizour is an Algerian project, it will pay Algerian taxes rather than Australian taxes and hence it will not generate any franking credits.
Sensitivity Analyses Ord Minnett’s derived valuation is a precise answer to a large number of assumptions.
In this part of the analysis, Ord Minnett tests the sensitivity of the derived result for changes in some of the more significant assumptions. These assumptions are :
Discount rate and Risk Weighting; Operational Costs and Capital Costs; and Commodity prices : Lead, Zinc and treatment Charges 17 April 2007
Page 46
Discount Rate and Risk Weighting Table 28 assumed a real discount rate of 10%, or 12.5% nominal. It also shows that Ord Minnett has applied a significant risk weighting to projects on which we have little information.
Table 28, above, shows that if the valuation is limited to Reserves, plus some notional value for Exploration, then the resulting valuation would be about $1.00.
Table 29 below shows the resulting valuation if the assumptions of discount rate and risk weightings are changed
Table 29 : Ord Minnett’s valuation for differing discount rates and risk assumptions discount rate
8.0%
9.0%
10.0%
11.0%
12.0%
Higher Risk
$ 1.93
$ 1.82
$ 1.72
$ 1.63
$ 1.54
Base Case Risk
$ 2.81
$ 2.64
$ 2.48
$ 2.34
$ 2.21
Un-weighted
$ 4.25
$ 3.97
$ 3.72
$ 3.49
$ 3.28
Source : Ord Minnett estimates
Table 29 shows that a change in the discount rate of 1% point (eg. from 10.0% to 9.0%) changes the valuation by about 6%; slightly more for the cases which are less risk weighted.
Table 30 below shows the risk weightings applied to each of the projects.
Table 30 : Various risk weightings applied to projects Base Case
Higher Risk
90%
80%
100%
70%
60%
100%
Angas franking credits
Un-Risked
Oued Amizour
70%
50%
100%
Menninnie Dam
50%
25%
100%
40%
10%
100%
franking credits Source : Ord Minnett estimates
Taken together, Tables 29 and 30 suggest that the present TZN share price is applying a very heavy discount to TZN’s projects.
Operating and Capital Cost estimates There are varying degrees of certainty as to both capital and operating costs :
For Angas, the capital costs are reasonably certain as the project is currently being developed
>
The operating cost estimates for Angas are based on data in the March 2007 presentation given by TZN,
17 April 2007
Page 47
For Tala Hamza, Ord Minnett’s assumptions > For capital costs are based on preliminary “guesstimates” advised by TZN in their March 2007 presentation which was US$ 150m for an initial 1.2Mt./yr and then a further US$ 40m to get to 3.0Mt/yr
¾
Ord Minnett understands that the project will look at larger production scales so the estimates have been adjusted upwards to US$ 175m for the first 1.5Mt/yr stage plus a further US$ 150m to get to 5.0Mt/yr
>
There is no guidance for operating costs, so Ord Minnett has based the cost estimates on the Angas and Nifty projects
¾
Lower productivity has been assumed for Tala Hamza and also lower labour costs, though the labour costs assumed are higher than the average for Algeria which, according to CIA, is US$11,000 (GDP US$ 102B and workforce 9.3m)
For Menninnie Dam, Ord Minnett’s capital and operating cost estimates are based on Oxiana’s published advice for Prominent Hill.
While Ord Minnett’s guesstimates are reasonable best guesses, there is considerable scope for error. This is tested by adjusting the estimated capital and operating costs as per Table 31 below.
Table 31 : Adjustments to Ord Minnett’s cost estimates Capital Costs Operating Costs
Angas
Tala Hamza
Menninnie Dam
+ / - 10%
+ / - 25%
+ / - 25%
+ / - 5%
+ / - 10%
+ / - 10%
Source : Ord Minnett
Table 32 below shows the impact on Ord Minnett’s base case valuation from the adjustments to the capital and operating costs shown in Table 29.
Table 32 : Sensitivity of Ord Minnett’s derived TZN valuation to operating and capital costs Cap. Ex /
Op. Ex
Higher
Base Case
Lower
Higher
$ 1.77
$ 2.20
$ 2.62
Base Case
$ 2.06
$ 2.48
$ 2.91
Lower
$ 2.35
$ 2.77
$ 3.20
Source : Ord Minnett estimates
Table 30 shows that the Ord Minnett’s derived valuation of TZN is more sensitive to the variation in operating costs (over 17%) than for capital costs (just under 12%).
However, all values are a premium to the TZN share price.
17 April 2007
Page 48
Sensitivty to Lead Price Assumptions Charts 15 and 16 earlier showed lead is an important source of revenue for TZN, though it is far from the major source.
Lead is generally produced as a by-product of zinc and silver production. Also, secondary supply is roughly half of total supply.
As a result the supply of lead does not really respond to the price of lead as it is produced for reasons fother than the lead price.
Chart 19 shows historical lead prices and Ord Minnett’s assumptions for prospective lead prices.
Chart 19 : historical and projected lead prices $ 1,750 /t
$ 1,500 /t
actual, nominal lead prices Ord minnett's lead prcie projections $ 1,250 /t
$ 1,000 /t
$ 750 /t
$ 500 /t
$ 250 /t
$ 0 /t Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Source : IRESS, Ord Minnett estimates
Chart 19 shows that present lead prices appear to be very high, but that Ord Minnett’s base case projections are for lead prices to fall back to a level that is only a little higher than that which might have been seen as the “Long-Run average”
Ord Minnett has used $750/t, or 34c/lb as the L-R average, which compares with estimates of $550/t (25c/lb) to $660/t (30c/lb) which prevailed for the decade from about 1994 to 2004.
Ord Minnett’s uplift in the assumed L-R price, of 13% - 36%, compares with uplifts of 30% to 65% for other commodities.
17 April 2007
Page 49
Chart 20, below, shows a more bullish and a more bearish case for projections of the lead price, and compares these with the historical lead price in real (ie. inflation adjusted prices) December 2006 terms.
Chart 20 : Ord Minnett’s projected lead prices compared with historical prices, in real terms $ 2,000 /t
$ 1,750 /t
$ 1,500 /t
$ 1,250 /t
$ 1,000 /t
$ 750 /t
$ 500 /t
$ 250 /t
actual, lead prices, real (Dec. 2006) terms
Ord minnett's lead prcie projections
bullish projections $ 0 /t Jan-86
Jan-88
Jan-90
Jan-92
bearish projections Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Source : IRESS, Bloomberg, Ord Minnett estimates
Chart 20 suggests that Ord Minnett’s lead price projections are not at all bullish.
Table 33 below shows that changes to the lead price assumptions impacts on Ord Minnett’s derived valuation for TZN by about 16% on the down side and 13% on the upside.
Table 33 : Impact of changes in lead price assumptions on TZN’s valuation Higher Risk
Base Case Risk
Un-risked
Bullish lead prices
$ 1.99
$ 2.87
$ 4.31
Base Case lead prices
$ 1.72
$ 2.48
$ 3.72
Bearish lead prices
$ 1.50
$ 2.16
$ 3.23
Source : Ord Minnett estimates
Sensitivity to Treatment Charges Treatment Charges (TCs) are the amounts paid by the miner to the smelter to produce metal from the concentrate. The smelter’s income is the TC plus the physical premium for metal sales.
TCs are set annually in negotiations between the major miners (in the case of zinc it is Teck Cominco, the world’s largest zinc miner) and certain smelters (either the Japanese as a group, or the major Europeans, such as Umicore).
17 April 2007
Page 50
There are many components to the TC, including :
A set charge, which for 2007 is US$ 300 per tonne of concentrate, but has more typically been between $120 and $180;
A price participation, which is a certain percentage, that changes from year to year, but typically about 10% of the different between a negotiated base price and the LME average
>
The base price for 2007 is $3,000/t, which compares with about $1,200/t which has been the base price for many years; and
“Free metal”, whereby the miner is only paid for a part of the metal in concentrate, which is typically 85%, subject to the minimum for zinc being at least 8 percentage points less than the proportion of zinc in conc.
Chart 21 below shows historical TCs paid compared with Ord Minnett’s projections.
Chart 21 : Historical TC paid and Ord Minnett’s projections $ 4,500/t
45.0 %
$ 4,000/t
40.0 %
$ 3,500/t
35.0 %
$ 3,000/t
30.0 %
$ 2,500/t
25.0 %
payment to miner, inlcuding transport costs Payment to refiner, before physical premium
$ 2,000/t
20.0 %
Refienrs's proporiton of LME zinc price
$ 1,500/t
15.0 %
$ 1,000/t
10.0 %
$ 500/t
$ 0/t Apr-92
5.0 %
0.0 % Apr-94
Apr-96
Apr-98
Apr-00
Apr-02
Apr-04
Apr-06
Apr-08
Apr-10
Apr-12
Apr-14
Source : various, Ord Minnett estimates
While the scale obscures the message, Chart 21 shows that returns to smelters are presently the highest they have ever been in absolute terms, though they are also the lowest they ever in percentage terms.
In Ord Minnett’s view, mining capacity is constrained while smelting capacity is easily and rapidly constructed, especially in China.
Ord Minnett’s base case is driven by the ease with which smelting capacity is being constructed in China.
Chart 22 below shows the range of TCs Ord Minnett has used to test the impact on the derived valuation.
17 April 2007
Page 51
Chart 22 : TCs over time $ 325/t
$ 280/t
Historical TC, $/t of conc
Ord Minnett base case
Higher TCs (i)
Higher TCs (ii)
Lower TCs $ 235/t
$ 190/t
$ 145/t
$ 100/t 92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Source :various, Ord Minnett
Table 34 below shows that the impact of the differing TCs on the derived valuation is about 9% - 10% for the lower TC scenario and just over 10%lower for the Higher TC scenario.
Table 34 : Derived Valuation for differing TC scenarios Higher Risk
Base Case Risk
Base Case
$ 1.72
$ 2.48
Un-risked $ 3.72
Higher TCs (i)
$ 1.29
$ 1.88
$ 2.83
Higher TCs (ii)
$ 1.54
$ 2.23
$ 3.34
Lower TCs
$ 1.88
$ 2.71
$ 4.05
Source : Ord Minnett estimates
However, Table 32 also shows that if TCs do not fall from current levels, then the derived value is reduced by about 25%, and the premium of the value of the share price almost disappears.
Sensitivity to Zinc Prices Chart 17 shows that TZN’s major revenue is zinc.
Chart 23 below shows two alternative scenarios for the zinc price :
The Bullish price scenario tests the impact of Ord Minnett’s assumed L-R price being too low
>
This may arise as the level of expenditure on zinc exploration has responded only weakly to presently elevated prices and the supply increase may struggle to match to rising demand;
The Bearish price scenario could arise only if Chinese mines respond to the present high prices in a manner similar to the response to the 1997 squeeze
>
This is not Ord Minnett’s base case as, while China is still highly prospective for zinc, mine supply has been flat over the last few months s the supply may have been already brought forward and / or clampdowns on dangerous mining.
17 April 2007
Page 52
Chart 23 : Possible zinc price scenarios $ 5,000 /t
$ 4,500 /t
Historical, actual zinc prices
$ 4,000 /t
Ord minnett's projected zinc prices $ 3,500 /t
Bearish zinc prices Bullish zinc prices
$ 3,000 /t
$ 2,500 /t
$ 2,000 /t
$ 1,500 /t
$ 1,000 /t
$ 500 /t
$ 0 /t Dec-95
Dec-96
Dec-97 Dec-98 Dec-99
Dec-00 Dec-01 Dec-02
Dec-03 Dec-04 Dec-05
Dec-06 Dec-07 Dec-08
Dec-09
Dec-10 Dec-11
Dec-12 Dec-13
Dec-14
Dec-15
Source : IRESS, Ord Minnett estimates
Table 35, below, shows that the differing price scenarios have a major impact on Ord Minnett’s derived valuation of TZN.
Table 35 : Impact of zinc price on TZN valuation Higher Risk
Base Case Risk
Un-risked
Bullish zinc prices
$ 2.35
$ 3.42
$ 5.16
Base Case zinc prices
$ 1.72
$ 2.48
$ 3.72
($0.83)
($1.00)
($1.23)
Bearish zinc prices Source : Ord Minnett estimates
Table 36 below shows why the low zinc price scenario has such an impact on the valuation; the low price scenario is, effectively, the scenario still being used by some analysts that have not updated their views on zinc prices from about five years ago, when it was said that “Zinc Stinks”.
Table 36 shows Ord Minnett’s estimated cash costs, which reflect elevated operated costs in the current environment due to higher oil prices and shortages of skilled labour. The costs are around the level of more dated views of the L-R zinc price.
Table 36 : Ord Minnett’s estimated cash costs Angas
Tala Hamza
Bullish zinc prices
59c/lb
60c/lb
Menninnie 61c/lb
Base Case zinc prices
59c/lb
57c/lb
57c/lb
Bearish zinc prices
47c/lb
50c/lb
49c/lb
Source : Ord Minnett estimates
17 April 2007
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Conclusions Zinc Prices Zinc prices have been poor for a period of an extended period, from about mid 1991 to the end of 2004; a period which more than covers the covers the working memory of most in the financial markets.
As a result, there has been almost no interest in finding new deposits.
The zinc price more than trebled in the two years from December 2004 when the lack of new supply was caught out by the growing demand from both China and also galvanising.
Zinc prices have eased from these high levels, but Ord Minnett expects that the zinc market will be deficit in 2007, before swinging to surpluses in 2008 and 2009 and back to deficit from 2010 onwards.
TZN : Brief Description Terramin Australia (TZN) is an emerging zinc producer with one project currently in development and two more; one is expected to begin development within two years, while the timing of third is assumed by Ord Minnett to be 12 moths later. However, there are still uncertainties on the timing of both related to the amount of further work required to determine an Inferred Resource.
TZN’s share is expected to be 200kt/yr of zinc in concentrate.
Table 37 below shows the details of TZN’s projects.
Table 37 : TZN’s Projects Angas
Tala Hamza
Menninnie
100%
65%
24%
60km S-E of Adelaide
Algeria
100km W-NW from Whyalla
Commissioning
2008 Q3
2011 Q1
2012 A1
Contained zinc
190kt
2,750kt
1,590kt
Annual production (payable Zn eq.)
28kt/yr
130kt/yr
170kt/yr
Cash costs of mining
$A 64/t
$A 42/t
$A 30/t
Net cash costs of zinc
59c/lb
57c/lb
57c/lb
TZN share Location
Source : Ord Minnett estimates
17 April 2007
Page 54
Base Case Valuation The value in TZN is in developments that have yet to have a F/S completed on them. As such, there is significant risk in the assumed time frames and capital and operating costs.
Table 38 below shows Ord Minnett’s base case valuation fro TZN. It shows that the present share price applies a very heavy discount to TZN’s projects and prospects.
Table 38 : Ord Minnett’s valuation of TZN Higher Risk
Base Case Risk
Un-risked
$ 1.72
$ 2.48
$ 3.72
Source : Ord Minnett estimates
Risks to Ord Minnett’s Valuation Costs Ord Minnett’s believes that its estimates of capital and operating costs are both highly defendable and also conservative.
The impact on Ord Minnett’s derived valuation of higher operating costs (+5% for Angas and +10% for Tala Hamza and Menninnie Dam) and / or capital costs (+10% for Angas and +25% for Tala Hamza and Menninnie Dam) is shown in Table 39 below.
Table 39 : Impact on Ord Minnett’s derived valuation of high operating and capital costs Base Case
Higher Cap.Ex
High Op.Ex
Cap.Ex & Op,. Ex
Higher Risk
$ 1.72
$ 1.53
$ 1.42
$ 1.23
Base Case Risk
$ 2.48
$ 2.20
$ 2.06
$ 1.77
Un-risked
$ 3.72
$ 3.27
$ 3.11
$ 2.66
Source : Ord Minnett estimates
Table 39 shows that the base case is robust for higher cost estimates.
Commodity Prices Key assumptions concerning commodity prices are :
Treatment Charges (TCs) fall as returns to smelters are at historical highs and new smelting capacity is easily constructed;
Lead prices fall steeply from present elevated levels, back to a L-R price of $750/t (or 34c/lb), which is a premium of 13% - 36% over the 1990s views of L-R lead prices; and
Zinc prices fall while the market is in surplus, and then rise again when the market is in deficit, reaching a L-R level of 75c/lb, or a premium of 36% to 50% over 1990s views of the L-R zinc price.
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To test the sensitivity of Ord Minnett’s derived valuation, revised scenarios were tested :
TCs fall only a small maount and remain at levels much higher than seen before, despite the ease with which new capacity is being built;
Lead prices fall back to historic L-R levels, despite much higher costs; and Zinc prices fall back to historic L-R levels, despite projected L-R shortages and elevated cost structures.
Table 40 below shows the impact of these revised assumptions.
Table 40 : Impact on TZN’s NPC from revised commodity prices Higher Risk
Base Case Risk
Base Case
$ 1.72
$ 2.48
Un-risked $ 3.72
Higher TCs
$ 1.54
$ 2.23
$ 3.34
Lower lead prices
$ 1.50
$ 2.16
$ 3.23
Lower zinc prices
($0.83)
($1.00)
($1.23)
Source : Ord Minnett estimates
Table 38 shows that TZN’s valuation is very sensitive to the zinc prices assumed, but not very sensitive to other assumptions.
Zinc Price Risk TZN’s major exposure is the zinc prices. Chart 24 below shows that the TZN share price moves with the zinc price.
Chart 24 : TZN share price v. zinc price $ 2.50
$ 5,500/t
$ 2.25
$ 5,000/t
$ 2.00
$ 4,500/t
TZN share price Zinc price
$ 1.75
$ 4,000/t
$ 1.50
$ 3,500/t
$ 1.25
$ 3,000/t
$ 1.00
$ 2,500/t
$ 0.75
$ 2,000/t
$ 0.50
$ 1,500/t
$ 0.25
$ 1,000/t
$ 0.00 Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
$ 500/t Mar-07
Source : IRESS, Ord Minnett
The correlation between the TZN share and the zinc price since TZN’s listing has been 97%.
17 April 2007
Page 56
As Ord Minnett projects the zinc price to ease over the period to about the middle of 2009, there is real risk that the TZN share price will also ease over this period.
Final Comments There are risks to Ord Minnett’s derived valuation of TZN. However, Ord Minnett’s analysis shows that the present price of TZN indicates that the market is either very negative on the prospects for zinc, or very cautious on the value of TZN’s developments.
In Ord Minnett’s view, the base case valuation makes an appropriate allowance for the risks involved.
Accordingly, Ord Minnett initiates coverage of TZN with a BUY rating. Reflecting the risks, Ord Minnett’s risk rating is High.
The zinc price is expected to be negative influence on the TZN share price over the next two years, but the growth in value of TZN’s progress on its current project and its prospective developments is expected to be a positive influence on the share price.
Ord Minnett is not able to guess as to whether the positive influence will be stronger or weaker than the negative influence.
If the TZN share price does weaken over the next two years, with the zinc price, then, in Ord Minnett’s view, this will make TZN an even better buy.
17 April 2007
Page 57
Appendix 1 : Board and Senior Management Board Kevin Moriarty Executive Chairman; CEO
Dr Moriarty is a professional geologist and company director. Dr Moriarty's career has included geophysical and geological projects in both petroleum and minerals. His early and later career has been in base and precious metal exploration and industrial mineral projects in many countries.
He formed and was CEO of Tarcoola Gold Ltd., which had a successful IPO in 1986. Dr Moriarty found the zinc projects for Terramin and was appointed Executive Chairman and CEO in 2000, guiding it to a listing in 2003.
Dr Moriarty holds BSc (Hons) and PhD degrees. He is a member of The Australian Institute of Mining and Metallurgy and the Geological Society of Australia.
David Paterson Executive Director; Audit Committee, Risk and Compliance Committee
Mr Paterson began his career as a geologist. He has diverse experience in the Australian minerals industry and has worked as a geologist for Zinc Corporation & Minerals Mining & Metallurgy, New Guinea Goldfields Ltd and BHP Exploration. He was a Member of Australian Stock Exchange Ltd, and brings 20 years experience in capital markets and finance to the Company.
Mr Paterson left Prescott Securities Ltd in December 2005. Prior to that he was a director of Ord Minnett (SA) Pty Ltd. and Manager SA-Equities for Ord Minnett. He has a BAppSc and GradDip Bus Admin. He is an Affiliate of The Securities Institute of Australia, a Member of The Australasian Institute of Mining and Metallurgy and the Geological Society of Australia.
