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Bell Potter Research Note 2014

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Bell Potter Independent Research Note - April 2014

Bell Potter Independent Research Note - April 2014

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  • 1. 1 April 2014 Walkabout Resources (WKT) Trans Kalahari Railway signing points to potential to unlock significant coal value Recommendation Buy Price $0.011 Target (12 months) $0.028 (previously $0.025) Risk Speculative Analyst, Retail Research Services Peter Arden 613 9235 1833 Authorisation Damien Williamson 613 9235 1958 Expected Return Capital growth 155% Dividend yield 0 Total expected return 155% Company Data & Ratios Enterprise value $8.0m Market cap $8.8m Issued capital 799m Free float 73% Avg. daily val. (52wk) $0.01m 12 month price range $0.004 - $0.019 GICS sector Materials Disclosure: Bell Potter Securities acted as lead broker to the $4.8M placement in March - April 2012 and the $0.54M placement in March 2014 and received fees for that service. Price Performance BELL POTTER SECURITIES LIMITED ACN250063907721 AFSL 243480 DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 6 THAT FORM PART OF IT. Page1 1mth 3mths 12mths Price ($A) 0.006 0.007 0.014 Absolute (%) 83.3 57.1 -21.4 Rel. Market (%) 83.8 56.4 -29.7 Focused on unlocking value from Takatokwane coal deposit African focused exploration and development company, Walkabout Resources Limited (WKT), is continuing its efforts to unlock significant value from its 67% owned and huge Takatokwane coal deposit, Botswana’s largest coal deposit. A Bi-Lateral Agreement between the governments of Botswana and Namibia for the construction of the Trans Kalahari Railway (TKR) Line Project was signed recently. Construction of the TKR is planned to get underway later in 2014 and is expected to go until 2019. The Project is expected to be developed as a private- public-partnership at a cost of about $US10B, which is expected to come from the private sector. The process to obtain the funding for the TKR has started and a dedicated project office is to be established in Walvis Bay, Namibia, which is where the proposed commodity terminal will be built with an expected capacity for about 65Mt of coal per annum plus capacity for other commodity exports. Absolute Price Earnings Forecast Year end Sales (A$m) EBITDA (A$m) NPAT (reported) (A$m) NPAT (adjusted) (A$m) EPS (adjusted) (¢ps) EPS growth (%) PER (x) FCF Yield (%) EV/EBITDA (x) Dividend (¢ps) Yield (%) Franking (%) ROE (%) SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES $0.00 $0.01 $0.02 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 WKT Share Price S & P Resources Index (rebased) Trans Kalahari Railway agreement is a very significant step We see the TKR agreement as a very significant step following many years during which various railway developments have been envisaged but never actioned. The TKR is expected to be a 1,500km long railway line between Mmamabula in Botswana and Walvis Bay. Although the route of the TKR has not yet been published, WKT expects that it will be close to the existing Trans Kalahari Highway and Export Corridor, which means the TKR would go near the planned mining area of its Takatokwane thermal coal project. Because of its central location, WKT’s coal may only have a haulage distance of about 1,250km to Walvis Bay. The Takatokwane coal project has a current resource of about 7Bt and is planned to be developed as a multiple mine operation given the huge size of the coal deposit and its relatively flat, shallow and wide coal seam. The company is currently carrying out a Pre-Feasibility Study (PFS) into development of the deposit. WKT is considering a multiple mine configuration of several large open pit mines with multiple production units to produce a washed coal and a direct shipping coal product giving the project total capacity of over 20Mtpa of export thermal coal. In addition to supplying coal for export, WKT is currently assessing the viability of a suitably sized modular coal-to-gas (CTG) process, which will initially produce electricity and syngas and later, through an integrated gasification combined cycle process, selected liquid fuels for domestic consumption. Increased price target of $0.028 reflects TKR agreement The TKR is being proposed on an aggressive time-line and WKT is planning to synchronise its Takatokwane mine development to deliver the first shipment of coal onto the TKR line as it represents the major way to monetise the huge Takatokwane coal deposit. After a recent placement and despite some slippage with the coal-to-gas arrangement, we have increased our base case and upside valuations to $0.028 and $0.107 per share respectively and we regard WKT as being inexpensive relative to its peers. We have increased our target price for WKT to $0.028 per share reflecting the TKR agreement. We retain our Buy with Speculative risk recommendation.
