I discovered Cassini Resources (ASX ticker: CZI) a few months ago after researching the Australian copper miner, OZ Minerals. Cassini is the 100% owner of the West Musgrave Project in Western Australia. They have a Joint Venture Agreement in place with OZ Minerals whereby OZ can earn up to a 70% interest in the project by committing a minimum of $36 million to development and exploration. The first phase of this Agreement entails the completion of a scoping study. (A "scoping study" is another name for a preliminary assessment of the viability of a mining project. It is typically done in the earlier stages of a project and before a more comprehensive feasibility study. It includes a preliminary economic assessment that gives investors a lot to go on.) A joint venture with a strong industry player like OZ is good news for Cassini because it provides the stable financial backing needed to bring West Musgrave into development.
It was beneficial for me to first have a detailed look at OZ Minerals and their production outlook because it showed me the importance of West Musgrave to the company’s future plans. OZ’s investor presentations make it clear that West Musgrave is next in their development pipeline. At present, OZ’s production comes exclusively from their Prominent Hill mine, but development has begun at their Carrapateena mine. Prominent Hill’s open pit operation will cease next year, at which point it will strictly be an underground operation. Carrapateena will also be an underground operation with production scheduled to begin in 2019.
Underground operations are inherently more complex and expensive to operate than open pit mines. Herein lies the beauty of West Musgrave to OZ because it is a large, open-pitable, nickel-copper project with good equivalent grades—not to mention the largest nickel-sulphide discovery since Voisey’s Bay in Canada (1993). Having seen the value of West Musgrave to OZ’s future, I was amazed to see Cassini trading with a market capitalization below $20 million.
West Musgrave Project
As you can see in the map, West Musgrave is located in the central-eastern section of the state of Western Australia.
The first thing I like about West Musgrave is that it is a large tract of land. The tenement boundary spans across a 40 km (20+ miles) mineralized trend. A large land package is something I prefer in a junior miner for two key reasons. First, a large, prospective piece of land that does, or is ultimately found to, contain an economic deposit will often hold more than one. Over time, the owner may be able to take advantage of infrastructure or processing synergies to make their overall operation more economic. Second, a major producer looking to acquire a project or company is looking for the same thing. They tend to need scale to replace their Reserves and maintain or grow their production.
Map of the Westgrave Project
The above map zooms in on the project. The key deposits, shown highlighted on the map by the yellow callout boxes, are Babel, Nebo, and Succoth. Babel has an Indicated & Inferred Resource of 174.2 million tons, grading .39% nickel and .41% copper; Nebo has a 29 million ton Indicated & Inferred Resource grading .53% nickel and .46% copper; and Succoth has a 156 million ton deposit grading .6% copper. Babel & Nebo reside right next to each other and would most likely be developed in tandem. They hold a combined 203.1 million ton Resource grading 1.4% copper equivalent or .57% nickel equivalent. The combined Resource also holds 30,000 tons of cobalt, which is icing on the cake, especially now that it is trading for around $60,000 per ton.
Prior to the OZ Minerals joint venture, Cassini completed a preliminary economic study on the joint development of Babel & Nebo. This study included the following assumptions and economic highlights:
- Joint open pit development of Babel & Nebo at 4 million tons per annum of production over 15 years (this would mine less than 1/3 of the entire Resource)
- Annual production of 12,300 tons of nickel and 14,300 tons of copper making this a primary nickel project (the price of nickel is roughly twice that of copper)
- Average nickel recoveries of 71.7% and average copper recoveries of 82.2%
- AUD $1.14 billion Net Present Value (NPV), 70% IRR
- AUD $432 million of pre-production capital expenditures (CAPEX) plus AUD $89 million contingency (AUD $521 million total)
- C1 cash operating costs of $1.82 per lb. (nickel equivalent) placing it in the 2nd quartile
As you can see here, this preliminary study revealed strong economic prospects for West Musgrave.
Since these results were announced in April 2015, Cassini has made additional progress on two project inputs that had been a cause for concern in the past. First, they located a water source that is much closer to the project (105 km closer) than the one used in the original study. Second, they extended the metallurgical testwork to cover the entire range of ore composites and grades in the Babel & Nebo Resources. This program determined that nickel concentrate grades of 10 -12% at 60 - 70% recoveries and copper concentrate grades of 21 - 25% at 78 - 80% can be achieved over the life of a larger project. This test work was thorough, as the company explained in their press release:
“Testwork was conducted at Bureau Veritas Laboratories in Perth under the supervision of GR Engineering Services and is the most thorough metallurgical program undertaken to date. It comprised 200 flotation tests and covered 17 variability composites (different mineralised domains covering a range of nickel and copper grades). Two locked cycle tests on master composites, each representing typical run of mine material, of the early and later years of a likely mine schedule, have also been tested. Locked cycle tests are used to simulate continuous flotation circuit conditions, such as those in an actual process plant, during which various streams are recycled until the test achieves stability.”