Steve Bonett Director; Audit Committee, Nominations and Remuneration Committee, Risk and Compliance Committee
Mr Bonett is a former partner of Finalysons Lawyers and holds degrees in Commerce and Law(Hons). He is recognised as an expert in the field of corporate and commercial law and corporate governance. Member of the Financial Services Institute of Australia, Australian Institute of Company Directors and Australian Corporate Lawyers Association. Appointed 15 June 2005.
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Michael Kennedy Director; Nominations and Remuneration Committee, Risk and Compliance Committee
Mr Kennedy has a degree in Commerce (Economics). Mr Kennedy worked as a metals and concentrate trader before joining CRA, a predecessor to Rio Tinto. At CRA Mr Kennedy worked for Australian Mining and Smelting, a predecessor to Zinifex.
In 1989 he left the CRA Group to from a specialist trading company, Colwell Kennedy Australia Pty Ltd. He was resident Director of the Korea Zinc group of companies in Australia from 1991 until early 2005. During that period, he was directly involved in all aspects of the group’s establishment and subsequent growth into a major corporate presence in the Australian zinc industry.
In 2005 he retired as a director of KZ and joined Terramin’s board.
Jim Hazel (as from 26 April 2007) Director; Chair Audit Committee
Mr Hazel is currently the Chairman of Elders Rural Bank and a Director of impedimed Limited. He was previously the Chief General Manager at Adelaide Bank and the Managing Director of Primelife Corporation.
Consultants and Senior Management Colin Jackson Chairman, Technical Committee
Colin Jackson was a Director of Terramin from 20 August 2003 to 31 December 2005. After graduating as a metallurgist and mineral process engineer, Mr Jackson worked for 10 years with Selection Trust Group and then RGC Limited.
Mr Jackson then joined McIntosh Securities, becoming Director of Corporate. He later joined Newcrest Mining and then Normandy Mining as Executive General Manager, Corporate.
Bob Jones Chief Operating Officer
Bob Jones is a metallurgist with over 35 years of experience. He has a B.App.Sc degree and an Associate Diploma in Primary Metallurgy. He was previously the President, US Operations, for Pasminco covering the Clarkesville Zinc Refinery, the Gordonsville Mine and the Clinch Valley Mine. Before that, he was the General Manager of the Port Pirie lead smelter.
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John Burgess General Manager, Angas Zinc
Mr Burgess is a process and environmental engineer with 35 years experience in zinc plants mostly at Broken Hill. He has consulted to Zinifex’s Century Mine and on nickel and gold operations. His roles include Manager of Metallurgy and Environment at Broken Hill and General Manager of the Renison Tin Mine. He has extensive experience in commissioning of nickel, copper and gold plants.
Martin Janes Chief Financial Officer
Mr Janes has over 20 years experience in the finance sector of the Resources and banking industries. This includes 14 years at Normandy Mining Limited where he was responsible for managing the commodity and foreign exchange hedging activates and debt funding requirements. He has extensive experience in many facets of mining finance including project finance, corporate finance, leasing and capital markets issuance.
He has a strong understanding of accounting, taxation and legal principles. He is trained as an economist and is a fellow of the Australian Institute of Company Directors and the Finance and Treasury Association.
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Share and Options Holdings Shares Major Shareholders
Shares Held
Kevin Moriarity
9,024,843 shares
9.92 %
David Paterson
8,664,302 shares
9.52 %
Sempra Metals & Concentrates
5,817,902 shares
6.39 %
Colin Jackson
1,500,000 shares
1.65 %
Note :
(i)
Above holdings may change with shares taken up under SPP; and
(ii)
% of total assumes that a total of 3.03m shares issued under SPP, for a take-up rate of about 30%
Options Option Holders
Options Held
Kevin Moriarity
2,000,000
David Paterson
1,000,000
Robert Jones
850,000
Martin Janes
350,000
Michael Kennedy
300,000
John Burgess
300,000
Steve Bonett
250,000
Other Employees & Consultants Former Employees & Consultants
1,860,000 200,000
Others
400,000
TOTAL
7,510,000
17 April 2007
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Appendix 2 : Projected Financials December year end
Terramin Australia Limited (TZN) FY 07e $ 0m $ 4m ($ 3.4m) $ 0.0m ($ 3.4m) $ 0.1m
FY 08e $ 15m $ 18m ($ 3.7m) $ 3.2m ($ 6.9m) $ 3.2m
FY 09e $ 91m $ 59m $ 31.3m $ 13.8m $ 17.4m $ 4.2m
FY 10e $ 128m $ 68m $ 60.6m $ 14.2m $ 46.4m ($2.5m)
($ 1.5m) $ 0.0m $ 0.8m ($2.3m) $ 0.0m ($ 2.3m) (213%) 0.0% (4.3c) (4.3c) 0.0c 0% 0%
($ 3.5m) $ 0.0m $ 0.0m ($3.5m) $ 0.0m ($ 3.5m) (1,694%) 0.0% (3.9c) (3.9c) 0.0c 0% 0%
($ 10.1m) $ 0.0m $ 0.0m ($10.1m) $ 0.0m ($ 10.1m) (25%) 0.0% (11.1c) (11.1c) 0.0c 0% 0%
$ 13.3m $ 0.0m $ 0.0m $ 13.3m $ 0.0m $ 13.3m 34.4% 0.0% 14.6c 14.6c 0.0c 0% 0%
$ 48.9m $ 11.0m $ 0.0m $ 37.9m $ 0.0m $ 37.9m 47.2% 22.5% 41.7c 41.7c 0.0c 0% 0%
Cash Flow Statement EBITDA Change in Working Capital Net Interest (paid)/received Tax Paid Operating Cash Flow Exploration / Net acquisitions Project + Sustaining Capex Other investing items Investing Cash Flow Inc/(Dec) in Equity Inc/(Dec) in Borrowings Dividends Paid Financing Cash Flow Net Inc/(Dec) in Cash
FY 06a ($1.9m) $ 0.0m ($0.4m) $ 0.0m ($ 2.3m) $ 0.0m $ 0m $ 0.0m $ 0m
FY 07e ($3.4m) ($3.7m) $ 0.1m $ 0.0m $ 0.4m $ 0.0m ($17m) $ 0.0m ($ 17m)
FY 08e ($3.7m) ($10.6m) $ 3.2m $ 0.0m $ 10.2m $ 3.0m ($52m) $ 0.0m ($ 49m)
FY 09e $ 31.3m ($2.2m) $ 4.2m $ 0.0m $ 37.6m $ 3.0m ($8m) $ 0.0m ($ 5m)
FY 10e $ 60.6m $ 1.7m ($2.5m) ($3.3m) $ 59.7m $ 5.0m ($8m) $ 0.0m ($ 3m)
$ 0.0m $ 3.1m
$ 0.0m $ 16.4m
$ 0.0m $ 38.8m
$ 0.0m ($32.3m)
$ 0.0m ($56.4m)
$ 0.0m $ 3m $ 1m
$ 0.0m $ 16m $ 0m
$ 0.0m $ 39m $ 0m
$ 0.0m ($ 32m) $ 0m
$ 0.0m ($ 56m) $ 0m
Balance Sheet ($A m) Cash Other Current Assets Total Current Asstes Fixed Assets Explor'n & Evalu'n Other Total Assets Current Liabilities Long term Debt Other Non Current Liabilities Total Liabilities Total Equity Net Debt (Cash)
FY 06a $ 9.6m $ 0.9m $ 10.5m $ 3m $ 16.2m $ 0.0m $ 30.0m $ 3.8m $ 6.4m $ 0.9m $ 11.1m $ 18.9m ($3.1m)
FY 07e $ 2.5m $ 1.0m $ 3m $ 20m $ 16m $ 1.7m $ 41m $ 8m $ 15.7m $ 2.9m $ 26m $ 15m $ 13.2m
FY 08e $ 2.0m $ 1.0m $ 3m $ 72m $ 19m $ 4m $ 98m $ 18m $ 54.0m $ 20.9m $ 93m $ 5m $ 52.0m
FY 09e $ 31.1m $ 1.0m $ 32m $ 80m $ 22m $ 6m $ 140m $ 20m $ 50.7m $ 50.9m $ 122m $ 19m $ 19.7m
FY 10e $ 93.3m $ 2.7m $ 96m $ 89m $ 27m $ 6m $ 218m $ 19m $ 56.6m $ 85.9m $ 161m $ 56m ($36.7m)
Leverage Net Debt/Equity Net Debt/Total Assets Interest Cover (x) Dividend Cover (x) Valuation Ratios (x) P/E Multiple Price To Book Value Price To Cash Flow EBITDA Multiple EBIT Multiple Dividend Yield Source : IRESS, Ord Minnett
17 April 2007
12 month return
Share Price :
FY 06a $ 1m $ 3m ($ 1.9m) $ 0.1m ($ 2.0m) ($0.4m)
Income Statement Sales Operating Costs EBITDA Depreciation & Amortisation EBIT Net Interest Expense (Revenue) Pre-Tax Profit Tax Expense/(Benefit) Minorities Reported NPAT Significant Items (After Tax) NPAT (Pre-Significant Items) EBITDA Margin (%) Effective tax Rate (%) EPS Reported (cps) EPS Pre Significant Items (c) DPS (c) Payout Ratio (%) Franking (%)
FY 06a
FY 07e
FY 08e
FY 09e
FY 10e
(16.7%) (10.5%) n/c n/a
86.1 % 31.9 % (27.2x) n/a
990.9 % 52.9 % (2.1x) n/a
106.2 % 14.0 % 4.2 x n/a
(65.1%) (16.9%) (18.4x) n/a
FY 06a
FY 07e
FY 08e
FY 09e
FY 10e
(53.5x) 10.2 x (293x) (102x) (98x) 0%
(48.2x) 11.0 x (48x) (50x) (50x) 0%
(16.7x) 32.3 x (24x) (46x) (25x) 0%
12.7 x 9.9 x 6.8 x 5.9 x 10.5 x 0%
4.5 x 3.2 x 3.5 x 3.0 x 3.9 x 0%
$ 1.86
Recommendation Risk Rating BUY
47 %
FY 06a FY 07e US 148c/lb US 147c/lb US 58c/lb US 68c/lb $ 11.55/oz $ 12.50/oz 0.754 0.780
Assumptions Zinc Price Lead Price Sivler price $A / US$
High
FY 08e US 102c/lb US 57c/lb $ 10.50/oz 0.770
FY 09e US 85c/lb US 45c/lb $ 8.50/oz 0.760
L-R US 75c/lb US 34c/lb $ 8.00/oz 0.750
1.5 m 5.8 m
1.6 % 6.4 %
Major Shareholders Kevin Moariarty (Exec.Chair) David Paterson (Exec. Director)
9.0 m 8.7 m
Production Angas Zinc (payable) Angas Lead eqiv, payable Tala Hamza Zinc pay. TZN shar Tala Hamza Lead pay. TZN sha Menninnie Dam Zinc, TZN Menninnie Dam Lead. TZN TOTAL, Zinc payable, TZN shar
FY 06a 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt
FY 07e 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt
FY 08e 4.1 kt 2.3 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 8.8 kt
FY 09e 26.6 kt 14.5 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 33.5 kt
FY 10e 25.1 kt 14.5 kt 31.2 kt 9.5 kt 0.0 kt 0.0 kt 32.0 kt
Reserves & Resources Angas Reserves zinc lead silver copper gold Tala Hamza Mineralisation (100 zinc lead
FY 06a 2.3 Mt 8.1 % 3.1 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 07e 2.3 Mt 8.1 % 3.1 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 08e 2.3 Mt 8.2 % 3.1 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 09e 1.9 Mt 8.0 % 3.2 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 10e 1.5 Mt 7.9 % 3.2 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
9.9 % Colin Jackson 9.5 % Sempra Metals
31 December 2006
Valuation Real Discount Rate : Angas franking credits Oued Amizour Menninnie Dam franking credits Administration Net Debt / Cash TOTAL Shares on Issue
10% 90% 70% 70% 50% 40% 100% 100% 83.9m
16-Apr-07
68c $ 67m $ 14m 14c $ 148m 151c $ 20m 21c $ 14m 14c ($32m) (33c) $ 5m 5c $ 236m 240c 7.5m options
$ 74m $ 20m $ 212m $ 41m $ 34m ($32m) $ 5m $ 354m FPO shares
89c 156c 35c (33c) 2c 248c
200kt
175kt
Menninnie Dam Tala Hamza
150kt
Angas 125kt
100kt
75kt
50kt
25kt
0kt 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Page 62
Please contact your Ord Minnett Adviser for further information on our document. Guide to Ord Minnett Recommendations BUY
The stock’s total return (nominal dividend yield plus capital appreciation) is expected to exceed 15% over 12 months.
ACCUMULATE
The stock’s total return is expected to be between 5% and 15%. Investors may add to existing holdings, or initiate holdings on share price weakness.
HOLD
The stock is fairly priced, and its total return is expected to be between 0% and 5%.
LIGHTEN
The stock’s total return is expected to be less than 0% and possibly down 15%. Investors should consider selling into share price strength.
SELL
The stock’s total return is expected to lose 15% or more.
RISK ASSESSMENT
Classified as High, Medium or Low, denotes the relative assessment of an individual stock’s risk based on an appraisal of its disclosed financial information, volatility, nature of its operations and other relevant quantitative and qualitative criteria.
Ord Minnett Limited ABN 86 002 733 048 ASX Market Participant AFS Licence Number 237121
Head Office Level 8, NAB House 255 George Street Sydney NSW 2000 Australia Tel: (61-2) 8216 6300 Fax: (61-2) 8216 6311
Ord Minnett Branches Adelaide Level 11 13 Grenfell Street Adelaide SA 5000 Tel: (08) 8203 2500 Fax: (08) 8203 2525 Brisbane Level 10 Waterfront Place 1 Eagle St Brisbane QLD 4000 Tel: (07) 3214 5555 Fax: (07) 3214 5550 Buderim Sunshine Coast 84 Burnett Street Buderim QLD 4556 Tel: (07) 5430 4444 Fax: (07) 5430 4400
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Coffs Harbour Suite 4 21 Park Avenue Coffs Harbour NSW 2450 Tel: (02) 6652 7900 Fax: (02) 6652 5716
Caloundra, Sunshine Coast 79-81 Bulcock Street Caloundra QLD 4551 Tel: (07) 5491 3100 Fax: (07) 5491 3222
Dubbo 35 Church Street Dubbo NSW 2830 Tel: (02) 6884 4680 Fax: (02) 6884 2353
Canberra Colombia House 101 Northbourne Avenue Canberra ACT 2600 Tel: (02) 6206 1700 Fax: (02) 6206 1720
Mackay 45 Gordon Street Mackay QLD 4740 Tel: (07) 4969 4888
Melbourne Level 19, Optus Centre 367 Collins Street Melbourne VIC 3000 Tel: (03) 9608 4111 Fax: (03) 9608 4142 Newcastle 3rd Floor, T & G Building 45 Hunter St Newcastle NSW 2300 Tel: (02) 4929 3937 Fax: (02) 4929 6194 Sydney Level 8, NAB House 255 George Street Sydney NSW 2000 Tel: (02) 8216 6300 Fax: (02) 8216 6311
Tamworth Suite 3, 344-346 Peel St Tamworth NSW 2340 Tel: (02) 6761 3333 Fax: (02) 6761 3104 Tuncurry Tuncurry Village Centre 60 Manning Street Tuncurry NSW 2428 Tel: (02) 6555 0000 Fax: (02) 6554 5226 Wollongong 3/55 Kembla Street Cnr Market & Kembla Sts Wollongong NSW 2520 Tel: (02) 4226 1688 Fax: (02) 4226 1604
Disclosure: Ord Minnett is the trading brand of Ord Minnett Limited ABN 86 002 733 048, holder of AFS Licence Number 237121 and an ASX Market Participant. Ord Minnett Limited and/or its associated entities, directors and/or its employees may have a material interest in, and may earn brokerage from, any securities referred to in this document. Further, Ord Minnett and/or its affiliated companies may have acted as manager or co-manager of a public offering of any such securities in the past three years. Ord Minnett and/or its affiliated companies may provide or may have provided corporate finance to the companies referred to in the report. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party or person without the prior written consent of Ord Minnett Limited. Disclaimer: Ord Minnett Limited believes that the information contained in this document has been obtained from sources that are accurate, but has not checked or verified this information. Except to the extent that liability cannot be excluded, Ord Minnett Limited and its associated entities accept no liability for any loss or damage caused by any error in, or omission from, this document. This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore before acting on advice contained in this document, you should consider its appropriateness having regard to your objectives, financial situation and needs. If any advice in this document relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement for that product before making any decision. Analyst Certification: The analyst certifies that: (1) all of the views expressed in this research accurately reflect their personal views about any and all of the subject securities or issuers; and (2) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein.
17 April 2007
Page 63
Ord Minnett Research
Terramin Australia Limited
TZN : $ 1.86
Great Zinc ! Good BUY.
Recommendation :
TZN is an emerging zinc producer that will start production from its first project
Risk Assessment :
in 2008 Q3 and could be producing about 200kt/yr of zinc in conc. by 2012.
Ord Minnett’s base case valuation is $2.48, giving a projected 12 month return of over 40%.
Ord Minnett’s analysis indicates that the present share price heavily discounts TZN’s projects for the risks inherent in future projects.
However Ord Minnett projects that the zinc market will remain in deficit in 2007 and move into surplus in 2008 and 2009 before heading back into deficit.
There are very few known zinc projects scheduled five years out, when TZN’s production gets into full swing.
TZN also has considerable further upside potential to that included in Ord Minnett’s valuation from known mineralisation.
TZN’s share price moves with the zinc price, so while Ord Minnett rates TZN as a BUY now, it may be even better buying in about two years from now. . Disclosure : the author has an economic interest in TZN Key Financials Year-end December Revenue ($m)
BUY High Materials Sector, Metals and Mining Industry Pieter Bruinstroop Research Analyst Company Name ASX Code 52 week range Market Cap Shares Outstanding Av Daily Turnover ASX 100 ASX 300 Resources NTA FY06 (¢ per share) Net Cash FY06 ($A m)
Terramin Australia TZN $0.93 - $2.50 $173m 91.0m $0.4m 4,796.8 4,392.9 22.5c $ 3.1m
Relative Share Price Performance
FY06 a
FY07 e
FY08 e
FY09 e
$ 1m
$ 0m
$ 15m
$ 91m
EBITDA ($m)
($ 2m)
($ 3m)
($ 4m)
$ 31m
Net profit after tax ($m)
($ 2m)
($ 4m)
($ 10m)
$ 13m
EPS (¢)
(4.3c)
(3.9c)
(11.1c)
14.6 c
P/E (x)
(53.5x)
(48.7x)
(16.9x)
12.9 x
EV/EDITDA
(104x)
(46.6x)
(32.2x)
5.3 x
Dividend (¢)
0c
0c
0c
0c
Net Yield (%)
0.0%
0.0%
0.0%
0.0%
Franking (%)
0%
0%
0%
0%
(339%)
10%
(188%)
231%
Normalised ROE (%)
(12%)
(23%)
(193%)
72%
NPV / share
$2.40
$2.69
$2.84
$2.83
$ 2.50
$ 2.25
$ 2.00
TZN share price ASX Accumulation Index (re-scaled)
$ 1.75
EPS Growth (%)
$ 1.50
$ 1.25
$ 1.00
$ 0.75
$ 0.50
$ 0.25
$ 0.00 Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
Source: Iress
Source: Iress, Terramin Australia, Ord Minnett Estimates
17 April 2007
Page 1
Table of Contents Piet’s Nuggets : Great Zinc ! A Good BUY
3
Zinc Prices : More than One Day in the Sun
9
TZN : A Lot of Experience, but a Short History
14
Angas : 18 months until zinc
16
Geology and Exploration
17
Proposed Operations : Small, not Complex
19
Projected Cashflows are very Good
20
Oued Amizour : The Big One ! Oued Amizour : Much Previous Work
25
Geology and Exploration : A Bit More to Do
26
Oued Amizour : Development Plan
28
Oued Amizour’s Proposed Operations
29
Oued Amizour : Financing is a Real Question
30
Projected Cashflows
31
Menninnie Dam : What Size ?
