AKM 0.00% 6.0¢ aspire mining limited

bell porter report for akm

  1. 35 Posts.
    Cannot copy the grafic but I think it pretty much provides everything SH want. $1.16 target price in 12 months. under the NPV cal, if HCC US$256/t at US$0.98/A$, AKM worths 3 dollars/share!!!

    Step-out drilling continues to hit coal at the Ovoot Project
    AKM has announced additional coal intersections at exploration drilling 5km to the
    northeast of its 331Mt Ovoot coking coal resource. This new discovery area now
    covers a 2km by 1km area and is open to the south, west and east. Best results are
    16.5m of coal from 389m. Coal quality is yet to be determined. AKM’s current resource
    is sufficient to support the planned 12Mtpa Ovoot coking coal project. This new
    discovery could potentially add another source mine and extend the project’s life.
    Ongoing drilling at Ovoot through the winter months
    AKM currently has five drill rigs operating at the Ovoot Project and we expect that
    exploration will continue at around this level through the winter months. We expect
    drilling to concentrate on the Ovoot Project Stage 1-2 reserve and also test the extent
    of the new discovery area. We also anticipate that AKM will use geophysical
    techniques to assist exploration.
    Next steps: Reserve and mining license application
    By early 2012, AKM will announce an initial reserve for the Ovoot Project and lodge a
    mining license application. The Stage 1 pilot development is scheduled to commence
    from next year, producing up to 1Mtpa. On full development (2016), AKM aims to
    produce 12Mtpa of coal from the Ovoot Project. Market consultants Wood Mackenzie
    recently deemed hard coking coal as the appropriate price benchmark for Ovoot coal.
    Investment view - Spec Buy, price leverage, strategic appeal
    Our AKM NPV is $1.16/sh (13% discount rate) at long term hard coking coal prices of
    US$180/t and currency of US$0.85/A$. At constant current spot prices and exchange
    rates (HCC US$256/t at US$0.98/A$), our AKM NPV increases to $3/sh. With tight
    hard coking coal supply-demand over the next few years, we see upside risk to our
    price forecasts. We also see significant strategic appeal in AKM’s 100% owned Ovoot
    coking coal project. AKM is a speculative investment as it carries significant
    infrastructure risks.

    Exploration success continues at Ovoot
    Further coal intersections at new Ovoot discovery area
    AKM has announced additional coal intersections at a new coal discovery area within 5km
    of its Ovoot Project resource. While coal quality is yet to be determined, drilling has
    intersected hard bright coal, typical of coking coals. AKM had previously announced coal
    intersections at this new discovery area on 19 September 2011. This latest release
    included four previously unreported drill holes.

    Positive for Ovoot Project scale and scope
    The proximity of this discovery to the Ovoot Project is a positive. The discovery may
    eventually support an additional resource and source mine for the Ovoot Project, adding
    scale, blending opportunities and/or project life. AKM will continue exploration at the new
    discovery area during the winter months.

    Wood Mackenzie confirms Ovoot coal’s high value properties
    In late August 2011, AKM published the results from consultants Wood Mackenzie’s
    analysis of the Ovoot coal. The analysis confirmed that the Ovoot coal:
    • would easily meet global seaborne market requirements;
    • had strong caking, hard coking and blend carrying capacity; and
    • pricing would be hard coking coal benchmark.

    Valuation and assumptions
    Valuation: Base case DCF of $1.16/sh
    Our base case valuation of AKM assumes:
    • that AKM achieves production/sales rates of 12Mtpa product coal in the December
    2017 quarter;
    • that AKM pays for around two thirds (US$1.1bn) of the total capex (US$1.7bn)
    required to build the rail infrastructure for the project (i.e. a proportion of this rail is
    • Bell Potter Securities coal price and currency forecasts (Table 3); and
    • AKM raises A$60m at $0.40/sh over the next 12 months to fund the development of
    Stage 1 of the Ovoot Project.
    Table 3: Bell Potter Securities coal price and currency forecasts
    2010a 2011f 2012f 2013f 2014f 2015f LT Real
    Hard coking US$/t 191 289 250 230 225 208 180
    Thermal US$/t 91 122 123 115 110 103 90
    US$/A$ US$/A$ 0.92 1.07 1.03 0.95 0.89 0.85 0.85

    NPV scenarios: Leverage to long term coking coal prices
    Table 4 shows calculated NPVs under flat coal price and currency scenarios. It highlights
    the significant leverage AKM has to coking coal prices. At constant current spot prices and
    exchange rates (HCC US$256/t at US$0.98/A$), our AKM NPV increases to $3/sh.
    Table 4: AKM NPV scenarios
    Hard coking coal price US$/t 160 170 180 190 200 210 220 230 250 300
    Currency US$/A$ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
    AKM NPV $/sh -0.74 -0.35 0.04 0.40 0.78 1.17 1.55 1.90 2.65 4.46
    Strategic value
    We believe there is strategic value in AKM through its:
    • large scale (330Mt), high quality Ovoot coking coal resource;
    • potential to partner with major off-take customer (steel producer) to assist with
    financing the Ovoot Project;
    • proximity to other potential minerals deposits, including the Burenhaan Phosphate
    project (a Mongolian Mineral Deposit of Strategic Importance); and
    • implicit relationships/ties with major mining/minerals houses including Ivanhoe
    Mines/SouthGobi Resources (19.8% shareholder) and Noble Group (8.6%