The concentrates and recoveries from this more recent test work confirmed what was used in the first economic study, but more noteworthy is the fact that this recent work covered the entire range of ore material within the 200+ million ton Resource. The metallurgy in the first economic study was only conducted on the highest grade material. This is significant because it means that the development scale of Babel & Nebo under the control of OZ Minerals could potentially be much larger. I should also point out that this recent test work confirmed that company will be able to receive by-product credits from cobalt, platinum, palladium, and gold. Historical exploration drilling at West Musgrave hit high grades of cobalt in various locations. Cassini’s management is now reviewing past drilling results for future cobalt exploration within West Musgrave.
The following weekly chart, courtesy of barchart.com, shows how shares of Cassini Resources have been grinding higher since January 2016 and are now trading for around AUD $.07 per share.
Significantly higher by-product credits for cobalt are likely to bring down operating costs in the forthcoming economic assessment. I also expect a much larger production plan to be brought forth, now that the metallurgy has been fully vetted and OZ Minerals is involved. However, one of the key determinants of the projects economics is the price of nickel which, as you can see in the following chart, has come down considerably since the time the first economic assessment was prepared:
Using $12,000 per ton nickel and $6,000 per ton copper, I expect the NPV in the upcoming economic study to potentially be in-line with that of the first study if the company is able to achieve significant economies of scale from a larger operation. However, it is important to note that these price levels for nickel and copper are historically conservative so the shares are likely to contain some hidden value for the patient investor.
I have estimated that a 7 million ton per annum Babel & Nebo project would require initial CAPEX of $500 million and generate $115 million of average annual free cash flow per year. In this case, a 30% owner would need $150 million of upfront capital to garner about $35 million of annual free cash flow from the project for 15+ years. Thus, Cassini’s 30% ownership of West Musgrave is a ticket to an asset having a net present value of around $100 million (assuming a 10% discount rate). Cassini has 277 million shares outstanding. If we value the company at half of this NPV, then Cassini’s shares would be worth twice that which they are currently trading for. Overall, this is a very conservative estimate. As potentially lower costs are achieved and metals prices rise, the NPV jumps significantly higher.
It is my view that we are in the early stages of a longer term bull market in industrial metals—a view I hope to feature in an upcoming True Vine Letter. Since the bull market in industrial metals began in January 2016, zinc is up 104%, iron ore is up 71%, copper is up 45%, and nickel is up 31%. Nickel has been a laggard and the monthly chart below shows how the price of nickel is just barely above its longer term base. The price has been rising off this base and recently just poked its head above a 6 1/2 year downward trend line.
Cassini has strong leverage to higher nickel prices. When I run my financial model for the company with $7,000 per ton copper and $15,000 per ton zinc, the NPV of its 30% share rises to $216 million. Valuing the company at half this NPV gives me a share price of $.31, which presents 343% upside from the current level.
I expect OZ Minerals to complete its Earn-in / Joint Venture Agreement, which would leave Cassini with a 30% stake in West Musgrave. West Musgrave is the largest undeveloped nickel copper project in Australia. The immediate economics of Babel & Nebo and the greater exploration potential of the West Musgrave tenement make Cassini a compelling value at the current share price. With nickel prices being so low, historically speaking, I see Cassini as a junior that investors can sock away shares of now for leverage to nickel as the metal engages in a new upward price cycle.
Joshua S. Hall, ChFC
I do not personally own shares of Cassini Resources, however, it is presently a small holding in some client portfolios that I manage, through which most of my salary is derived.
The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, and a Registered Investment Advisor in the U.S.A. The information presented is for educational purposes only and should not be regarded as specific financial or investment advice nor a recommendation to buy or sell securities or other investments. It does not have regard to the investment objectives, financial situation, and the particular needs of any person who may read this Letter. True Vine Investments will not be held responsible for the independent financial or investment actions taken by readers. All data presented by the author is regarded as factual, however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive evaluation of financial strategies or specific investments and consult a professional before making any decisions.
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