17 April 2007
24
33
Menninnie Dam : Geology and Exploration
34
Menninnie Dam : Proposed Operations
36
Menninnie Dam : Projected Cashflows
38
TZN : Other Potential Present but not Valued
42
TZN : Three Projects Gives Good Growth
42
TZN Valuation : The Bottom Line
44
Accounting Based Measures
44
Base Case Valuation
45
Sensitivity Analyses
46
Conclusions
54
Appendix 1 : Board and Management
58
Appendix 2 : Financials
61
Page 2
PIET’s NUGGETS : Great Zinc ! Good BUY. Zinc prices are presently high. As shown in Chart 1, in the last two years, zinc prices have trebled from the levels of the previous 12 years, which more than covers the experience of most in the financial markets.
Chart 1 : Zinc prices $ 5,000 /t
$ 4,500 /t
$ 4,000 /t
$ 3,500 /t
$ 3,000 /t
$ 2,500 /t
Zinc prices are high
$ 2,000 /t
$ 1,500 /t
$ 1,000 /t
$ 500 /t
$ 0 /t Oct-92
Oct-93
Oct-94
Oct-95
Oct-96
Oct-97
Oct-98
Oct-99
Oct-00
Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Because
Oct-06
Source : IRESS, Ord Minnett
Stocks are low The recent rise in prices is due to the fall in available zinc stocks, as shown in Chart 2 below.
Because Chart 2 : LME zinc stocks v. zinc prices 1,250,000 t
US 5,000 /t
LME Zinc Stockpiles
US 4,500 /t
1,125,000 t
LME Zinc price, 3m
US 4,000 /t
1,000,000 t
US 3,500 /t
875,000 t
US 3,000 /t
750,000 t
US 2,500 /t
625,000 t
US 2,000 /t
500,000 t
US 1,500 /t
375,000 t
US 1,000 /t
250,000 t
US 500 /t
125,000 t
US 0 /t Jul-94
Mar-95
Dec-95
Sep-96
Jun-97
Mar-98
Dec-98
Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
0t Mar-07
A long period of low prices means little new mining
And
Continuing demand growth in China
Source : IRESS, Ord Minnett
and The low stocks and resulting high prices have resulted from the following three reasons :
Mining production has increased only slowly due to the long period of low prices;
The continuing growth in China’s demand for all commodities, including zinc; and
The continuing growth in zinc demand for galvanising, while other uses have been stable.
17 April 2007
from Galvanising.
Page 3
Zinc stocks have fallen to very low levels, which means that demand has exceeded supply. Ord Minnett projects that 2007 will also have a deficit, while 2008 and 2009 will have small
Ord Minnett projects that 2007 will be fourth consecutive year of deficit in the zinc market
surpluses, before the market returns to deficit again in 2010.
This is shown in Chart 3 below.
Chart 3 : Historical demand and supply for zinc, and Ord Minnett’s projections 800 kt
14,000 kt
Global zinc supply-demand balance Esttmated global zinc supply
600 kt
13,000 kt
Estimated global zinc consumption
400 kt
12,000 kt
200 kt
11,000 kt
0 kt
10,000 kt 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200kt)
9,000 kt
(400kt)
8,000 kt
(600kt)
7,000 kt
(800kt)
6,000 kt
Virtually wiping out available stocks And then only two years of surplus Before returning to deficits.
Source : ILZSG, Brook Hunt, J.P. Morgan, Ord Minnett
Accordingly, Ord Minnett projects that zinc prices will remain firm in 2007, and then ease in 2008 and 2009 before strengthening again. Ord Minnett’s projections are shown in Chart 4 below.
Ord Minnett’s projections for zinc prices are for prices to fall before rising again in 2009.
Chart 4 : Historical zinc prices and Ord Minnett’s projections $ 7,000/t
$ 6,000/t
$ 5,000/t
Historical zinc price, in 2006 US$ /t
Moving average, from 1900
Moving average, from 1921 (nadir)
Ord Minnett's price projections
$ 4,000/t
$ 3,000/t
$ 2,000/t
$ 1,000/t
$ 0/t 1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source : USGS, Ord Minnett estimates
Chart 4 uses historical, real zinc prices. It shows that :
The presently high prices are consistent with historically high prices; and
Ord Minnett’s projected Long-Run (L-R) prices are higher than those that would have
2020
Our Long-Run prices projections are higher than would have been used in the 1990s, but lower than truly long run historical averages.
been used in the 1990s, but lower than suggested by historical averages.
17 April 2007
Page 4
Terramin (TZN) : An Emerging Zinc Producer Terramin Australia (TZN) is an emerging zinc producer with one project currently in development and two more that are expected to begin development within the next three years. These developments are shown in Figure 1 below.
Figure 1 : TZN’s Projects
TZN is currently developing its Angas project
And has two more projects under investigation. Source : Terramin Australia
In total, TZN is expected to become a producer of about 200kt/yr of zinc in concentrate, it own share, from its three projects, the details of which are given in Table 1 below.
Table 1 : TZN’s Projects Angas
Tala Hamza
100%
65%
24%
2008 Q3
2011 Q1
2012 Q1
TZN share Commissioning Contained zinc
Ord Minnett expects TZN to produce at the rate of 200kt/yr during 2012.
Menninnie
190kt
2,750kt
1,590kt
Annual production (payable Zn eq.)
28kt/yr
130kt/yr
170kt/yr
Cash costs, Mine Site
$A 64/t
$A 42/t
$A 30/t
Net cash costs of zinc
59c/lb
57c/lb
57c/lb
Source : Ord Minnett estimates
Base Case Valuation The value in TZN is in developments that have yet to have a F/S completed on them. As such, there is significant risk in the assumed time frames and capital and operating costs.
Table 2 below shows Ord Minnett’s base case valuation fro TZN. It shows that the present share price applies a very heavy discount to TZN’s projects and prospects.
Ord Minnett’s base case valuation, after allowing for developmental risks, is $2.48
Table 2 : Ord Minnett’s valuation of TZN Higher Risk
Base Case Risk
Un-risked
$ 1.72
$ 2.48
$ 3.72
Source : Ord Minnett estimates
17 April 2007
Page 5
Table 3 below shows the detail of Ord Minnett’s valuation of TZN, clearly showing the risks attached to each of the asset valuations.
Table 3 : Detail of Ord Minnett’s valuation of TZN 31 December 2006 100 % Product per share Angas franking credits Oued Amizour Menninnie Dam
13-Apr-07
90 %
$74m
$67m
68c
70 %
$20m
$14m
14c
74c 14c
70 %
$212m
$148m
151c
156c
50 %
$41m
$20m
21c
21c
40 %
$34m
$14m
14c
14c
Administration
100 %
($32m)
($32m)
(33c)
(33c)
Net Debt / Cash
100 %
$5m
$5m
5c
2c
$354m
$236m
240c
248c
91.0m
FPO shares
7.5m
franking credits
TOTAL Shares on Issue Source : Ord Minnett estimates
The present share price reflects a very high risk weighting on TZN’s projects.
options
Risks to Ord Minnett’s Valuation Costs Ord Minnett’s believes that its estimates of capital and operating costs are both highly defendable and also conservative.
The impact on Ord Minnett’s derived valuation of higher operating costs (+5% for Angas and +10% for Tala Hamza and Menninnie Dam) and / or capital costs (+10% for Angas and +25% for Tala Hamza and Menninnie Dam) is shown in Table 4 below.
Table 4 : Impact on Ord Minnett’s derived valuation of high operating and capital costs Base Case
Higher Cap.Ex
High Op.Ex
Cap.Ex & Op,. Ex
Higher Risk
$ 1.72
$ 1.53
$ 1.42
$ 1.23
Base Case Risk
$ 2.48
$ 2.20
$ 2.06
$ 1.77
Un-risked
$ 3.72
$ 3.27
$ 3.11
$ 2.66
Even with higher costs Ord Minnett’s value for TZN is well above the present share price
Source : Ord Minnett estimates
Table 4 shows that the base case is robust for higher cost estimates.
Commodity Prices Key assumptions concerning commodity prices are :
Only with much lower prices does TZN cease to be good value.
Treatment Charges (TCs) fall as returns to smelters are at historical highs and new smelting capacity is easily constructed;
Lead prices fall steeply from present elevated levels, back to a L-R price of $750/t (or 34c/lb), which is a premium of 13% - 36% over the 1990s views of L-R lead prices; and
17 April 2007
Page 6
Zinc prices fall while the market is in surplus, and then rise again when the market is in deficit, reaching a L-R level of 75c/lb, or a premium of 36% to 50% over 1990s views of the L-R zinc price.
To test the sensitivity of Ord Minnett’s derived valuation, revised scenarios were tested :
TCs fall only a small amount and remain at levels much higher than seen before, despite the ease with which new capacity is being built;
Lead prices fall back to historic L-R levels, despite much higher costs; and Zinc prices fall back to historic L-R levels, despite projected L-R shortages and elevated cost structures.
Table 5 below shows the impact of these revised assumptions.
Table 5 : Impact on TZN’s NPV from revised commodity prices Higher Risk
Base Case Risk
Un-risked
Base Case
$ 1.72
$ 2.48
$ 3.72
Higher TCs
$ 1.54
$ 2.23
$ 3.34
Lower lead prices
$ 1.49
$ 2.16
$ 3.23
Lower zinc prices
($0.83)
($1.00)
($1.23)
Source : Ord Minnett estimates
Table 5 shows that TZN’s valuation is very sensitive to the zinc prices assumed, but not very sensitive to other assumptions.
Ord Minnett expects presently high zinc prices to ease over the next two years,
Zinc Price TZN’s major exposure is the zinc prices. Chart 5 below shows that the TZN share price moves with the zinc price.
Chart 5 : TZN share price v. zinc price $ 2.50
$ 5,500/t
$ 2.25
$ 5,000/t
$ 2.00
$ 4,500/t
TZN share price Zinc price
$ 1.75
$ 4,000/t
$ 1.50
$ 3,500/t
$ 1.25
$ 3,000/t
$ 1.00
$ 2,500/t
$ 0.75
$ 2,000/t
$ 0.50
$ 1,500/t
$ 0.25
$ 1,000/t
$ 0.00 Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
And TZN’s share price follows the zinc price.
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
$ 500/t Mar-07
Source : IRESS, Ord Minnett
17 April 2007
Page 7
The correlation between the TZN share and the zinc price since TZN’s listing has been a very high 97%.
As Ord Minnett [projects the zinc price to ease over the period to about the middle of 2009, there is real risk that the TZN share price will also ease over this period.
However, the TZN share price should be supported by growing production and progress on its projects.
While a weaker zinc price may drag the TZN share price down over the next two years, the TZN share price should be buoyed by getting into production and progress on its projects.
If the TZN share price does ease over the period to the middle of 2009, along with the zinc price, In Ord Minnett’s view, this will make TZN an even better buy.
Final Comments There are risks to Ord Minnett’s derived valuation of TZN. However, Ord Minnett’s analysis shows that the present price of TZN indicates that the market is either very negative on the prospects for zinc, or very cautious on the value of TZN’s developments.
In Ord Minnett’s view, the base case valuation makes an appropriate allowance for the risks involved.
Ord Minnett has not given a value for TZN’s potential from known mineralisation.
There is also considerable resource potential that is not included in Ord Minnett’s valuation :
The Fleurieu tenements, surrounding Angas, are an historic mining area, and TZN has carried out very little regional exploration as it has focused its resources on getting Angas into operation and hence generating a positive cashflow;
The Tala Hamza deposit is not structurally defined and there is considerable further potential along strike and at depth, given that some of the historical drilling ended in mineralization;
At least 22Mt of mineralized deposits have been identified in Oued Amizour, apart from Tala Hamza; and
Menninnie Metals has tenements in the Gawler Craton that are prospective for coppergold.
Accordingly, Ord Minnett initiates coverage of TZN with a BUY rating. Reflecting the risks,
Ord Minnett initiates research on TZN with a BUY Recommendation
Ord Minnett’s risk rating is High.
High Risk rating.
17 April 2007
Page 8
Zinc Prices : More than One Day in the Sun Zinc Prices are High, but not Too High Zinc prices are presently high, as shown in Chart 6 below, which shows daily zinc prices over the last 12 years.
Chart 6 : Daily zinc prices, since January 1995. US 5,000 /t
US 4,000 /t
Zinc prices are higher than anyone would have thought 12 months ago…...
US 3,000 /t
US 2,000 /t
US 1,000 /t
US 0 /t Jan-95
Jan-96
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Source : IRESS, Ord Minnett
However, if taken over a period of more than 100 years, zinc prices are high, but not
But present high prices are not out of line with history.
abnormally so, as shown in Chart 6 below, which shows annual average zinc prices.
Chart 7 : Zinc prices, in real terms, since 1900 $ 7,000/t
$ 6,000/t
$ 5,000/t
Historical zinc price, in 2006 US$ /t $ 4,000/t
$ 3,000/t
$ 2,000/t
$ 1,000/t
$ 0/t 1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Source : United States Geological Service, Bloomberg, Ord Minnett
Reviewing Chart 7 suggests :
Apart from a major price spike from 1988 to 1990, zinc prices have been in a significant downtrend since about 1974; and
Present prices are consistent with previous price spikes.
17 April 2007
Page 9
Present Zinc Prices are Consistent with Low Inventories As shown in Chart 8 below, present zinc prices are high because
Inventory levels are low; and
Prospective inventory levels are low.
Chart 8 : LME zinc stock level v. zinc price US 5,000 /t
1,250,000 t
LME Zinc Stockpiles
US 4,500 /t
1,125,000 t
LME Zinc price, 3m
US 4,000 /t
1,000,000 t
US 3,500 /t
875,000 t
US 3,000 /t
750,000 t
US 2,500 /t
625,000 t
US 2,000 /t
500,000 t
US 1,500 /t
375,000 t
US 1,000 /t
250,000 t
US 500 /t
125,000 t
US 0 /t Jul-94
Mar-95
Dec-95
Sep-96
Jun-97
Mar-98
Dec-98
Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
Present zinc prices are also consistent with low zinc stocks.
0t Mar-07
Source : Bloomberg, IRESS, Ord Minnett
China is One Driver Chart 8 also shows that the recent fall in prices has been associated with a small rise in LME zinc stocks. This rise was caused by a fall in apparent Chinese demand, with China becoming an exporter of zinc metal, though increasing its imports of concentrates, as shown in Chart 9 below.
Chart 9 : China’s imports and exports of zinc 125kt
100kt
China's net imports of zinc in concentrate 75kt
Low zinc stocks at least partly due to China’s change from an exporter to an importer of zinc.
China's net imports of refined zinc China's net imports of zinc
50kt
25kt
Ja n9 6 M ay -9 6 S ep -9 6 Ja n9 7 M ay -9 7 S ep -9 7 Ja n9 8 M ay -9 8 Se p -9 8 Ja n9 9 M ay -9 9 S ep -9 9 Ja n0 0 M ay -0 0 S ep -0 0 Ja n0 1 M ay -0 1 S ep -0 1 Ja n0 2 M ay -0 2 Se p -0 2 Ja n0 3 M ay -0 3 S ep -0 3 Ja n0 4 M ay -0 4 S ep -0 4 Ja n05 M ay -0 5 S ep -0 5 Ja n0 6 M ay -0 6 S ep -0 6 Ja n0 7
0kt
(25kt)
(50kt)
(75kt)
(100kt)
Source : Bloomberg, Ord Minnett
17 April 2007
Page 10
Zinc Demand : The Growing Areas Get Bigger ! China’s growth and galvanising are the key demand drivers for zinc. Chart 10 shows how galvanising demand has grown.
Chart 10 : Growth in galvanised sheet use 1,000 kt
30,000 kt
900 kt
27,000 kt
C A G R = 5.8% 800 kt
24,000 kt
W orld, ex C hina : G alvanised sheet use 700 kt
21,000 kt
600 kt
18,000 kt
500 kt
15,000 kt
400 kt
300 kt
Zinc’s main demand, and the driver of increased demand, has been galvanising.
12,000 kt
C A G R = 19%
9,000 kt
200 kt
6,000 kt
C hina : G alvanised Sheet use 100 kt
0 kt 1997 Q 1
3,000 kt
0 kt 1998 Q 1
1999 Q 1
2000 Q 1
2001 Q 1
2002 Q 1
2003 Q 1
2004 Q 1
2005 Q 1
2006 Q 1
Source : CRU International, China Iron and Steel Association, Ord Minnett
Table 6 below shows that Ord Minnett’s projected growth rates for zinc demand are less than the historical experience, except for the Rest of the World (RoW), where the projected demand is derived by the growth in galvanising demand by the proportion of total demand represented by galvanising (47%),and projecting other demand uses to remain flat, as has been the historical experience.
Table 6 : Historic v projected zinc demand China
Rest of World
Global Total
1997 - 2006, Galvanising
19.2 %
5.6 %
5.8 %
1997 - 2006, Total
18.0 %
1.3 %
3.9 %
2007 - 2015, projected
10.3 %
2.5 %
5.3 %
Mine supply IS responding to higher demand, but struggles to respond quickly enough.
Source : ILZSG, Ord Minnett estimates
Supply v. Demand : Deficit then Surplus then Deficit Zinc supply is responding to the high prices, as Table 7 shows the potential increase in zinc supply from announced projects. In short, mine supply IS coming.
Table 7 : Ord Minnett’s projected increases in mined zinc supply Increase from New Mines Increase from Mine Expansions TOTAL Change Source : various, Ord Minnett
17 April 2007
2006
2007
2008
2009
2010
2011
2012
2013
301kt
414kt
695kt
449kt
366kt
208kt
172kt
108kt
381kt
666kt
239kt
258kt
102kt
220kt
0kt
0kt
10,785kt
11,864kt
12,799kt
13,506kt
13,973kt
14,401kt
14,573kt
14,680kt
6.4 %
10.0 %
7.9 %
5.5 %
3.5 %
3.1 %
1.2 %
0.7 %
Page 11
Ord Minnett’s projections for mine supply could be too optimistic, if projects do not proceed as projected, or too pessimistic if there is significant increase in Chinese mine supply.
Chart 11, below, shows that Ord Minnett projects that zinc will be
In deficit for 2007, to about the extent of available LME stocks,
In surplus in 2008 and 2009; and
In deficit again by 2010.
Chart 11 : Historical and Ord Minnett’s projected balance for the zinc market 800 kt
14,000 kt
Global zinc supply-demand balance Esttmated global zinc supply
600 kt
13,000 kt
Estimated global zinc consumption
400 kt
12,000 kt
200 kt
11,000 kt
0 kt
Ord Minnett projects a further deficit in 2007, about the size of available inventory……
10,000 kt 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(200kt)
9,000 kt
(400kt)
8,000 kt
(600kt)
7,000 kt
(800kt)
6,000 kt
Source : ILZSG, Brook Hunt, J.P. Morgan, Ord Minnett
then surpluses in 2008 and 2009….
then deficit again in 2010.
Projected Zinc Prices : Strong, Softer then Rebound The features of Ord Minnett’s projected zinc prices, as shown in Chart 12 below, are :
The Long-Run (L-R) price will be much higher than previously thought;
Prices will ease later in 2007 as the market swings into surplus;
Prices will bounce back when the market moves back into deficit.
Chart 12 : Historical zinc prices and Ord Minnett’s projections $ 7,000/t
$ 6,000/t
$ 5,000/t
Historical zinc price, in 2006 US$ /t
Moving average, from 1900
Moving average, from 1921 (nadir)
Ord Minnett's price projections
$ 4,000/t
$ 3,000/t
$ 2,000/t
$ 1,000/t
$ 0/t 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source : USGS, Ord Minnett estimates
17 April 2007
Page 12
In reviewing Copper, Nickel and Coal, Ord Minnett compared the objective data with commonly developed views of the Long-Run prices held through the 1990s and until about 2005 or so. The comparison is shown in Table 8 below.