    Ovoot Project summary
    Proof of concept, infrastructure, haulage and customers
    Stage 1 of the Ovoot Project is to highlight to markets that a larger-scale (Stage 2)
    development is feasible by:
    • Identifying multiple potential routes to market – AKM have identified four;
    • Showcasing the coal product to a potential customer base – to secure coal off-take;
    • Building relationships with infrastructure and other service providers for construction
    and ongoing project operation; and
    • Managing sovereign issues (coal crossing country borders, etc.).
    The two stages of the Ovoot Project can be summarised as follows.
    Stage 1 development: 0.5-1.0Mtpa ROM coking coal from 2012
    The scoping study for Stage 1 of the Ovoot Project is nearing completion. Stage 1 is a low
    capital intensity, higher operating cost trial operation. Stage 1 will mine around 0.5-1.0Mtpa
    ROM coking coal. This coking coal will then be trucked to the nearest rail siding (570km to
    Erdenet) for freight forwarding to Russian east coast ports, or to customers in Russia or
    Stage 2 development: 12Mtpa hard coking coal from 2016
    The pre-feasibility study for the Stage 2 development is expected to commence in the
    September 2011 quarter and be completed by the end of 2011. AKM then plans to
    complete a bankable feasibility study by mid-2012.
    Stage 2 involves a significant infrastructure build (wash plant and 570km rail line) and will
    mine 15Mtpa ROM coal for 12Mtpa of washed high quality coking coal. Product coal will be
    railed from the Ovoot Project to Russian east coast ports, or to customers in Russia or
    Four potential routes to market for Ovoot coal
    Through discussions with Russian rail providers and Mongolian infrastructure providers,
    AKM has identified four potential routes to market.
    1. East coast Russian ports: Railing coal north along the trans-Mongolian railway, then
    across the trans-Siberian railway to east coast Russian ports;
    2. South to the Chinese border: Railing coal south along the trans-Mongolian railway for
    sale at the Mongolian-Chinese border;
    3. China via Manzhouli: Railing coal north along the trans-Mongolian railway then east to
    the Mongolian-Chinese border at Manzhouli (Inner Mongolia); and
    4. West to Europe: Depending on freight agreements, it may be viable to rail coal north
    along the trans-Mongolian railway then west along the trans-Siberian railway to
    markets in Europe.
    Transport to port a key hurdle
    The example in Table 7 calculates the freight distances to Vostochny Port (east coast
    Russia), one of the four routes to market identified by AKM. This route is likely to be the
    most direct point of access to the seaborne market (and therefore seaborne prices).
    The analysis highlights the significant distances that Ovoot Project coal will have to travel,
    and the leverage of costs to rail tariffs. In Australia, Bowen Basin hard coking coal is railed
    300-400km to port. In Canada, Peace River hard coking coal is railed around 1,000km to
    port. The rail distance from the Ovoot Project to Vostochny port is around 4,600km.

    Ovoot Project transport costs
    The example in Table 8 examines FOB transport costs to Vostochny Port, the most direct
    point of access to the seaborne market (and therefore seaborne prices). The construction
    of the Ovoot Project to Erdenet rail line lowers transport costs by around US$30/t.
    We have used a conservative Russian freight tariff of USc1.5/tkm. However, we
    understand that rates of less than USc1.0/tkm have been negotiated by other users.
    Lowering Russian rail tariff assumptions to USc1.0/tkm (from USc1.5/tkm) reduces
    transport costs by around US$20/t and increases our NPV base case NPV from
    $1.16/sh to $2.09/sh.
    Mining costs: Low strip ratio an offset to rail distance
    To AKM’s advantage, the Ovoot Project has a low strip ratio when compared with
    Australian hard coking coal mines. AKM estimate that Stage 1 will have a strip ratio of
    around 3 (BCM:t). We estimate that some Australian hard coking coal operations in the
    Bowen Basin (E.g. BMA) are operating at strip ratios of 15-17:1 (BCM:t).
    Project capital costs
    We estimate modest capital costs of around US$52m for Stage 1. For Stage 2, we
    estimate that site infrastructure (including coal wash plant) will have a capital cost of
    around US$450m. The Stage 2 rail capital cost assumption in Table 10 is for the 180km
    rail link between the Ovoot Project and Moron. The assumptions follow consultation with
    AKM and reviews of similar projects under development (E.g. Mongolia Mining Corporation
    Ukhaa Khudag coking coal project).
    AKM partner in 50% of the Moron to Erdenet rail link
    The Moron to Erdenet rail link will likely be used by other minerals projects and be of
    regional development importance. Therefore, we think it is likely that AKM will likely partner
    with the Mongolian Government and/or other potential users in the construction of the
    Moron to Erdenet rail link. This component accounts for around 390km of the total required
    rail infrastructure of 570km. We factor in AKM funding and owning 50% of this
    infrastructure and estimate the total capital cost (100%) US$1.2bn. This infrastructure
    ownership appears as a negative ($0.34/sh) in our NPV calculation.
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