Table 8 : Revised views of “Long-Run” prices Copper Convention 1995 - 2005 Ord Minnett, 2006
Thermal Coal
Nickel
Zinc
90 c/lb
$A 50/t
$ 3.00/lb
50 c/lb
135 c/lb
US$ 47.5/t
$ 5.00/lb
75 c/lb
50%
27%
67%
50%
Uplift Source : Ord Minnett
Table 9 shows Ord Minnett’s zinc price projections
Table 9 : Zinc prices : historical and Ord Minnett’s projections 2000 H1 H2 2001 H1 H2 2002 H1 H2 2003 H1 H2 2004 H1 H2 2005 H1 H2 2006 H1 H2 2007 H1 H2 2008 H1 H2 2009 H1 H2 2010 H1 H2 2011 H1 H2 2012 H1 H2 2013 H1 H2 2014 H1 H2 2015 H1 H2
Zinc Price
Zinc Price
$ 1,150 /t
52 c/lb
$ 1,126 /t
51 c/lb
$ 991 /t
45 c/lb
$ 817 /t
37 c/lb 37 c/lb
$ 809 /t $ 786 /t
36 c/lb
$ 795 /t
36 c/lb
$ 890 /t
40 c/lb
$ 1,064 /t
48 c/lb
$ 1,063 /t
48 c/lb
$ 1,306 /t
59 c/lb
$ 1,481 /t
67 c/lb
$ 2,745 /t
125 c/lb
$ 3,756 /t
170 c/lb
$ 3,500 /t
159 c/lb
$ 3,000 /t
136 c/lb
$ 2,500 /t
113 c/lb
$ 2,000 /t
91 c/lb
$ 1,750 /t
79 c/lb
$ 2,000 /t
91 c/lb
$ 2,500 /t
113 c/lb
$ 3,000 /t
136 c/lb
$ 3,000 /t
136 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,500 /t
113 c/lb
$ 2,000 /t
91 c/lb
$ 2,000 /t
91 c/lb
$ 1,650 /t
75 c/lb
$ 1,650 /t
75 c/lb
Ord Minnett believes that the financial markets are too pessimistic on Long-Run zinc prices.
Source : IRESS, Ord Minnett estimates
17 April 2007
Page 13
TZN : A Lot of Experience, but a Short History TZN was incorporated in December 1993, under the name Playford Resources NL to explore for base and precious metals in Northern Territory, Western Australia and Queensland.
Three Development Projects TZN listed in December 2003 with one definite project in Angas and a good prospect in Menninnie Dam.
In 2005, TZN bought 65% of Western Mediterranean Zinc (WMZ), which owns the Oued Amizour lease area.
Each of these three properties has highly prospective Zinc – Lead mineralisation.
Ord Minnett expects that each of these three properties will be developed over the coming years, with :
Angas is expected to be in production by August 2008; Oued Amizour is presently going through a pre-feasibility, though it has already been drilled to suggest 50Mt of mineralisation at 5.5% Zn and 1.4% Pb in a 98m thick, flat lying lens
>
TZN is to pay not less than US$ 6.6m to complete the F/S; and
Menninnie Dam is being farmed into by Zinifex, who must spend $4m by the end of 2010 to gain an effective 76% interest; ZFX has already earned to 59.8% effective.
Figure 2 : The location of TZN’s projects
Source : Terramin Australia
17 April 2007
Page 14
TZN also has some Copper-Gold (Cu-Au) prospects in the Gawler Craton.
A Brief History In 1997, TZN reached agreement with Aberfoyle (ABF) to farm in to ABF’s Fleurieu tenements near Adelaide to 60% by spending $4 million. This amount was subsequently reduced to $2.0 million when the Menninnie Dam title was added to the joint venture assets.
In September 2000, Kevin Moriarty and David Paterson acquired all the shares in TZN in exchange for work they had done on TZN’s projects. Subsequently, private placements raised $0.8m to continue exploration.
ABF was subsequently acquired by Western Metals (WMT)
In June 2003 WMT invited TZN to farm into the Menninnie Dam title (EL2848) with an undertaking that minimum expenditure commitments be met by Terramin. The name of the Fleurieu Exploration Joint Venture was changed to Fleurieu Menninnie Dam Joint Venture (FMDJV).
WMT was later put into administration as it had sold forward more US$ than it generated from its operations due to the commodity price falls after the 1997 Asian Crisis, and the subsequent Russian Rouble and “Tequillla” crises
WMT’s administrators disposed of WMT’s assets, and TZN was able to move to 100% of the FMDJV post its listing on the Australian Stock Exchange in December 2003. Prior to listing Terramin had spent some $1.1 million on the FMDJV. Hence, while TZN has been listed for only just over three years, it :
Has been in operation for over 13 years; and Will become a producer. within 18 months.
While TZN is a young company, each of its Board and senior management, as outlined in Appendix 1, has between 15 years and 35 years of relevant experience.
TZN announced, on 27 February 2005, that the acquisition of 65% of of a newly formed Algerian company, Western Mediterranean Zinc SPA (WMZ). WMZ’s major asset is the Oued Amizour zinc project in Algeria. The other shareholders in WMZ are two entities owned by the Algerian Government.
17 April 2007
Page 15
Angas : 18 Months Until Zinc Figure 3 below shows TZN’s Fleurieu tenements, which contain the Angas project. The project is about 60km from the Adelaide CBD. It is centred on Strathalbyn, which was the site of the second base metal mine in Australia, in 1845.
Figure 3 : Location of TZN’s Angas project
Source : Terramin Australia
Figure 3 also shows that that there are many historic mines within the area of TZN’s Fleurieu tenements, and nearby. This suggests that the area is highly prospective.
TZN acquired its initial interest in the Fleurieu tenements in 1997.
Aberfoyle (ABF) had identified the prospect in 1991 and by 1993 ABF had spent $2.6m and identified an Inferred Resources of 1Mt of 10% Zn, 4% Pb, 60g/t Ag and 1g/t Au. A further $0.63m was spent on Fleurieu from 1994 to 1996 by a major company that elected to withdraw, without any retained interest.
Prior to listing, TZN had spent a further $0.9m to double both the tonnes and the grade of Angas. The increase followed a geophysical survey which highlighted significant potential.
TZN listed in 2003 with 60% of the Fleurieu Joint Venture and was able to move to 100% subsequently.
17 April 2007
Page 16
Angas : Geology and Exploration Table 10 below compares the initial resource estimate made by ABF in 1991 and the present Indicated Resources from TZN. These are contained within 3 shoots.
Table 10 : ABF’s initial resource estimate v. TZN’s Indicated Resources ABF's Resource estimate, 1991 TZN's Indicated Resources, 2005
Zinc
Lead
Copper
Silver
Gold
930kt
16.0%
5.2%
0.21%
53g/t
0.7g/t
3,040kt
8.0%
3.1%
0.3%
34g/t
0.5g/t
Source : Terramin Australia
The resource estimate includes three distinct lodes :
Garwood;
Hanging Wall; and
Rankine
There is also significant potential in the Rankine Extension and Jettner Anomaly in the Angas area, as well as probably economic mineralisation, grading up to 16% Zn plus 6% Pb, in the area between the Garwood shoot and the Rankine that is not included in Resources.
Figure 4 below shows that there are many areas near the Angas lodes that have further potential.
Figure 4 : Areas near Angas with further potential
Source : Terramin Australia
There are also further areas near the Angas mine with potential, as shown in Figure 5 below, which shows potential identified by geophysical survey.
17 April 2007
Page 17
Figure 5 : The prospectivity of the area near Angas
Source : Terramin Australia
Figure 2 suggested significant near mine potential. There is further potential within the Fleurieu tenements as indicated by the number of historic mines in the area.
These areas have yet to be properly explored as :
TZN’s focus was to get into production, and hence generate positive cashflow, and the Resources were sufficient to do that;
The focus of the drilling that has taken place has been firstly reserve definition and more recently on stope delineation for mine planning; and
Many of the more prospective areas can be better accessed from underground
> >
Much less time and hence cost to access the mineralised areas than from surface; No need to get access or to seek clearance for drilling from underground.
Ord Minnett endorses the commerciality of TZN’s approach; we believe that this approach generates best value for shareholders, especially in a small company
Figure 6 suggests that the Rankine shoot outcrops either under or very near the evaporative ponds, which are part of the Sewerage system for the town of Strathalbyn.
Accordingly, in its mine design, TZN is leaving a 50m crown pillar below the evaporation ponds.
17 April 2007
Page 18
Angas : Proposed Operations are Small, not Complex Table 11 shows TZN’s reported Probable Reserves and also the Mining reserve on which the F/S is based. It shows that mining dilution has been allowed for.
Table 11 : TZN’s Angas project : mining reserves Volume
Zinc
Lead
Copper
Silver
Gold
Indicated Resource
3,040kt
8.0%
3.1%
0.3%
34g/t
0.5g/t
Mining Reserve
2,344kt
8.1%
3.1%
0.3%
34g/t
0.5g/t
Source : Terramin Australia
Comparing the Reserves to the Resources shows that there is about 600kt of Mineral Resources that is not included in Ore Reserves.
Figure 6 below shows that the proposed mine is accessed from an abandoned quarry. As a result, it is a very low impact mine.
Figure 6 : Surface expression of the proposed mine plan
Source : Terramin Australia
The mine is about 2km North-East of the town of Strathalbyn, which is 60k south-west of Adelaide.
Figure 7 below shows the mine plan. Each of the colours is a different mining method, with the dark blue requiring cemented fill.
17 April 2007
Page 19
Figure 7 : TZN’s Angas mine
Source : Terramin Australia
The capital cost estimate was increased from $50m for the development alone, in February 2006, to $63m, including contingencies, in April 2006. Some of the increase in capital costs is for higher environmental standards.
In their 18 April 2006 announcement, TZN advised Life of Mine average operating costs of $A 79/t for mining, milling, transport and mine administration. TZN’s September 2007 presentation indicated (slide 41) Life of Mine (LoM) average cost of $A 84//t of ore mined.
In modelling, Ord Minnett has assumed costs around $A 85/t.
The Angas project is advantaged by the coarse grained, Broken Hill style, ore. This means that optimum liberation is achieved with a coarse grind to 106µ. The mill circuit is very simple with NO recirculation as about 85% of the lead and 88% of the zinc are liberated on the first pass. Further passes increase the iron content more than that of the desired metal.
Angas : Projected Cashflows are Very Good The Angas development is expected to cost $67.2m, which includes start-up costs. It is being financed by two tranches of debt :
$10m is being provided by Sempra Metals and Concentrates $56.5m is being organised by Investec.
TZN raised $11m in a placement in November 2006, some of which was used to finance some infrastructure and some long lead time items at Angas.
17 April 2007
Page 20
However, as the project is debt financed, there is some hedging involved. The extent of hedging required is an issue being worked through. The indicative financing terms require that TZN inject $7m to $12m in equity to develop Angas, as reported in the December 2006 quarterly report.
The Angas operations are expected to produce a
Zinc concentrate, grading about 52% zinc with 8.5% iron, hence attracting a small penalty as its iron level is above the standard;
>
this will be trucked about 70km to Port Adelaide for export;
Lead-Copper concentrate which is expected to grade about 48% lead, 4% copper, 400g/t silver and 7g/t gold.
>
Ord Minnett assumes that this will be trucked 300km to the Pt. Pirie smelter.
Chart 13 below shows Ord Minnett’s projected cashflows for TZN’s Angas operations.
Chart 13 : Ord Minnett’s projected cashflows for Angas $A 120m
payable copper payable gold $A 100m
payable silver payable lead
$A 80m
payable zinc Cash costs
$A 60m
$A 40m
$A 20m
$A 0m 2007
2008
2009
2010
2011
2012
2013
2014
Source : Terramin Australia, Ord Minnett
Chart 13 uses payable metal as the revenue basis to shows the impact of the by-products, especially gold and copper. It shows that the projected revenue stream is overwhelmingly zinc.
The data in Table 12 below, which shows the details of Ord Minnett’s projections for TZN’s Angas operations, uses gross revenue (ie. metal in concentrate by the metal price) and adds the non-payable metal to the cash costs, along with the Treatment Changes, net of byproduct credits.
17 April 2007
Page 21
Table 12 : TZN’s Angas operations Ore Mined
2008
2009
2010
2011
2012
2013
2014 260kt
90kt
390kt
400kt
400kt
400kt
400kt
Zn grade
6.4%
9.0%
8.3%
7.0%
8.3%
8.3%
8.3%
Pb grade
2.0%
3.0%
3.2%
2.8%
3.3%
3.3%
3.3%
Cu grade
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
Ag grade
23g/t
38g/t
30g/t
32g/t
34g/t
34g/t
34g/t
Au grade
0.5g/t
0.5g/t
0.5g/t
0.5g/t
0.5g/t
0.5g/t
0.5g/t
Recovery : Zn
84%
90%
90%
90%
90%
90%
90%
Recovery : Pb
80%
85%
85%
85%
85%
85%
85%
Recovery : Cu
75%
75%
75%
75%
75%
75%
75%
Recovery : Ag
65%
65%
65%
65%
65%
65%
65%
Recovery : Au
75%
80%
80%
80%
80%
80%
80%
Zinc in Conc
4,853t
31,428t
29,700t
25,110t
29,873t
29,873t
19,418t
Zn Conc Produced
9,332t
60,438t
57,115t
48,288t
57,448t
57,448t
37,342t
52%
52%
52%
52%
52%
52%
52%
Pb-Cu Conc Produced
2,984t
20,807t
22,313t
19,833t
23,515t
23,515t
15,285t
Pb in Conc
1,432t
9,988t
10,710t
9,520t
11,287t
11,287t
7,337t
Cu in Conc
203t
878t
900t
900t
900t
900t
585t
Ag in Conc
1,346kg
9,555kg
7,800kg
8,320kg
8,744kg
8,744kg
5,684kg
Au in Conc
34kg
156kg
160kg
160kg
160kg
160kg
104kg
Pb grade
48%
48%
48%
48%
48%
48%
48%
Cu grade
6.8%
4.2%
4.0%
4.5%
3.8%
3.8%
3.8%
Ag grade
451g/t
459g/t
350g/t
419g/t
372g/t
372g/t
372g/t
Au grade
11.3g/t
7.5g/t
7.2g/t
8.1g/t
6.8g/t
6.8g/t
6.8g/t
Zn grade
Source : Terramin Australia, Ord Minnett estimates
Table 12 shows that Angas has a project life of only six years. Ord Minnett expects that Angas will operate for many more years than this, but we do not give any value for this in our base case.
Ord Minnett assumes that TZN’s Pb-Cu concentrate will be trucked about 300km to Zinfiex’s (ZFX’s) Pt Pirie lead smelter. Ord Minnett estimates that the cost to TZN / Sempra, which has the role of placing the product from Angas, of trucking the concentrate to Pt Pirie will be about US$ 30/t less than the cost of shipping to an overseas smelter.
However, ZFX is currently working on a deal to pool its smelting interests with a major European smelter, Unicore, and float the combined entity. This takes priority negotiations on concentrate off-take for any particular smelter.
While Ord Minnett expects that TZN will delineate further resources and reserve to extend the mine life at Angas, this is not part of our base case valuation.
Table 13 below shows Ord Minnett’s estimates for the operations at Angas, including its cash costs. Features shown in Table 13 include :
The major cost is the zinc TC, which is about half of the total;
17 April 2007
Page 22
The treatment charge (TC) for lead is estimated to be negative at times due to the high value of the by-product credits from copper, silver and gold;
Sites costs at Angas are estimated to be about $85/t.
Table 13 : Ord Minnett’s projected operating parameters for TZN’s Angas project. 2008
2009
2010
2011
2012
2013
2014
0.770
0.760
0.750
0.750
0.750
0.750
0.750
Zinc
$2,250/t
$1,875/t
$2,750/t
$2,750/t
$1,650/t
$1,650/t
$1,650/t
Lead
$1,250/t
$1,000/t
$800/t
$750/t
$750/t
$750/t
$750/t
AUD / USD
Copper, US$ /t
$4,625/t
$3,238/t
$2,976/t
$2,976/t
$2,976/t
$2,976/t
$2,976/t
Silver - US$/oz
$10.50/oz
$8.50/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
Gold - US$/oz
$550/oz
$550/oz
$500/oz
$500/oz
$500/oz
$500/oz
$500/oz
4,853t
31,428t
29,700t
25,110t
29,873t
29,873t
19,418t $ 42.7m
Zinc Sales Gross Zinc Revenue
$ 14.2m
$ 77.5m
$ 108.9m
$ 92.1m
$ 65.7m
$ 65.7m
Lead Sales
1,432t
9,988t
10,710t
9,520t
11,287t
11,287t
7,337t
Gross Lead revenue
$ 2.3m
$ 13.1m
$ 11.4m
$ 9.5m
$ 11.3m
$ 11.3m
$ 7.3m
$ 4.8m
$ 12.9m
$ 12.9m
$ 12.9m
$ 12.9m
$ 12.9m
$ 9.6m
$ 53/t
$ 33/t
$ 32/t
$ 32/t
$ 32/t
$ 32/t
$ 37/t
Processing
$ 2.2m
$ 6.6m
$ 6.7m
$ 6.7m
$ 6.7m
$ 6.7m
$ 4.8m
$ 25/t
$ 17/t
$ 17/t
$ 17/t
$ 17/t
$ 17/t
$ 19/t
Mine Admin
$ 2.7m
$ 7.1m
$ 7.1m
$ 7.1m
$ 7.1m
$ 7.1m
$ 5.3m
$ 30/t
$ 18/t
$ 18/t
$ 18/t
$ 18/t
$ 18/t
$ 20/t
Transport
$ 1.0m
$ 6.4m
$ 6.4m
$ 5.4m
$ 6.5m
$ 6.5m
$ 4.2m
Royalties
$ 0.2m
$ 0.8m
$ 1.1m
$ 1.0m
$ 0.6m
$ 1.5m
$ 0.9m
TOTAL
$ 120/t
$ 87/t
$ 86/t
$ 83/t
$ 85/t
$ 87/t
$ 96/t
Treatment Charge - Zinc
$ 5.4m
$ 31.9m
$ 37.9m
$ 32.1m
$ 28.8m
$ 28.8m
$ 18.7m
Treatment Charge - Lead
($0.5m)
($0.7m)
$ 0.1m
($0.9m)
$ 0.0m
$ 0.0m
$ 0.0m
96c/lb
57c/lb
70c/lb
74c/lb
59c/lb
59c/lb
64c/lb
Cash Costs Mining
Net Zinc Cash Costs Source : Ord Minnett estimates
Table 14 below shows Ord Minnett’s projected cashflows to TZN shareholders.
Table 14 :Ord Minnett’s projected cashflows from TZN’s Angas project 2006
2007
2008
2009
2010
2011
2012
2013
2014
Revenue
$ 0.0m
$ 16.5m
$ 90.7m
$ 120m
$ 102m
$ 77.0m
$ 77.0m
$ 50.1m
Cash Costs
$ 0.0m
($15.7m)
($65.1m)
($72.3m)
($64.3m)
($62.7m)
($63.5m)
($43.7m)
Dep'cn & Amotr'sn
$ 0.0m
$ 3.2m
$ 13.8m
$ 14.2m
$ 14.2m
$ 14.2m
$ 14.2m
$ 9.2m
EBIT
$ 0.0m
($2.4m)
$ 11.8m
$ 33.9m
$ 23.1m
$ 0.2m
($0.7m)
($2.9m)
($16.8m)
($50.4m)
$ 0.0m
$ 0.0m
$ 0.0m
$ 0.0m
$ 0.0m
$ 0.0m ($1.1m)
Project Cap.Ex
($15.7m)
Sus.Cap.Ex
$ 0.0m
Interest Expense Taxes paid
$ 0.0m
$ 0.0m
Debt Principal Repaid
($0.5m)
($1.5m)
($1.5m)
($1.5m)
($1.5m)
($1.5m)
($1.6m)
($1.5m)
($1.2m)
($0.9m)
($0.5m)
($0.2m)
$ 0.0m
$ 0.0m
$ 0.0m
($4.8m)
($6.1m)
$ 0.0m
$ 0.0m
$ 0.0m
($2.9m)
($3.0m)
($3.3m)
($3.6m)
($3.9m)
($1.9m)
$ 0.0m
Corporate Expenses
($1.8m)
($1.8m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
($1.9m)
Net Cashflow to s/h
($17.5m)
($1.8m)
($6.0m)
$ 17.7m
$ 35.4m
$ 23.3m
$ 6.5m
$ 8.1m
$ 3.4m
Source : Ord Minnett estimates
17 April 2007
Page 23
The data in Table 14 reflects the cashflows to shareholders, after the debt providers; in other words, the $67m for the project capital is not a cashflow from shareholders, but the repayments of that debt are.
Corporate costs are also included in the cashflows in Table 5.
Ord Minnett’s projected financial returns for Angas are :
IRR = 40%;
NPV, using 10% real discount is :
> >
$53m on the after-tax cashflows; or $60m on the after-tax cashflows, if franking credits are valued at 80%.
Oued Amizour : The Big One ! On 27 February 2006, TZN announced that it had reached agreement with the Algerian Government to purchase 65% of Western Mediterranean Zinc (WMC), which owns the Oued Amizour prospect.
Figure 8, below, shows that the project is located near the Mediterranean coast of Algeria.
Figure 8 : Oued Amizour project, in Algeria
Source : Terramin Australia
17 April 2007
Page 24
TZN is to spend at least US$ 6.6m to reach a decision to mine.
TZN also has the first right of refusal on the 35% of the project that the Algerian Government will retain.
TZN was lucky to secure the opportunity; Breakwater, a Canadian zinc company, was in discussion with the Algerian Government in 1999 and 2000, but the Government then decided not to deal. TZN was there at the right time.
Oued Amizour : Much Previous Work Oued Amizour is a mineralised area of 126km2 that has been defined by ORGM (Office National de Recherche Géologique et Minière), which is the Algerian Government’s Geological Survey Office.
Figure 9 below shows that the Tala Hamza deposit within the Oued Amizour project area.
Figure 9 : Tal Hamza within Oued Amizour
Source : Terramin Australia
In the 1970s, the Oued Amizour massif was mapped at a 1:50,000 scale and covered by an airborne geophysical survey. In the 1980s, geological, geophysical and geochemical surveys were carried out by ORGM.
The base metal mineralization was discovered in 1989 after three years of detailed exploration. The Tala Hamza deposit was delineated from 1990 to 1994 with 40 diamond drill holes.
17 April 2007
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In addition to Tala Hamza, ORGM defined three other deposits totalling about 22Mt of ore. However, Tala Hamza is the largest and so it is the focus of the current work.
Oued Amizour : Geology and Exploration : A Bit More to Do A resource has been defined for Tala Hamza by ORGM :
30Mt at 5.5% Zn and 1.4% Pb, using a 6% zinc equivalent (Zn.eq) cut-off;
11Mt at 10.9% Zn and 3% Pb in the high grade core.
TZN has used the drill results from ORGM in the Vulcan geological modelling package which has determined a 50Mt Resource using a 2% Zn.eq cut-off. Figure 10 below shows the grade – tonnes trade-off curve plotted by TZN based on the drill results by ORGM.
Figure 10 : TZN’s grade – tonnes trade-off curve for Tala Hamza
Source : Terramin Australia
The overall deposit is as shown in Figure 11 below. Figure 11 shows :
The Tala Hamza deposit is described as a dipping orebody;
The deposit dips from East to West, while the topography rises from North to South;
ORGM’s drilling was done with vertical holes so little information was gained on the structural controls of the deposit; and
ORGM’s drilling only went to a depth of 500m, and there were drill holes that ended in mineralisation.
The overall deposit has a thickness of 98m, while the high grade core is 49m thick. On 15 March 2007, TZN announced that the drill hole, TH003, had intersected 158m of mineralisation, though the angle of the drill hole and consequently True Width, is not given.
17 April 2007
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Figure 11 : TZN’s Tala Hamza deposit – Mineralised shell generated by Vulcan software
Source : Terramin Australia
The Resource defined by ORGM is not able to be directly compared to JORC as the systems for Quality Control and Quality Assurance were not pre-defined and able to be subsequently audited. However, the data is supported by the results of
39 diamond drill holes in the Tala Hamza deposit;
Thousands of analyses and detailed geological logging; and
Interpretation by well trained geologists.
The ORGM core was left in the open, not in sheds, in wooden trays, so it cannot be used for metallurgical testwork.
Of the drill holes defining the Tala Hamza resource:
All are vertical, diamond drill holes, HQ and NQ, forming a grid approximately 100120m x 100-120m;
Eight holes intersected high grade mineralisation;
Four holes were abandoned due to poor ground and drilling conditions (alternating soft and hard rock conditions); and
Five holes were stopped short in mineralisation.
To date, the results achieved have supported the work of ORGM. The December 2006 Quarterly reported that a core, from drill-hole TH002, was prepared from the mineralised horizon, from 321m to 509m below surface, which is 188m in thickness compared with 98m noted above. .
17 April 2007
Page 27
The assays showed
184m of mineralisation grading 6.58% Zn + Pb, within which was
64m section assaying 10.69% Zn and 2.25% Pb, including a
13.75m intercept assaying 24.26% Zn and 4.14% Pb.
Ord Minnett also assumes that the Mining Inventory is as shown in Table 15 below.
Table 15 : Ord Minnett’s assumed mining inventory for Tala Hamza Ore
Zinc
50,000kt 5.5% Source : Terramin Australia, Ord Minnett
Lead 1.4%
Ord Minnett assumes a larger mining inventory than that indicated by ORGM, but consistent with that produced by the Vulcan model and consistent with Figure 10 above.
Ord Minnett believes that there is considerable upside potential from ORGM’s 30Mt estimate as ORGM did not drill deeper than 500m from surface and drill holes ended in mineralisation.
Oued Amizour : Development Plan In March 2006, when TZN announced its initial agreement, the indicative plan was :
Confirmatory drilling (ie. effectively twin the ORGM holes) to define an Inferred Resource;
>
this should also provides some samples for preliminary metallurgical testing;
The Scoping Study would take about two months more and involve defining the preferred mining method and the scale of the operation; :
Infill drilling, of about 25 holes, to define a JORC compliant Indicated Resource with a target of at least 50Mt
>
this would take a further four to six months from the time of publication of the Inferred Resource;
The Pre-Feasibility Study (pre F/S), with cost estimates to +/- 20%, would take about three months after the publication of the Indicated Resource;
To complete the F/S, to Bankable (BFS) standard will take eight to nine more months
>
This will define a Probable Reserve, with costs to +/- 15%;
Complete preliminary design; and
Commissioning stage is expected to be 30 to 36 months after BFS.
During the time of the F/S, TZN will also look for extensions to the known orebody.
17 April 2007
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Progress to date has been slower than expected at that time, partly due to the lack of availability of powerful drill rigs which were finally sourced from Turkey.
TZN has engaged Golder Associates to review the first phase of TZN’;s drilling programme and then determine whether the confirmatory programme (ie. twinning holes previously drilled by ORGM) is sufficient to define an Inferred resource, or whether more drilling will be required.
If Golder Associates believes that TZN’s confirmatory programme allows an Inferred Resource to be calculated on the basis of ORGM’s data, then the Inferred Resource could be published in April or May 2007.
Commissioning then could be in 2011.
Oued Amizour : Proposed Operations Ord Minnett assumes that the first shipment of concentrate will be in 2011 Q1.
In their September 2006 presentation, TZN showed a summary presentation given to the Algerian Government that gave options for the mining rate of 1.2Mt/yr and 3.0Mt/yr.
Due to the thickness of the orebody and the probably size of the overall deposit, Ord Minnett expects that the operations will start at about 1.5Mt/yr and build up to 5.0Mt/yr of ore.
Table 16 below shows Ord Minnett’s understanding of Tala Hamza’s proposed operations.
Table 16 : Ord Minnett’s understanding of TZN’s Tala Hamza operations 2011
2012
2013
2014
2015
2016
2017
1,050kt
1,500kt
1,763kt
3,075kt
4,475kt
5,000kt
5,000kt
Zn grade
10.9%
10.9%
10.0%
6.7%
4.6%
4.3%
4.3%
Pb grade
3.0%
3.0%
2.7%
1.9%
1.2%
1.0%
1.0%
Recovery : Zn
80%
85%
85%
85%
85%
85%
85%
Recovery : Pb
80%
85%
85%
85%
85%
85%
85%
Zinc in Conc
91kt
139kt
149kt
176kt
174kt
181kt
181kt
180kt
267kt
287kt
338kt
335kt
349kt
349kt
51%
52%
52%
52%
52%
52%
52%
Lead in Conc
25.1kt
38.3kt
41.1kt
48.4kt
46.4kt
42.3kt
42.3kt
Pb Conc Produced
39.6kt
58.8kt
63.2kt
74.5kt
71.5kt
65.1kt
65.1kt
63%
65%
65%
65%
65%
65%
65%
Ore Mined
Zn Conc Produced Zn grade
Pb grade
Source : Terramin Australia, Ord Minnett
17 April 2007
Page 29
Table 16 shows :
Production starts in early 2011;
Production gets to the 1.5Mt/yr rate after about 12 months and then pauses as extra resources are put into capital development and then the production rate creeps up to the 5.0Mt/yr rate progressively;
The zinc concentrate grades58% Zn and low in iron;
The lead concentrate grades 65% Pb, but has no payable silver;
Mininhg starts in the reported high grade area so the grades drop over time
TZN has not given any cost guidance, so cost estimates are based on comparables. For capital costs, Ord Minnett assumes an underground mine :
US$ 175m for the first 1.5Mt/yr stage
>
TZN, in their March 2007 presentation, at slide 3, estimated US$ 150m for 1.2Mt/yr; plus
US$ 150m to raise production to 5.0Mt/yr
>
TZN, in their March 2007 presentation, at slide 3, estimated an additional US$ 40m to get to 3.0Mt/yr.
For operating costs, Ord Minnett assumes that there are significant cost advantages from the very thick orebody. Table 17 below shows Ord Minnett’s cost assumptions.
Table 17 : Ord Minnett’s estimates of Tala Hamza’s operating costs 1.5 Mt/yr
5.0 Mt/yr
Mining
US 19/t
US 13/t
Processing
US 16/t
US 12/t
Administration
US 11/t
US 6.6/t
Land transport
US 11/t
US 11/t
Sea transport
US 30/t
US 30/t
Total (US$/t ore)
US 54/t
US 36/t
Source : Ord Minnett
The costs in Table 17 are given in terms of US$/t of ore for on-site costs and US$/t of concentrate for transport, which is why the total is not the simple addition of the amounts above.
Oued Amizour : Financing is a Real Question Oued Amizour is a very large project, especially for a small company like TZN. Ord Minnett expects that while Angas will be generating cash when the major capital is required for Oued Amizour, the cash generated will be :
Directed to the debt providers for Angas; and
Not large enough for the needs of the Tala Hamza development.
17 April 2007
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TZN hopes to secure some form of project financing, probably from a trader that will be able to place the concentrate produced.
In Ord Minnett’s view, some equity raising is likely to be required, especially if the Algerian Government declines to contribute further, as has been indicated.
Oued Amizour : Projected Cashflows Chart 15 below shows Ord Minnett’s projections, in $A, of TZN’s 65% economic interest in Tala Hamza. It shows that Tala Hamza’s projected cashflows are dominated by zinc.
Chart 15 : Ord Minnett’s projections for TZN’s interest in Tala Hamza $A 350m
payable zinc
payable lead
Cash costs
$A 300m
$A 250m
$A 200m
$A 150m
$A 100m
$A 50m
$A 0m 2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source : Ord Minnett estimates
Table 18 below shows the operating parameters from Ord Minnett’s indicative analysis of TZN’s Tala Hamza project. Note that this data is in US$, on a 100% basis.
Table 18 shows that Ord Minnett projects that :
The Tala Hamza project produces its first concentrate in 2011 and the 50Mt resource is mined out in 2013
>
Ord Minnett does not expect that operations will cease then, but that other areas within Oued Amizour will be exploited, though at this time, with 15 years to prove up other resources, we cannot evaluate them;
While efficiencies and operating rates are high, the economics of Tala Hamza suffer from its lack of silver by-product credits;
Algeria does not presently have a royalty, but Ord Minnett has assumed one, as the alternative is some form of subsidised Government equity in the project.
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Table 18 : Ord Minnett’s estimates of the operating parameters for TZN’s Tala Hamza project Zinc
2011
2012
2013
2014
2015
2016
2017
2023
$ 2,750/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
86.9kt
138.3kt
149.3kt
175.9kt
188.9kt
208.1kt
208.1kt
130.6kt
US 239m
US 228m
US 246m
US 290m
US 312m
US 343m
US 343m
US 215m
37.8kt
58.6kt
63.2kt
74.5kt
74.8kt
79.0kt
79.0kt
49.6kt
US 18m
US 29m
US 31m
US 36m
US 36m
US 39m
US 39m
US 24m
US 21.7m
US 27.4m
US 33.2m
US 49.1m
US 61.6m
US 65.0m
US 65.0m
US 52.7m
US 20.6/t
US 18.3/t
US 18.8/t
US 16.0/t
US 13.8/t
US 13.0/t
US 13.0/t
US 16.8/t
US 18.1m
US 24.0m
US 29.0m
US 44.7m
US 58.1m
US 62.1m
US 62.1m
US 47.9m
US 17.2/t
US 16.0/t
US 16.5/t
US 14.6/t
US 13.0/t
US 12.4/t
US 12.4/t
US 15.3/t
US 12.8m
US 16.0m
US 19.9m
US 27.9m
US 32.5m
US 33.1m
US 33.1m
US 29.7m
Lead Zinc Sales Gross Zinc Revenue Lead Sales Gross Lead revenue Cash Costs Mining Processing Mine Admin
US 12.2/t
US 10.7/t
US 11.3/t
US 9.1/t
US 7.3/t
US 6.6/t
US 6.6/t
US 9.5/t
Transport
US 7.9m
US 12.3m
US 13.3m
US 15.7m
US 16.6m
US 18.2m
US 18.2m
US 11.4m
Royalties
US 6.2m
US 5.8m
US 6.3m
US 7.4m
US 7.9m
US 8.7m
US 8.7m
US 5.4m
TOTAL
US 67m
US 86m
US 102m
US 145m
US 177m
US 187m
US 187m
US 147m
US 63/t
US 57/t
US 58/t
US 47/t
US 39/t
US 37/t
US 37/t
US 47/t
T.C. - Zinc
US 67m
US 69m
US 75m
US 88m
US 95m
US 104m
US 104m
US 65m
T.C. - Lead
US 5.7m
US 8.8m
US 9.5m
US 11.2m
US 11.2m
US 11.9m
US 11.9m
US 7.4m
63c/lb
44c/lb
47c/lb
54c/lb
59c/lb
58c/lb
58c/lb
68c/lb
Net Zinc Cash Costs Source : Ord Minnett
Table 19 below shows Ord Minnett’s financial projections for TZN’s Tala Hamza project, in terms of Australian dollars for TZN shareholders.
Table 19 : Ord Minnett’s financial projections for TZN’s share of Tala Hamza 2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Revenue
$ 223m
$ 324m
$ 350m
$ 336m
$ 302m
$ 331m
$ 331m
$ 331m
$ 331m
$ 331m
Cash Costs
$ 118m
$ 167m
$ 187m
$ 220m
$ 238m
$ 256m
$ 256m
$ 256m
$ 256m
$ 256m
Dep'cn & Amotr'sn
$ 6.7m
$ 8.0m
$ 15.8m
$ 22.7m
$ 30.7m
$ 34.3m
$ 34.7m
$ 35.3m
$ 36.1m
$ 37.3m
EBIT
$ 98m
$ 150m
$ 147m
$ 93m
$ 32.8m
$ 40.3m
$ 39.8m
$ 39.2m
$ 38.4m
$ 37.3m
Interest Expense
$ 0.0m
$ 9.7m
$ 8.6m
$ 16.3m
$ 14.1m
$ 11.6m
$ 9.0m
$ 6.2m
$ 3.1m
$ 1.6m
$ 19.5m
$ 42.0m
$ 41.7m
$ 23.1m
$ 5.6m
$ 8.6m
$ 9.2m
$ 9.9m
$ 10.6m
$ 10.7m
$ 78m
$ 98m
$ 97m
$ 54m
$ 13.1m
$ 20.0m
$ 21.6m
$ 23.1m
$ 24.8m
$ 25.0m
($ 159m)
($ 43.3m) ($ 10.7m)
($ 43.3m) ($ 11.5m)
($ 43.3m) ($ 13.6m)
$ 0.0m ($ 14.4m)
$ 0.0m ($ 38.5m)
$ 0.0m ($ 15.7m)
$ 0.0m ($ 15.7m)
$ 0.0m ($ 54.7m)
$ 0.0m ($ 15.7m)
($ 12.6m)
($ 13.6m)
($ 26.3m)
($ 28.5m)
($ 30.9m)
($ 33.5m)
($ 36.4m)
($ 17.3m)
($ 18.7m)
$ 39.5m
$ 44.6m
($ 6.5m)
$ 1.0m
($ 15.1m)
$ 7.0m
$ 6.3m
($ 11.1m)
$ 27.8m
Taxes paid NPAT Project Cap.Ex Sus.Cap.Ex Debt Repaid Net to s/h
$ 0.0m
Source : Ord Minnett
There are many assumptions underlying the data in Table 19 :
Lead and zinc metal prices as shown in Table 16 above;
TNZ’s share is assumed to be 65%
>
We assume that the Algerian Government does not contribute further, but that TZN involves other parties (eg. a trader who will place the concentrate and possibly also a listing on the local stock exchange for about 15% as a form of political risk insurance);
17 April 2007
Page 32
The development is project financed, with TZN’s required equity contribution being funded by the other parties TZN invites to participate in the development;
>
The return on TZN’s equity invested is very high due to very small amount of equity invested by TZN
The last year in which there is debt to be repaid is 2020, so the net cashflows jump to about $A 48m for 2021 and 2022, while 2023 is the final year of operation in the model;
The surge in sustaining capital in 2019 is due to our assumption that the mobile fleet will require replacement after 6 years of service.
While Ord Minnett’s model has the operation being finished in 2023, we expect that the mine will continue to operate for many years after this, fed by potential resource extensions to Tala Hamza as well as other mineralised areas within Oued Amizour.
Menninnie Dam : What Size ? Figure 12 below shows that Menninnie Dam project is about 100km W-NW of Whyalla, or 160km from the Pt Pirie lead smelter.
Figure 12 : TZN’s Menninnie project
Source : Terramin Australia
TZN farmed in to 60% of Menninnie by funding the required expenditure to retain the tenement and later acquired the other 40% from the administrators of WMT
TZN’s interest is held through a subsidiary company, Menninnie Metals Limited (MML). MML is owned 80% by TZN and 20% by Zinifex (ZFX). MML holds, at present, 51% of the Menninnie Dam prospect and also other prospects in the Gawler Craton. ZFX has earned to 49% of he Menninnie Dam tenement.
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ZFX is able to farm into 70% of the Menninnie Dam prospect, by funding $8m of exploration. ZFX had spent $5m by 31 December 2006, giving them a direct 49% interest and a total effective interest of 59.2%. The structure is shown in Figure 13 below.
Figure 13 : Menninnie Dam interests Terramin TZN
Zinifex ZFX
80%
20% Menninnie Metals MML 100%
Gawler Craton
51% from Jan 2007, but farming down to 30%
EL2969, EL3039, EL2987
Zinifex ZFX
Farmed in to 49% Can get to 70%
Menninnie Dam Prospect EL 3640
Source : Terramin Australia, Ord Minnett
Zinifex’s farm-in was announced on 16 May 2005. The schedule at that time was for Zinifex to earn into Menninnie Dam by spending :
$2m by 31 December 2006, which gives ZFX no entitlement;
$3m more by 31December 2008, which gives ZFX a 49% interest in the EL; and
A further $3m by 31 December 2010 to earn 70%.
TZN manages the exploration programme which ZFX is funding.
There was an intensive phase of drilling which ended, as planned, in December 2006, as the weather gets too hot. It had been expected that assays would be available from this drilling to be able to plant the next phase of drilling, which is to commence in May 2007, but the turnaround from assay labs has been very slow due to the volume of work with assays labs as a result of the drilling from Olympic Dam.
We should expect to see some results by late April or May.
Menninnie : Geology and Exploration Menninnie was discovered in 1981 by Selection Trust. After drilling 6 RAB and 16 cored holes, an Inferred Resource was published of 1.7Mt at 8% Zn, 5% Pb and 100g/t Ag for an area 3km by 1km.
17 April 2007
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ABF farmed into the prospect in 1988. A further 18 cored holes and 25 RC and RAB holes were drilled, which extended to strike of significant grade mineralisation. However, it was felt that sufficient continuity had not been established for a Resources estimate to be published.
Prior to TZN acquiring an interest, about $5m had been spent.
On 16 May 2005, when announcing ZFX’s agreement to farm-in, TZN stated : “Substantial drill intersections have already confirmed the significance of this mineralisation, estimated to have a 20 million tonne envelope in central area alone”.
Further, TZN’s web-site states : “For example, at a cut-off grade of 7% Zn equivalent (where ZnE = Zn% + Pb%/1.3) there are a total of 73 continuous intercepts in 16 core holes and 2 percussion holes outlining some 20 million tonnes of mineralisation. Length-weighted average grades, over an aggregate 96 m, are 9.3% Zn, 7.1% Pb, and 58 ppm Ag.”
Figure 14 below shows that the Menninnie Dam central area, which is established as a 400m trend of mineralisation, open at both ends, is only a small part of the potential mineralised area at Menninnie.
Figure 14 : Menninnie’s potential
Source : Terramin Australia
17 April 2007
Page 35
The potential at Menninnie is :
3km long by 1km wide zone of Zn-Pb-Cu calcrete anomaly, within an EL 8km by 13km;
Over 6km of drill intersections; and
3.5km long trend, only 400m of which is well established.
TZN explains in their December 2006 Annual Report that the mineralised horizons are a subparallel set of east dipping fracture zones, and that earlier explorers oriented their drill holes sub-parallel to these mineralised zones. Hence, earlier explorers were unable to recognise the geometry and establish the continuity of the mineralised zones along 3.5km of strike.
Figure 15 below shows the results of a recently completed geophysical survey of Menninnie Dam, and drilling done. The core is clearly shown. Figure 15 : Mineralisation at Menninnie
Source : Terramin Australia
TZN hopes that when it receives the assays from the drill programme that was suspended in December 2006, it will have more definitive information on Menninnie’s mineralisation.
Menninnie : Development Potential We have, at best, poor information on the size, grade and depth of the orebody :
Size : 20Mt or larger
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Depth : oxidised material extends to about 150m below surface and there is at least one shoot of mineralisation into the oxide layer; Figure 15 shows that the best mineralisation is around 250m to 350m from surface.
Grade : SelTrust (1981) gave 1.7Mt at 8% Zn, 5% Pb and 100g/t Ag
> >
it should be assumed that a larger ore-body will have a lower grade; the grades of the intercepts shown in Figure 15 are all quite good, but a likely reserve will need to incorporate mining dilution
Figure 16 below shows some drill results for Menninnie announced by TZN in July 2006. It shows many good intersections of mineralisation and some very economic intersections.
Figure 16 : TZN’s July 2006 drill results for Menninnie
To get some indication, Ord Minnett assumes :
The mineralogy is simple with coarse grain size, which suggests good recovery.
Source : Terramin Australia
17 April 2007
Page 37
As yet, TZN does not understand whether Menninnie Dam will be mined as a single large Open Cut or as a series of smaller pits. It is hoped that the assay results from the recent drill campaign will help resolve these issues.
As such, any attempt to project cashflows is fraught with considerable error.
Size is the most critical variable; ZFX is seeking ore-bodies of 30Mt or more. Hence, the greatest value for TZN may be if Menninnie proves to be only 20Mt, as then ZFX may either walk away or sell its interest back to TZN.
For this analysis, Ord Minnett will assume a 30Mt ore-body, which is about the lowest value outcome for TZN.
For this indicative analysis, Ord Minnett assumes a mining inventory for Menninnie as shown in Table 20 below.
Table 20 : Ord Minnett’s guess of the Menninnie mining inventory Ore
Zinc
Lead
Silver
30,000kt
5.3%
2.5%
20g/t
Source : Ord Minnett estimates
For indicative costs, we use the date provided by Oxiana (OXR) for their recently announced Prominent Hill development and adjust it for :
The small deposit size at Menninnie; and
Menninnie should be lower costs as it is not as remote as Prominent Hill, though both are in S.A.
Table 21 shows the relevant parameters. Table 21 : Ord Minnett’s guesses for Menninnie v. OXR’s Prominent Hill project Size
Rate
Cap.Ex
Prominent Hill
79.2 Mt
8.0 Mt/yr
$ 829m
Op. Ex $A 29/t
Menninnie Dam
30.0 Mt
3.0 Mt/yr
$ 300m
$A 35/t
Source : Ord Minnett estimates
For comparison :
Prominent Hill is planned to be a 480m deep pit, with a surface area 1.4km by 1.2km;
The average Strip Ratio (S/R) for Prominent Hill is 7.2, with material being mined at the rate of 69Mt/yr in the first 6 years then 20Mt/yr for the 4 subsequent years;
The capital costs for Prominent Hill includes $54m spent prior to commitment on exploration, evaluation and feasibility assessment and $176m for the 15 month prestrip of 100m of sedimentary cover.
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Menninnie : Proposed Operations Ord Minnett assumes the following timetable for Menninnie
June 2008 : Inferred Resource :
>
Ord Minnett assumes that a further round of drilling is required, from May to November 2007, and then assay results and Resource calculation;
June 2009 : Indicated Resource published and scoping study completed;
December 2010 : Bankable Feasibility Study competed;
December 2012 : commence commissioning.
Table 22 below shows Ord Minnett’s estimates for the operations at Menninnie Dam.
Table 22 : Estimated operations for Menninnie Dam Ore Mined
2013
2014
2015
2016
2017
2018
2022
2023
1,988kt
3,000kt
3,000kt
3,000kt
3,000kt
3,000kt
3,000kt
1,013kt
Zn grade
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
5.3 %
Pb grade
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
2.5 %
Ag grade
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
30 g/t
Recovery : Zn
86 %
88 %
88 %
88 %
88 %
88 %
88 %
88 %
Recovery : Pb
88 %
90 %
90 %
90 %
90 %
90 %
90 %
90 %
Recovery : Ag
63 %
65 %
65 %
65 %
65 %
65 %
65 %
65 %
Zinc in Conc Zn Conc Produced Zn grade Lead in Conc Pb Conc Produced Silver in Conc
90,336t
139,920t
139,920t
139,920t
139,920t
139,920t
139,920t
47,223t
168,616t
263,132t
263,132t
263,132t
263,132t
263,132t
263,132t
88,807t
54 %
53 %
53 %
53 %
53 %
53 %
53 %
53 %
43,580t
67,500t
67,500t
67,500t
67,500t
67,500t
67,500t
22,781t
67,578t
103,846t
103,846t
103,846t
103,846t
103,846t
103,846t
35,048t
37,769kg
58,500kg
58,500kg
58,500kg
58,500kg
58,500kg
58,500kg
19,744kg
Pb grade
56 %
65 %
65 %
65 %
65 %
65 %
65 %
65 %
Ag grade
559 g/t
563 g/t
563 g/t
563 g/t
563 g/t
563 g/t
563 g/t
563 g/t
Source : Ord Minnett estimates
Menninnie : Projected Cashflows Table 23 below compares the published costs for Prominent Hill with the costs modelled by Ord Minnett for Menninnie Dam.
Table 23 : Costs : Prominent Hill v. Menninnie Dam Prominent Hill Mining & Geology Milling & Processing
Menninnie Dam
$A 16/t
$A 15/t
$A 7/t
$A 13/t
Mine Admin, transport
$A 4/t
$A 4/t
Royalties
$A 2/t
$A 3/t
$A 29/t
$A 35/t
TOTAL
Source : Oxiana Resources, Ord Minnett estimates
17 April 2007
Page 39
A key assumption in Table 21 is that Menninnie Dam is assumed to have a S/R of 5.0.
Otherwise it should be expected that :
Menninnie’s costs should be lower as the site is much less remote and staff can be bussed in from Kimba Town, Whyalla and Pt Augusta, rather than flow in;
Other transport costs for Menninnie Dam should also be lower;
Prominent Hill is a larger operation so will have some advantages, especially in milling and processing, from economies of scale.
Chart 16 below shows Ord Minnett’s projected cashflows for Menninnie Dam.
Chart 16 : Ord Minnett’s projected cashflows for Menninnie Dam. $A 105m
payable zinc
payable lead
payable silver
Cash costs
$A 90m
$A 75m
$A 60m
$A 45m
$A 30m
$A 15m
$A 0m 2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source : Ord Minnett estimates
Note that the data in Chart 16 is for TZN’s effective 24% interest in Menninnie Dam. TZN is expected to be diluted down to an effective 24% holding (80% of Menninnie Metals which is being farmed down to 30% of the Menninnie Dam project).
In valuing the project, Ord Minnett assumes that TZN changes its effective interest into a direct interest of 24%.
Table 24 below shows Ord Minnett’s estimates for the possible operations at Menninnie Dam. Note that the costs given in Table 24 are not directly comparable with those in Table 23 as Ord Minnett has :
Included geology in mine administration, along with O, H, S & E and general administration; and
Included total transport costs, including sea freight, in transport as an item separate from mine administration.
17 April 2007
Page 40
Table 24 : Ord Minnett’s estimates of the operating parameters for Menninnie Dam Zinc
2013
2014
2015
2016
2017
2018
2019
2023 $ 1,650/t
$ 2,500/t
$ 2,000/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
$ 1,650/t
Lead
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
$ 750/t
Silver
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
Zinc Sales
90.3kt
139.9kt
139.9kt
139.9kt
139.9kt
139.9kt
139.9kt
47.2kt
$ 301m
$ 373m
$ 308m
$ 308m
$ 308m
$ 308m
$ 308m
$ 104m
Lead Sales
67.6kt
103.8kt
103.8kt
103.8kt
103.8kt
103.8kt
103.8kt
35.0kt
Gross Lead revenue
$ 44m
$ 68m
$ 68m
$ 68m
$ 68m
$ 68m
$ 68m
$ 23m
Mining
$ 21.5m
$ 33.3m
$ 34.7m
$ 36.0m
$ 37.3m
$ 38.6m
$ 39.9m
$ 15.8m
$ 10.8/t
$ 11.1/t
$ 11.6/t
$ 12.0/t
$ 12.4/t
$ 12.9/t
$ 13.3/t
$ 15.6/t
Processing
$ 28.1m
$ 38.7m
$ 38.7m
$ 38.7m
$ 38.7m
$ 38.7m
$ 38.7m
$ 14.9m
$ 14.1/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 12.9/t
$ 14.8/t
Mine Admin
$ 18.8m
$ 29.3m
$ 29.3m
$ 29.3m
$ 29.3m
$ 29.3m
$ 29.3m
$ 9.9m
$ 9.5/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t
$ 9.8/t $ 7.8m
Gross Zinc Revenue
Cash Costs
Transport
$ 11.1m
$ 13.9m
$ 13.9m
$ 13.9m
$ 13.9m
$ 13.9m
$ 13.9m
Royalties
$ 8.1m
$ 10.0m
$ 8.3m
$ 8.3m
$ 8.3m
$ 8.3m
$ 8.3m
$ 2.8m
TOTAL T. C. - Zinc T. C. - Lead Net Zinc Cash Costs
$ 88m
$ 125m
$ 125m
$ 126m
$ 127m
$ 129m
$ 130m
$ 51.3m
$ 44.1/t
$ 41.7/t
$ 41.6/t
$ 42.0/t
$ 42.5/t
$ 42.9/t
$ 43.4/t
$ 50.6/t
$ 92m $ 3.2m
$ 121m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 105m $ 4.8m
$ 35.5m
52c/lb
45c/lb
41c/lb
41c/lb
41c/lb
42c/lb
42c/lb
47c/lb
$ 1.6m
Source : Ord Minnett estimates
Table 25 below shows Ord Minnett’s projected cashflows for TZN’s share of Menninnie Dam. Ord Minnett’s projections assume that the mining fleet is owned by the operator (as Zinfex, the 76% holder, has significant cash reserves), and hence there is an allowance to replace the fleet after five years.
Table 25 : Ord Minnett’s projected cashflows for TZN from Menninnie Dam. 2012
2013
2014
2015
2018
2019
2022
2023
Revenue
$ 0.0m
$ 82.7m
$ 105.7m
$ 90.1m
$ 90.1m
$ 90.1m
$ 90.1m
$ 30.4m
Cash Costs
$ 0.0m
$ 43.8m
$ 60.2m
$ 56.4m
$ 57.3m
$ 57.6m
$ 58.6m
$ 21.2m
Dep'cn & Amotr'sn
$ 0.0m
$ 7.8m
$ 9.6m
$ 9.6m
$ 9.6m
$ 9.6m
$ 9.6m
$ 1.8m
EBIT
$ 0.0m
$ 31.1m
$ 36.0m
$ 24.1m
$ 23.2m
$ 22.9m
$ 21.9m
$ 7.4m
Zinc produced
0.0kt
21.7kt
33.6kt
33.6kt
33.6kt
33.6kt
33.6kt
11.3kt
Lead produced
0.0kt
16.2kt
24.9kt
24.9kt
24.9kt
24.9kt
24.9kt
8.4kt
($74.4m)
$ 0.0m
$ 0.0m
$ 0.0m
($21.6m)
$ 0.0m
$ 0.0m
$ 0.0m
Project Capital Sustaining Capital Net Cashflow
$ 0.0m
($0.6m)
($1.2m)
($1.2m)
($1.2m)
($1.2m)
($1.2m)
($0.6m)
($74.4m)
$ 38.3m
$ 44.4m
$ 32.5m
$ 10.0m
$ 31.3m
$ 30.3m
$ 8.6m
Source : Ord Minnett estimates
While Table 25 shows TZN spending its share of capital in 2012, the model assumes that this spend takes place over the period from 2008 onwards (assuming that ZFX has competed its earn-in to 75% during 2007).
17 April 2007
Page 41
Other Potential : Present but not Valued As well as the Angas development, the Tala Hamza project and the potential of Menninnie Dam, TZN has further potential :
Near Angas, TZN has significant holding in a historic mining area, but has not explored this as it has focussed on getting Angas into operation and hence generating a positive cashflow;
While there is still upside to the Tala Hamza deposit, there is also a further 22Mt of identified mineralisation in the Oued Amizour area;
In addition to Menninnie Dam, Menninnie Metals has three ELs in the area near Prominent Hill.
While Ord Minnett believes there is further potential to TZN, we have not attempted to value this potential as it is too uncertain and too far off in the future.
TZN : Three Projects gives Huge Growth Chart 17 shows Ord Minnett’s projections for TZN’s cashflows. It clearly shows the steep growth in projected cashflows as three projects are brought into operation over a period of about seven years.
Chart 17 : Ord Minnett’s projections for TNZ’s operating cashflows. $A 500m
$A 450m
$A 400m
$A 350m
$A 300m
$A 250m
$A 200m
$A 150m
$A 100m
Angas Zinc
Angas Lead / Silver/ etc.
Tala Hamza Zinc
Tala Hamza Lead
Menninie Zinc
Menninnie Lead / Silver
Total Cash Costs $A 50m
$A 0m 2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source : Ord Minnett estimates
17 April 2007
Page 42
Chart 18 below shows similar information, this time in terms of TZN’s share of net payable zinc equivalent (1t Zn = 2.0t Pb = 0.55t Cu = 3oz Au = 200oz Ag).
Chart 18 : TZN’’s projected production, net share of zinc equivalent 200kt
175kt
Menninnie Dam 150kt
Tala Hamza Angas
125kt
100kt
75kt
50kt
25kt
0kt 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Source : Ord Minnett estimates
Chart 18 clearly shows that TZN’s major asset is its 65% of the Tala Hamza deposit, though comparing Tables 12, 15 and 21 shows that Tala Hamza’s costs are about the same as Angas and much higher than Menninnie.
Table 26 below shows Ord Minnett’s projections for TZN’s reported accounting data.
Table 26 : Ord Minnett’s projected reported accounting data for TZN 2007 $A / US$ Zinc
2008
2009
2010
2011
2012
2013
2014
2015
0.780
0.770
0.760
0.750
0.750
0.750
0.750
0.750
0.750
$3,250/t
$2,250/t
$1,875/t
$2,750/t
$2,750/t
$2,500/t
$2,500/t
$2,000/t
$1,650/t
Lead
$1,500/t
$1,250/t
$1,000/t
$800/t
$750/t
$750/t
$750/t
$750/t
$750/t
Silver
$12.5/oz
$10.5/oz
$8.50/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
$8.00/oz
Zinc
0.0kt
4.9kt
31.4kt
29.7kt
179kt
268kt
378kt
463kt
466kt
Lead
0.0kt
1.3kt
9.4kt
10.1kt
33kt
49kt
95kt
123kt
116kt
Silver
0.0koz
47.9koz
340koz
278koz
296koz
311koz
1,526koz
2,083koz
1,881koz
Reported Revenue
$ 0.2m
$ 14.8m
$ 91m
$ 127m
$ 422m
$ 609m
$ 732m
$ 657m
$ 538m
Cash Costs
$ 3.6m
$ 18.5m
$ 59m
$ 68m
$ 241m
$ 322m
$ 396m
$ 440m
$ 427m
EBITDA
($3.4m)
($3.7m)
$ 31m
$ 59m
$ 181m
$ 287m
$ 336m
$ 217m
$ 111m
Dep'cn & Amort'sn
$ 0.0m
$ 3.2m
$ 13.8m
$ 14m
$ 25m
$ 27m
$ 45m
$ 47m
$ 43m
Interest
$ 0.2m
$ 3.4m
$ 4.3m
($2m)
($9m)
($17m)
($24m)
($24m)
($22m)
Taxes
$ 0.0m
$ 0.0m
$ 0.0m
$ 10m
$ 50m
$ 83m
$ 94m
$ 58m
$ 27m
Minorities
$ 0.0m
$ 0.0m
$ 0.0m
$ 0m
($61m)
($105m)
($104m)
($59m)
($22m)
($3.6m)
($10.3m)
$ 13.1m
$ 37m
$ 55m
$ 89m
$ 117m
$ 77m
$ 41m
(4.0c) 0c
(11.4c) 0c
15c 0c
41c 0c
61c 6c
99c 20c
130c 20c
86c 30c
46c 30c
Total TZN production
NPAT e.p.s. d.p.ds
Source : Ord Minnett estimates
17 April 2007
Page 43
The basis of the above data is :
TZN has 100% of Angas;
TZN consolidates 100% of Western Mediterranean Zinc, but the 355 of WMZ that is not owned by TZN is reported in “:Minorities”; and
TZN’s interest in Menninnie is assumed to be a 24% share of an unincorporated Joint Venture, so that TZN reports its direct 24% interest.
TZN has debt financing in place for the development of Angas.
Ord Minnett assumes that the development of Tala Hamza will be able to be financed by :
Some equity from TZN from the cashflows from Angas;
Some further equity for the project from the sell down and inducting of new partners into the project for the 35% that is presently owned by the Algerian Government; and
The balance is sourced as project finance.
As such, TZN may not need to raise further equity.
Table 24 clearly shows very strong earnings five to seven years from now, when Ord Minnett assumes :
TZN’s zinc production is at peak levels; while
Zinc prices are still elevated.
TZN : Valuation – The Bottom Line Accounting Based Measures Table 27 below shows a range of accounting based valuation measures for TZN.
Table 27 : Accounting based valuation measures for TZN 2006
2007
2008
2009
2010
2011
e.p.s.
(4.3c)
(4.0c)
(11.4c)
14.6c
41c
d.p.ds
0c
0c
0c
0c
0c
(40x)
(43x)
(15x)
11.6x
4.1x
P/E Multiple Dividend Yield
2012
2013
2014
2015
61c
99c
130c
86c
46c
6c
20c
20c
30c
30c
2.8x
1.7x
1.3x
2.0x
3.7x
0%
0%
0%
0%
0%
4%
12%
12%
18%
18%
(216x) 36c
(43x) 45c
(22x) 102c
6.1x 103c
3.2x 108c
2.1x 78c
1.4x 91c
1.0x 191c
1.3x 240c
2.0x 252c
P / Book
4.8 x
3.8x
1.7x
1.7x
1.6x
2.2x
1.9x
0.9x
0.7x
0.7x
R. O. E.
(4%)
(23%)
(204%)
72%
67%
53%
51%
43%
24%
12%
(7%) Source : Ord Minnett estimates
(8%)
(7%)
17%
43%
206%
295%
157%
73%
28%
P / GCFPS BV / share
R. O. A.
17 April 2007
Page 44
Table 27 shows that Ord Minnett projects that TZN will have some very appealing investment parameters from about 2009, and outstanding measures from 2011 onwards.
This is consistent with mine development, where there is a lean period before significant cashflows arrive.
TZN currently has 87,952,608 shares on issue, following the recent placement. TZN has a Share Purchase Plan under way. Ord Minnett assumes that a further 3.03m shares are issued pursuant to the SPP.
Base Case Valuation Table 26 above gave Ord Minnett’s projected cashflows for TZN. To derive the NPV, the discount rate needs to be determined.
Discount Rate The text-book method to estimate the appropriate discount rate is to use the Weighted Average Cost of Capital (WACC), which is estimated using the following formula : WACC = D / A * (1-t) * Kd + (1 – D / A) * [Rf + β * (Rm – Rf)] where :
D / A is the Debt / Asset ratio (ie. how much of the asset base is debt);
β is the co-variance risk (ie. the degree to which the stock moves more or less than the market) for that particular stock.
(1-t) * Kd is the after-tax cost of debt; Rf is the risk-free rate (ie. about 6%) (Rm – Rf) is the equity risk premium, or the expected market return less the risk-free rate. For Australia, Bloomberg estimates this to be 6.25%; and
There are many practical difficulties with this formulation. In Ord Minnett’s view, the most significant are :
The value used for β is estimated from historical trading data and is assumed to be relatively constant over time;
Because it is a formula, it gives a precise answer and is used for this reason in ignorance of the many underlying assumptions; and
In Ord Minnett’s experience, this formula tends to give valuations that are higher than the market prices.
According to Bloomberg data, the β for TZN is 1.39, which gives a cost of equity (Ke) of 13.53%, or a WACC of 13.36% in what is effectively an un-geared company.
17 April 2007
Page 45
TZN has been listed only for a relatively short time and it has hugely out-performed the market in that that time, which gives it a higher β.
In previous reports, Ord Minnett has shown that similar companies can have different costs of capital, when the standard calculation is used. Ord Minnett uses a discount rate of 10%, real, on the after-tax cashflows of the companies, with some value given for franking credits.
Derived Value Table 28 below shows the detail of Ord Minnett’s derived valuation for TZN of $2.48.
Table 28 : Detail of Ord Minnett’s derived valuation for TZN 31 December 2006 100 % Product per share Angas
13-Apr-07
90 %
$74m
$67m
68c
74c
70 %
$20m
$14m
14c
14c
Oued Amizour
70 %
$212m
$148m
151c
156c
Menninnie Dam
50 %
$41m
$20m
21c
21c
40 %
$34m
$14m
14c
14c
Administration
100 %
($32m)
($32m)
(33c)
(33c)
Net Debt / Cash
100 %
franking credits
franking credits
TOTAL Shares on Issue Source : Ord Minnett estimates
$5m
$5m
5c
2c
$354m
$236m
240c
248c
91.0m
FPO shares
7.5m
options
In this valuation, Ord Minnett has assumed that TZN’s options are exercised when they fall due and the present value of the resulting cash is adding to TZN’s cash balance.
The present share price reflects a very high risk weighting on TZN’s projects.
In effect, the number of shares on issue is assumed to be 97.2m.
As Oued Amizour is an Algerian project, it will pay Algerian taxes rather than Australian taxes and hence it will not generate any franking credits.
Sensitivity Analyses Ord Minnett’s derived valuation is a precise answer to a large number of assumptions.
In this part of the analysis, Ord Minnett tests the sensitivity of the derived result for changes in some of the more significant assumptions. These assumptions are :
Discount rate and Risk Weighting; Operational Costs and Capital Costs; and Commodity prices : Lead, Zinc and treatment Charges 17 April 2007
Page 46
Discount Rate and Risk Weighting Table 28 assumed a real discount rate of 10%, or 12.5% nominal. It also shows that Ord Minnett has applied a significant risk weighting to projects on which we have little information.
Table 28, above, shows that if the valuation is limited to Reserves, plus some notional value for Exploration, then the resulting valuation would be about $1.00.
Table 29 below shows the resulting valuation if the assumptions of discount rate and risk weightings are changed
Table 29 : Ord Minnett’s valuation for differing discount rates and risk assumptions discount rate
8.0%
9.0%
10.0%
11.0%
12.0%
Higher Risk
$ 1.93
$ 1.82
$ 1.72
$ 1.63
$ 1.54
Base Case Risk
$ 2.81
$ 2.64
$ 2.48
$ 2.34
$ 2.21
Un-weighted
$ 4.25
$ 3.97
$ 3.72
$ 3.49
$ 3.28
Source : Ord Minnett estimates
Table 29 shows that a change in the discount rate of 1% point (eg. from 10.0% to 9.0%) changes the valuation by about 6%; slightly more for the cases which are less risk weighted.
Table 30 below shows the risk weightings applied to each of the projects.
Table 30 : Various risk weightings applied to projects Base Case
Higher Risk
90%
80%
100%
70%
60%
100%
Angas franking credits
Un-Risked
Oued Amizour
70%
50%
100%
Menninnie Dam
50%
25%
100%
40%
10%
100%
franking credits Source : Ord Minnett estimates
Taken together, Tables 29 and 30 suggest that the present TZN share price is applying a very heavy discount to TZN’s projects.
Operating and Capital Cost estimates There are varying degrees of certainty as to both capital and operating costs :
For Angas, the capital costs are reasonably certain as the project is currently being developed
>
The operating cost estimates for Angas are based on data in the March 2007 presentation given by TZN,
17 April 2007
Page 47
For Tala Hamza, Ord Minnett’s assumptions > For capital costs are based on preliminary “guesstimates” advised by TZN in their March 2007 presentation which was US$ 150m for an initial 1.2Mt./yr and then a further US$ 40m to get to 3.0Mt/yr
¾
Ord Minnett understands that the project will look at larger production scales so the estimates have been adjusted upwards to US$ 175m for the first 1.5Mt/yr stage plus a further US$ 150m to get to 5.0Mt/yr
>
There is no guidance for operating costs, so Ord Minnett has based the cost estimates on the Angas and Nifty projects
¾
Lower productivity has been assumed for Tala Hamza and also lower labour costs, though the labour costs assumed are higher than the average for Algeria which, according to CIA, is US$11,000 (GDP US$ 102B and workforce 9.3m)
For Menninnie Dam, Ord Minnett’s capital and operating cost estimates are based on Oxiana’s published advice for Prominent Hill.
While Ord Minnett’s guesstimates are reasonable best guesses, there is considerable scope for error. This is tested by adjusting the estimated capital and operating costs as per Table 31 below.
Table 31 : Adjustments to Ord Minnett’s cost estimates Capital Costs Operating Costs
Angas
Tala Hamza
Menninnie Dam
+ / - 10%
+ / - 25%
+ / - 25%
+ / - 5%
+ / - 10%
+ / - 10%
Source : Ord Minnett
Table 32 below shows the impact on Ord Minnett’s base case valuation from the adjustments to the capital and operating costs shown in Table 29.
Table 32 : Sensitivity of Ord Minnett’s derived TZN valuation to operating and capital costs Cap. Ex /
Op. Ex
Higher
Base Case
Lower
Higher
$ 1.77
$ 2.20
$ 2.62
Base Case
$ 2.06
$ 2.48
$ 2.91
Lower
$ 2.35
$ 2.77
$ 3.20
Source : Ord Minnett estimates
Table 30 shows that the Ord Minnett’s derived valuation of TZN is more sensitive to the variation in operating costs (over 17%) than for capital costs (just under 12%).
However, all values are a premium to the TZN share price.
17 April 2007
Page 48
Sensitivty to Lead Price Assumptions Charts 15 and 16 earlier showed lead is an important source of revenue for TZN, though it is far from the major source.
Lead is generally produced as a by-product of zinc and silver production. Also, secondary supply is roughly half of total supply.
As a result the supply of lead does not really respond to the price of lead as it is produced for reasons fother than the lead price.
Chart 19 shows historical lead prices and Ord Minnett’s assumptions for prospective lead prices.
Chart 19 : historical and projected lead prices $ 1,750 /t
$ 1,500 /t
actual, nominal lead prices Ord minnett's lead prcie projections $ 1,250 /t
$ 1,000 /t
$ 750 /t
$ 500 /t
$ 250 /t
$ 0 /t Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Source : IRESS, Ord Minnett estimates
Chart 19 shows that present lead prices appear to be very high, but that Ord Minnett’s base case projections are for lead prices to fall back to a level that is only a little higher than that which might have been seen as the “Long-Run average”
Ord Minnett has used $750/t, or 34c/lb as the L-R average, which compares with estimates of $550/t (25c/lb) to $660/t (30c/lb) which prevailed for the decade from about 1994 to 2004.
Ord Minnett’s uplift in the assumed L-R price, of 13% - 36%, compares with uplifts of 30% to 65% for other commodities.
17 April 2007
Page 49
Chart 20, below, shows a more bullish and a more bearish case for projections of the lead price, and compares these with the historical lead price in real (ie. inflation adjusted prices) December 2006 terms.
Chart 20 : Ord Minnett’s projected lead prices compared with historical prices, in real terms $ 2,000 /t
$ 1,750 /t
$ 1,500 /t
$ 1,250 /t
$ 1,000 /t
$ 750 /t
$ 500 /t
$ 250 /t
actual, lead prices, real (Dec. 2006) terms
Ord minnett's lead prcie projections
bullish projections $ 0 /t Jan-86
Jan-88
Jan-90
Jan-92
bearish projections Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Source : IRESS, Bloomberg, Ord Minnett estimates
Chart 20 suggests that Ord Minnett’s lead price projections are not at all bullish.
Table 33 below shows that changes to the lead price assumptions impacts on Ord Minnett’s derived valuation for TZN by about 16% on the down side and 13% on the upside.
Table 33 : Impact of changes in lead price assumptions on TZN’s valuation Higher Risk
Base Case Risk
Un-risked
Bullish lead prices
$ 1.99
$ 2.87
$ 4.31
Base Case lead prices
$ 1.72
$ 2.48
$ 3.72
Bearish lead prices
$ 1.50
$ 2.16
$ 3.23
Source : Ord Minnett estimates
Sensitivity to Treatment Charges Treatment Charges (TCs) are the amounts paid by the miner to the smelter to produce metal from the concentrate. The smelter’s income is the TC plus the physical premium for metal sales.
TCs are set annually in negotiations between the major miners (in the case of zinc it is Teck Cominco, the world’s largest zinc miner) and certain smelters (either the Japanese as a group, or the major Europeans, such as Umicore).
17 April 2007
Page 50
There are many components to the TC, including :
A set charge, which for 2007 is US$ 300 per tonne of concentrate, but has more typically been between $120 and $180;
A price participation, which is a certain percentage, that changes from year to year, but typically about 10% of the different between a negotiated base price and the LME average
>
The base price for 2007 is $3,000/t, which compares with about $1,200/t which has been the base price for many years; and
“Free metal”, whereby the miner is only paid for a part of the metal in concentrate, which is typically 85%, subject to the minimum for zinc being at least 8 percentage points less than the proportion of zinc in conc.
Chart 21 below shows historical TCs paid compared with Ord Minnett’s projections.
Chart 21 : Historical TC paid and Ord Minnett’s projections $ 4,500/t
45.0 %
$ 4,000/t
40.0 %
$ 3,500/t
35.0 %
$ 3,000/t
30.0 %
$ 2,500/t
25.0 %
payment to miner, inlcuding transport costs Payment to refiner, before physical premium
$ 2,000/t
20.0 %
Refienrs's proporiton of LME zinc price
$ 1,500/t
15.0 %
$ 1,000/t
10.0 %
$ 500/t
$ 0/t Apr-92
5.0 %
0.0 % Apr-94
Apr-96
Apr-98
Apr-00
Apr-02
Apr-04
Apr-06
Apr-08
Apr-10
Apr-12
Apr-14
Source : various, Ord Minnett estimates
While the scale obscures the message, Chart 21 shows that returns to smelters are presently the highest they have ever been in absolute terms, though they are also the lowest they ever in percentage terms.
In Ord Minnett’s view, mining capacity is constrained while smelting capacity is easily and rapidly constructed, especially in China.
Ord Minnett’s base case is driven by the ease with which smelting capacity is being constructed in China.
Chart 22 below shows the range of TCs Ord Minnett has used to test the impact on the derived valuation.
17 April 2007
Page 51
Chart 22 : TCs over time $ 325/t
$ 280/t
Historical TC, $/t of conc
Ord Minnett base case
Higher TCs (i)
Higher TCs (ii)
Lower TCs $ 235/t
$ 190/t
$ 145/t
$ 100/t 92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Source :various, Ord Minnett
Table 34 below shows that the impact of the differing TCs on the derived valuation is about 9% - 10% for the lower TC scenario and just over 10%lower for the Higher TC scenario.
Table 34 : Derived Valuation for differing TC scenarios Higher Risk
Base Case Risk
Base Case
$ 1.72
$ 2.48
Un-risked $ 3.72
Higher TCs (i)
$ 1.29
$ 1.88
$ 2.83
Higher TCs (ii)
$ 1.54
$ 2.23
$ 3.34
Lower TCs
$ 1.88
$ 2.71
$ 4.05
Source : Ord Minnett estimates
However, Table 32 also shows that if TCs do not fall from current levels, then the derived value is reduced by about 25%, and the premium of the value of the share price almost disappears.
Sensitivity to Zinc Prices Chart 17 shows that TZN’s major revenue is zinc.
Chart 23 below shows two alternative scenarios for the zinc price :
The Bullish price scenario tests the impact of Ord Minnett’s assumed L-R price being too low
>
This may arise as the level of expenditure on zinc exploration has responded only weakly to presently elevated prices and the supply increase may struggle to match to rising demand;
The Bearish price scenario could arise only if Chinese mines respond to the present high prices in a manner similar to the response to the 1997 squeeze
>
This is not Ord Minnett’s base case as, while China is still highly prospective for zinc, mine supply has been flat over the last few months s the supply may have been already brought forward and / or clampdowns on dangerous mining.
17 April 2007
Page 52
Chart 23 : Possible zinc price scenarios $ 5,000 /t
$ 4,500 /t
Historical, actual zinc prices
$ 4,000 /t
Ord minnett's projected zinc prices $ 3,500 /t
Bearish zinc prices Bullish zinc prices
$ 3,000 /t
$ 2,500 /t
$ 2,000 /t
$ 1,500 /t
$ 1,000 /t
$ 500 /t
$ 0 /t Dec-95
Dec-96
Dec-97 Dec-98 Dec-99
Dec-00 Dec-01 Dec-02
Dec-03 Dec-04 Dec-05
Dec-06 Dec-07 Dec-08
Dec-09
Dec-10 Dec-11
Dec-12 Dec-13
Dec-14
Dec-15
Source : IRESS, Ord Minnett estimates
Table 35, below, shows that the differing price scenarios have a major impact on Ord Minnett’s derived valuation of TZN.
Table 35 : Impact of zinc price on TZN valuation Higher Risk
Base Case Risk
Un-risked
Bullish zinc prices
$ 2.35
$ 3.42
$ 5.16
Base Case zinc prices
$ 1.72
$ 2.48
$ 3.72
($0.83)
($1.00)
($1.23)
Bearish zinc prices Source : Ord Minnett estimates
Table 36 below shows why the low zinc price scenario has such an impact on the valuation; the low price scenario is, effectively, the scenario still being used by some analysts that have not updated their views on zinc prices from about five years ago, when it was said that “Zinc Stinks”.
Table 36 shows Ord Minnett’s estimated cash costs, which reflect elevated operated costs in the current environment due to higher oil prices and shortages of skilled labour. The costs are around the level of more dated views of the L-R zinc price.
Table 36 : Ord Minnett’s estimated cash costs Angas
Tala Hamza
Bullish zinc prices
59c/lb
60c/lb
Menninnie 61c/lb
Base Case zinc prices
59c/lb
57c/lb
57c/lb
Bearish zinc prices
47c/lb
50c/lb
49c/lb
Source : Ord Minnett estimates
17 April 2007
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Conclusions Zinc Prices Zinc prices have been poor for a period of an extended period, from about mid 1991 to the end of 2004; a period which more than covers the covers the working memory of most in the financial markets.
As a result, there has been almost no interest in finding new deposits.
The zinc price more than trebled in the two years from December 2004 when the lack of new supply was caught out by the growing demand from both China and also galvanising.
Zinc prices have eased from these high levels, but Ord Minnett expects that the zinc market will be deficit in 2007, before swinging to surpluses in 2008 and 2009 and back to deficit from 2010 onwards.
TZN : Brief Description Terramin Australia (TZN) is an emerging zinc producer with one project currently in development and two more; one is expected to begin development within two years, while the timing of third is assumed by Ord Minnett to be 12 moths later. However, there are still uncertainties on the timing of both related to the amount of further work required to determine an Inferred Resource.
TZN’s share is expected to be 200kt/yr of zinc in concentrate.
Table 37 below shows the details of TZN’s projects.
Table 37 : TZN’s Projects Angas
Tala Hamza
Menninnie
100%
65%
24%
60km S-E of Adelaide
Algeria
100km W-NW from Whyalla
Commissioning
2008 Q3
2011 Q1
2012 A1
Contained zinc
190kt
2,750kt
1,590kt
Annual production (payable Zn eq.)
28kt/yr
130kt/yr
170kt/yr
Cash costs of mining
$A 64/t
$A 42/t
$A 30/t
Net cash costs of zinc
59c/lb
57c/lb
57c/lb
TZN share Location
Source : Ord Minnett estimates
17 April 2007
Page 54
Base Case Valuation The value in TZN is in developments that have yet to have a F/S completed on them. As such, there is significant risk in the assumed time frames and capital and operating costs.
Table 38 below shows Ord Minnett’s base case valuation fro TZN. It shows that the present share price applies a very heavy discount to TZN’s projects and prospects.
Table 38 : Ord Minnett’s valuation of TZN Higher Risk
Base Case Risk
Un-risked
$ 1.72
$ 2.48
$ 3.72
Source : Ord Minnett estimates
Risks to Ord Minnett’s Valuation Costs Ord Minnett’s believes that its estimates of capital and operating costs are both highly defendable and also conservative.
The impact on Ord Minnett’s derived valuation of higher operating costs (+5% for Angas and +10% for Tala Hamza and Menninnie Dam) and / or capital costs (+10% for Angas and +25% for Tala Hamza and Menninnie Dam) is shown in Table 39 below.
Table 39 : Impact on Ord Minnett’s derived valuation of high operating and capital costs Base Case
Higher Cap.Ex
High Op.Ex
Cap.Ex & Op,. Ex
Higher Risk
$ 1.72
$ 1.53
$ 1.42
$ 1.23
Base Case Risk
$ 2.48
$ 2.20
$ 2.06
$ 1.77
Un-risked
$ 3.72
$ 3.27
$ 3.11
$ 2.66
Source : Ord Minnett estimates
Table 39 shows that the base case is robust for higher cost estimates.
Commodity Prices Key assumptions concerning commodity prices are :
Treatment Charges (TCs) fall as returns to smelters are at historical highs and new smelting capacity is easily constructed;
Lead prices fall steeply from present elevated levels, back to a L-R price of $750/t (or 34c/lb), which is a premium of 13% - 36% over the 1990s views of L-R lead prices; and
Zinc prices fall while the market is in surplus, and then rise again when the market is in deficit, reaching a L-R level of 75c/lb, or a premium of 36% to 50% over 1990s views of the L-R zinc price.
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To test the sensitivity of Ord Minnett’s derived valuation, revised scenarios were tested :
TCs fall only a small maount and remain at levels much higher than seen before, despite the ease with which new capacity is being built;
Lead prices fall back to historic L-R levels, despite much higher costs; and Zinc prices fall back to historic L-R levels, despite projected L-R shortages and elevated cost structures.
Table 40 below shows the impact of these revised assumptions.
Table 40 : Impact on TZN’s NPC from revised commodity prices Higher Risk
Base Case Risk
Base Case
$ 1.72
$ 2.48
Un-risked $ 3.72
Higher TCs
$ 1.54
$ 2.23
$ 3.34
Lower lead prices
$ 1.50
$ 2.16
$ 3.23
Lower zinc prices
($0.83)
($1.00)
($1.23)
Source : Ord Minnett estimates
Table 38 shows that TZN’s valuation is very sensitive to the zinc prices assumed, but not very sensitive to other assumptions.
Zinc Price Risk TZN’s major exposure is the zinc prices. Chart 24 below shows that the TZN share price moves with the zinc price.
Chart 24 : TZN share price v. zinc price $ 2.50
$ 5,500/t
$ 2.25
$ 5,000/t
$ 2.00
$ 4,500/t
TZN share price Zinc price
$ 1.75
$ 4,000/t
$ 1.50
$ 3,500/t
$ 1.25
$ 3,000/t
$ 1.00
$ 2,500/t
$ 0.75
$ 2,000/t
$ 0.50
$ 1,500/t
$ 0.25
$ 1,000/t
$ 0.00 Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
$ 500/t Mar-07
Source : IRESS, Ord Minnett
The correlation between the TZN share and the zinc price since TZN’s listing has been 97%.
17 April 2007
Page 56
As Ord Minnett projects the zinc price to ease over the period to about the middle of 2009, there is real risk that the TZN share price will also ease over this period.
Final Comments There are risks to Ord Minnett’s derived valuation of TZN. However, Ord Minnett’s analysis shows that the present price of TZN indicates that the market is either very negative on the prospects for zinc, or very cautious on the value of TZN’s developments.
In Ord Minnett’s view, the base case valuation makes an appropriate allowance for the risks involved.
Accordingly, Ord Minnett initiates coverage of TZN with a BUY rating. Reflecting the risks, Ord Minnett’s risk rating is High.
The zinc price is expected to be negative influence on the TZN share price over the next two years, but the growth in value of TZN’s progress on its current project and its prospective developments is expected to be a positive influence on the share price.
Ord Minnett is not able to guess as to whether the positive influence will be stronger or weaker than the negative influence.
If the TZN share price does weaken over the next two years, with the zinc price, then, in Ord Minnett’s view, this will make TZN an even better buy.
17 April 2007
Page 57
Appendix 1 : Board and Senior Management Board Kevin Moriarty Executive Chairman; CEO
Dr Moriarty is a professional geologist and company director. Dr Moriarty's career has included geophysical and geological projects in both petroleum and minerals. His early and later career has been in base and precious metal exploration and industrial mineral projects in many countries.
He formed and was CEO of Tarcoola Gold Ltd., which had a successful IPO in 1986. Dr Moriarty found the zinc projects for Terramin and was appointed Executive Chairman and CEO in 2000, guiding it to a listing in 2003.
Dr Moriarty holds BSc (Hons) and PhD degrees. He is a member of The Australian Institute of Mining and Metallurgy and the Geological Society of Australia.
David Paterson Executive Director; Audit Committee, Risk and Compliance Committee
Mr Paterson began his career as a geologist. He has diverse experience in the Australian minerals industry and has worked as a geologist for Zinc Corporation & Minerals Mining & Metallurgy, New Guinea Goldfields Ltd and BHP Exploration. He was a Member of Australian Stock Exchange Ltd, and brings 20 years experience in capital markets and finance to the Company.
Mr Paterson left Prescott Securities Ltd in December 2005. Prior to that he was a director of Ord Minnett (SA) Pty Ltd. and Manager SA-Equities for Ord Minnett. He has a BAppSc and GradDip Bus Admin. He is an Affiliate of The Securities Institute of Australia, a Member of The Australasian Institute of Mining and Metallurgy and the Geological Society of Australia.
Steve Bonett Director; Audit Committee, Nominations and Remuneration Committee, Risk and Compliance Committee
Mr Bonett is a former partner of Finalysons Lawyers and holds degrees in Commerce and Law(Hons). He is recognised as an expert in the field of corporate and commercial law and corporate governance. Member of the Financial Services Institute of Australia, Australian Institute of Company Directors and Australian Corporate Lawyers Association. Appointed 15 June 2005.
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Michael Kennedy Director; Nominations and Remuneration Committee, Risk and Compliance Committee
Mr Kennedy has a degree in Commerce (Economics). Mr Kennedy worked as a metals and concentrate trader before joining CRA, a predecessor to Rio Tinto. At CRA Mr Kennedy worked for Australian Mining and Smelting, a predecessor to Zinifex.
In 1989 he left the CRA Group to from a specialist trading company, Colwell Kennedy Australia Pty Ltd. He was resident Director of the Korea Zinc group of companies in Australia from 1991 until early 2005. During that period, he was directly involved in all aspects of the group’s establishment and subsequent growth into a major corporate presence in the Australian zinc industry.
In 2005 he retired as a director of KZ and joined Terramin’s board.
Jim Hazel (as from 26 April 2007) Director; Chair Audit Committee
Mr Hazel is currently the Chairman of Elders Rural Bank and a Director of impedimed Limited. He was previously the Chief General Manager at Adelaide Bank and the Managing Director of Primelife Corporation.
Consultants and Senior Management Colin Jackson Chairman, Technical Committee
Colin Jackson was a Director of Terramin from 20 August 2003 to 31 December 2005. After graduating as a metallurgist and mineral process engineer, Mr Jackson worked for 10 years with Selection Trust Group and then RGC Limited.
Mr Jackson then joined McIntosh Securities, becoming Director of Corporate. He later joined Newcrest Mining and then Normandy Mining as Executive General Manager, Corporate.
Bob Jones Chief Operating Officer
Bob Jones is a metallurgist with over 35 years of experience. He has a B.App.Sc degree and an Associate Diploma in Primary Metallurgy. He was previously the President, US Operations, for Pasminco covering the Clarkesville Zinc Refinery, the Gordonsville Mine and the Clinch Valley Mine. Before that, he was the General Manager of the Port Pirie lead smelter.
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John Burgess General Manager, Angas Zinc
Mr Burgess is a process and environmental engineer with 35 years experience in zinc plants mostly at Broken Hill. He has consulted to Zinifex’s Century Mine and on nickel and gold operations. His roles include Manager of Metallurgy and Environment at Broken Hill and General Manager of the Renison Tin Mine. He has extensive experience in commissioning of nickel, copper and gold plants.
Martin Janes Chief Financial Officer
Mr Janes has over 20 years experience in the finance sector of the Resources and banking industries. This includes 14 years at Normandy Mining Limited where he was responsible for managing the commodity and foreign exchange hedging activates and debt funding requirements. He has extensive experience in many facets of mining finance including project finance, corporate finance, leasing and capital markets issuance.
He has a strong understanding of accounting, taxation and legal principles. He is trained as an economist and is a fellow of the Australian Institute of Company Directors and the Finance and Treasury Association.
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Share and Options Holdings Shares Major Shareholders
Shares Held
Kevin Moriarity
9,024,843 shares
9.92 %
David Paterson
8,664,302 shares
9.52 %
Sempra Metals & Concentrates
5,817,902 shares
6.39 %
Colin Jackson
1,500,000 shares
1.65 %
Note :
(i)
Above holdings may change with shares taken up under SPP; and
(ii)
% of total assumes that a total of 3.03m shares issued under SPP, for a take-up rate of about 30%
Options Option Holders
Options Held
Kevin Moriarity
2,000,000
David Paterson
1,000,000
Robert Jones
850,000
Martin Janes
350,000
Michael Kennedy
300,000
John Burgess
300,000
Steve Bonett
250,000
Other Employees & Consultants Former Employees & Consultants
1,860,000 200,000
Others
400,000
TOTAL
7,510,000
17 April 2007
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Appendix 2 : Projected Financials December year end
Terramin Australia Limited (TZN) FY 07e $ 0m $ 4m ($ 3.4m) $ 0.0m ($ 3.4m) $ 0.1m
FY 08e $ 15m $ 18m ($ 3.7m) $ 3.2m ($ 6.9m) $ 3.2m
FY 09e $ 91m $ 59m $ 31.3m $ 13.8m $ 17.4m $ 4.2m
FY 10e $ 128m $ 68m $ 60.6m $ 14.2m $ 46.4m ($2.5m)
($ 1.5m) $ 0.0m $ 0.8m ($2.3m) $ 0.0m ($ 2.3m) (213%) 0.0% (4.3c) (4.3c) 0.0c 0% 0%
($ 3.5m) $ 0.0m $ 0.0m ($3.5m) $ 0.0m ($ 3.5m) (1,694%) 0.0% (3.9c) (3.9c) 0.0c 0% 0%
($ 10.1m) $ 0.0m $ 0.0m ($10.1m) $ 0.0m ($ 10.1m) (25%) 0.0% (11.1c) (11.1c) 0.0c 0% 0%
$ 13.3m $ 0.0m $ 0.0m $ 13.3m $ 0.0m $ 13.3m 34.4% 0.0% 14.6c 14.6c 0.0c 0% 0%
$ 48.9m $ 11.0m $ 0.0m $ 37.9m $ 0.0m $ 37.9m 47.2% 22.5% 41.7c 41.7c 0.0c 0% 0%
Cash Flow Statement EBITDA Change in Working Capital Net Interest (paid)/received Tax Paid Operating Cash Flow Exploration / Net acquisitions Project + Sustaining Capex Other investing items Investing Cash Flow Inc/(Dec) in Equity Inc/(Dec) in Borrowings Dividends Paid Financing Cash Flow Net Inc/(Dec) in Cash
FY 06a ($1.9m) $ 0.0m ($0.4m) $ 0.0m ($ 2.3m) $ 0.0m $ 0m $ 0.0m $ 0m
FY 07e ($3.4m) ($3.7m) $ 0.1m $ 0.0m $ 0.4m $ 0.0m ($17m) $ 0.0m ($ 17m)
FY 08e ($3.7m) ($10.6m) $ 3.2m $ 0.0m $ 10.2m $ 3.0m ($52m) $ 0.0m ($ 49m)
FY 09e $ 31.3m ($2.2m) $ 4.2m $ 0.0m $ 37.6m $ 3.0m ($8m) $ 0.0m ($ 5m)
FY 10e $ 60.6m $ 1.7m ($2.5m) ($3.3m) $ 59.7m $ 5.0m ($8m) $ 0.0m ($ 3m)
$ 0.0m $ 3.1m
$ 0.0m $ 16.4m
$ 0.0m $ 38.8m
$ 0.0m ($32.3m)
$ 0.0m ($56.4m)
$ 0.0m $ 3m $ 1m
$ 0.0m $ 16m $ 0m
$ 0.0m $ 39m $ 0m
$ 0.0m ($ 32m) $ 0m
$ 0.0m ($ 56m) $ 0m
Balance Sheet ($A m) Cash Other Current Assets Total Current Asstes Fixed Assets Explor'n & Evalu'n Other Total Assets Current Liabilities Long term Debt Other Non Current Liabilities Total Liabilities Total Equity Net Debt (Cash)
FY 06a $ 9.6m $ 0.9m $ 10.5m $ 3m $ 16.2m $ 0.0m $ 30.0m $ 3.8m $ 6.4m $ 0.9m $ 11.1m $ 18.9m ($3.1m)
FY 07e $ 2.5m $ 1.0m $ 3m $ 20m $ 16m $ 1.7m $ 41m $ 8m $ 15.7m $ 2.9m $ 26m $ 15m $ 13.2m
FY 08e $ 2.0m $ 1.0m $ 3m $ 72m $ 19m $ 4m $ 98m $ 18m $ 54.0m $ 20.9m $ 93m $ 5m $ 52.0m
FY 09e $ 31.1m $ 1.0m $ 32m $ 80m $ 22m $ 6m $ 140m $ 20m $ 50.7m $ 50.9m $ 122m $ 19m $ 19.7m
FY 10e $ 93.3m $ 2.7m $ 96m $ 89m $ 27m $ 6m $ 218m $ 19m $ 56.6m $ 85.9m $ 161m $ 56m ($36.7m)
Leverage Net Debt/Equity Net Debt/Total Assets Interest Cover (x) Dividend Cover (x) Valuation Ratios (x) P/E Multiple Price To Book Value Price To Cash Flow EBITDA Multiple EBIT Multiple Dividend Yield Source : IRESS, Ord Minnett
17 April 2007
12 month return
Share Price :
FY 06a $ 1m $ 3m ($ 1.9m) $ 0.1m ($ 2.0m) ($0.4m)
Income Statement Sales Operating Costs EBITDA Depreciation & Amortisation EBIT Net Interest Expense (Revenue) Pre-Tax Profit Tax Expense/(Benefit) Minorities Reported NPAT Significant Items (After Tax) NPAT (Pre-Significant Items) EBITDA Margin (%) Effective tax Rate (%) EPS Reported (cps) EPS Pre Significant Items (c) DPS (c) Payout Ratio (%) Franking (%)
FY 06a
FY 07e
FY 08e
FY 09e
FY 10e
(16.7%) (10.5%) n/c n/a
86.1 % 31.9 % (27.2x) n/a
990.9 % 52.9 % (2.1x) n/a
106.2 % 14.0 % 4.2 x n/a
(65.1%) (16.9%) (18.4x) n/a
FY 06a
FY 07e
FY 08e
FY 09e
FY 10e
(53.5x) 10.2 x (293x) (102x) (98x) 0%
(48.2x) 11.0 x (48x) (50x) (50x) 0%
(16.7x) 32.3 x (24x) (46x) (25x) 0%
12.7 x 9.9 x 6.8 x 5.9 x 10.5 x 0%
4.5 x 3.2 x 3.5 x 3.0 x 3.9 x 0%
$ 1.86
Recommendation Risk Rating BUY
47 %
FY 06a FY 07e US 148c/lb US 147c/lb US 58c/lb US 68c/lb $ 11.55/oz $ 12.50/oz 0.754 0.780
Assumptions Zinc Price Lead Price Sivler price $A / US$
High
FY 08e US 102c/lb US 57c/lb $ 10.50/oz 0.770
FY 09e US 85c/lb US 45c/lb $ 8.50/oz 0.760
L-R US 75c/lb US 34c/lb $ 8.00/oz 0.750
1.5 m 5.8 m
1.6 % 6.4 %
Major Shareholders Kevin Moariarty (Exec.Chair) David Paterson (Exec. Director)
9.0 m 8.7 m
Production Angas Zinc (payable) Angas Lead eqiv, payable Tala Hamza Zinc pay. TZN shar Tala Hamza Lead pay. TZN sha Menninnie Dam Zinc, TZN Menninnie Dam Lead. TZN TOTAL, Zinc payable, TZN shar
FY 06a 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt
FY 07e 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt
FY 08e 4.1 kt 2.3 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 8.8 kt
FY 09e 26.6 kt 14.5 kt 0.0 kt 0.0 kt 0.0 kt 0.0 kt 33.5 kt
FY 10e 25.1 kt 14.5 kt 31.2 kt 9.5 kt 0.0 kt 0.0 kt 32.0 kt
Reserves & Resources Angas Reserves zinc lead silver copper gold Tala Hamza Mineralisation (100 zinc lead
FY 06a 2.3 Mt 8.1 % 3.1 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 07e 2.3 Mt 8.1 % 3.1 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 08e 2.3 Mt 8.2 % 3.1 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 09e 1.9 Mt 8.0 % 3.2 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
FY 10e 1.5 Mt 7.9 % 3.2 % 33 g/t 0.3 % 0.5 g/t 50.0 Mt 5.5 % 1.4 %
9.9 % Colin Jackson 9.5 % Sempra Metals
31 December 2006
Valuation Real Discount Rate : Angas franking credits Oued Amizour Menninnie Dam franking credits Administration Net Debt / Cash TOTAL Shares on Issue
10% 90% 70% 70% 50% 40% 100% 100% 83.9m
16-Apr-07
68c $ 67m $ 14m 14c $ 148m 151c $ 20m 21c $ 14m 14c ($32m) (33c) $ 5m 5c $ 236m 240c 7.5m options
$ 74m $ 20m $ 212m $ 41m $ 34m ($32m) $ 5m $ 354m FPO shares
89c 156c 35c (33c) 2c 248c
200kt
175kt
Menninnie Dam Tala Hamza
150kt
Angas 125kt
100kt
75kt
50kt
25kt
0kt 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Page 62
Please contact your Ord Minnett Adviser for further information on our document. Guide to Ord Minnett Recommendations BUY
The stock’s total return (nominal dividend yield plus capital appreciation) is expected to exceed 15% over 12 months.
ACCUMULATE
The stock’s total return is expected to be between 5% and 15%. Investors may add to existing holdings, or initiate holdings on share price weakness.
HOLD
The stock is fairly priced, and its total return is expected to be between 0% and 5%.
LIGHTEN
The stock’s total return is expected to be less than 0% and possibly down 15%. Investors should consider selling into share price strength.
SELL
The stock’s total return is expected to lose 15% or more.
RISK ASSESSMENT
Classified as High, Medium or Low, denotes the relative assessment of an individual stock’s risk based on an appraisal of its disclosed financial information, volatility, nature of its operations and other relevant quantitative and qualitative criteria.
Ord Minnett Limited ABN 86 002 733 048 ASX Market Participant AFS Licence Number 237121
Head Office Level 8, NAB House 255 George Street Sydney NSW 2000 Australia Tel: (61-2) 8216 6300 Fax: (61-2) 8216 6311
Ord Minnett Branches Adelaide Level 11 13 Grenfell Street Adelaide SA 5000 Tel: (08) 8203 2500 Fax: (08) 8203 2525 Brisbane Level 10 Waterfront Place 1 Eagle St Brisbane QLD 4000 Tel: (07) 3214 5555 Fax: (07) 3214 5550 Buderim Sunshine Coast 84 Burnett Street Buderim QLD 4556 Tel: (07) 5430 4444 Fax: (07) 5430 4400
Bundall, Gold Coast Level 5, 140 Bundall Road Bundall QLD 4217 Tel: (07) 5557 3333 Fax: (07) 5574 0301
Coffs Harbour Suite 4 21 Park Avenue Coffs Harbour NSW 2450 Tel: (02) 6652 7900 Fax: (02) 6652 5716
Caloundra, Sunshine Coast 79-81 Bulcock Street Caloundra QLD 4551 Tel: (07) 5491 3100 Fax: (07) 5491 3222
Dubbo 35 Church Street Dubbo NSW 2830 Tel: (02) 6884 4680 Fax: (02) 6884 2353
Canberra Colombia House 101 Northbourne Avenue Canberra ACT 2600 Tel: (02) 6206 1700 Fax: (02) 6206 1720
Mackay 45 Gordon Street Mackay QLD 4740 Tel: (07) 4969 4888
Melbourne Level 19, Optus Centre 367 Collins Street Melbourne VIC 3000 Tel: (03) 9608 4111 Fax: (03) 9608 4142 Newcastle 3rd Floor, T & G Building 45 Hunter St Newcastle NSW 2300 Tel: (02) 4929 3937 Fax: (02) 4929 6194 Sydney Level 8, NAB House 255 George Street Sydney NSW 2000 Tel: (02) 8216 6300 Fax: (02) 8216 6311
Tamworth Suite 3, 344-346 Peel St Tamworth NSW 2340 Tel: (02) 6761 3333 Fax: (02) 6761 3104 Tuncurry Tuncurry Village Centre 60 Manning Street Tuncurry NSW 2428 Tel: (02) 6555 0000 Fax: (02) 6554 5226 Wollongong 3/55 Kembla Street Cnr Market & Kembla Sts Wollongong NSW 2520 Tel: (02) 4226 1688 Fax: (02) 4226 1604
Disclosure: Ord Minnett is the trading brand of Ord Minnett Limited ABN 86 002 733 048, holder of AFS Licence Number 237121 and an ASX Market Participant. Ord Minnett Limited and/or its associated entities, directors and/or its employees may have a material interest in, and may earn brokerage from, any securities referred to in this document. Further, Ord Minnett and/or its affiliated companies may have acted as manager or co-manager of a public offering of any such securities in the past three years. Ord Minnett and/or its affiliated companies may provide or may have provided corporate finance to the companies referred to in the report. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party or person without the prior written consent of Ord Minnett Limited. Disclaimer: Ord Minnett Limited believes that the information contained in this document has been obtained from sources that are accurate, but has not checked or verified this information. Except to the extent that liability cannot be excluded, Ord Minnett Limited and its associated entities accept no liability for any loss or damage caused by any error in, or omission from, this document. This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore before acting on advice contained in this document, you should consider its appropriateness having regard to your objectives, financial situation and needs. If any advice in this document relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement for that product before making any decision. Analyst Certification: The analyst certifies that: (1) all of the views expressed in this research accurately reflect their personal views about any and all of the subject securities or issuers; and (2) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein.
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