  • 2. Page 2 Walkabout Resources (WKT) 1 April 2014 Trans Kalahari Railway (TKR) expected to go near WKT’s Takatokwane deposit The governments of Botswana and Namibia signed a Bi-Lateral Agreement on Thursday 20 March 2014 for the construction of the Trans Kalahari Railway (TKR) Line Project. Construction of the TKR is planned to get underway later in 2014 and is expected to go until 2019. The Project is expected to be developed as a private public partnership at a cost of about $US10B. The process to obtain the funding for it has started, and it is expected that the funding will come from the private sector. A dedicated project office is to be established in Walvis Bay, Namibia, which is where there will be a major new export port facility established to enable a range of exports of which coal is clearly the major one. The proposed Walvis Bay Commodity Terminal is expected to have a capacity of about 65Mt of coal per annum. Figure 1 - Map showing location of Takatokwane Coal Project and proposed route of TKR SOURCE: WALKABOUT RESOURCES LTD WKT expects that the route of the TKR, which has not yet been published, will be close to the existing Trans Kalahari Highway and Export Corridor, which means the TKR would go near the planned mining area of WKT’s 67%-owned Takatokwane thermal coal project in Botswana. The TKR is expected to be a 1,500km long railway line between Mmamabula in Botswana and Walvis Bay (Figure 1), however due to its central location, Walkabout coal would only have to be hauled some 1,250km along the route. The Takatokwane coal project has a current resource of about 7Bt and is planned to be developed as a multiple mine operation given the huge size of the coal deposit and its relatively flat, shallow and wide coal seam. The company is currently carrying out a Pre- Feasibility Study (PFS) on development of the deposit. WKT is considering a multiple mine configuration of several large open pit mines producing a washed coal product with coal quality specifications around 6,000kcal/kg and a direct shipping coal product at about 4,800 kcal/kg. The mines are planned to produce from multiple production units of around 6Mtpa each, giving the whole project the capacity to produce over 20Mtpa of export thermal coal. As well as supplying coal for export, WKT is currently assessing the viability of a suitably sized modular coal-to-gas (CTG) process, which will produce electricity, syngas and later, through an integrated gasification combined cycle process, selected liquid fuels for domestic consumption (Botswana has no liquid hydrocarbon production).
  • 3. Page 3 Walkabout Resources (WKT) 1 April 2014 Finalisation of Coalswana deal delayed The company announced a limited on-site coal off-take agreement for Takatokwane coal with technology company, Coalswana (Pty) Ltd (Coalswana), which is a Botswana-based ecological coal based industrialisation company, in November 2013. Coalswana had agreed to fund WKT’s pre-feasibility study (PFS) and Bankable Feasibility Study into the development of an integrated mine and an ultra-clean coal energy fuel beneficiation facility at the Takatokwane deposit at an estimated cost of around $US10M. The initial focus of this is expected to be on coal-to-gas (CTG) output. WKT and Coalswana continue to work towards finalising a Long Term On-site Off-take Agreement (LTOOA) by May 31, 2014. WKT retains sole export rights after satisfying the LTOOA requirements. WKT recently reported that it had granted Coalswana an extension to the commitment date, which we understand is so Coalswana can complete the necessary financing arrangements. Lindi Coal Prospect under consolidation discussions The Lindi Coal Prospect is located on the east coast of Tanzania within 50km of the deep water port of Mtwara. The Lindi area has had relatively little modern exploration. Reconnaissance exploration by the company recently discovered an outcrop of coal about 6km to the southeast of an outcrop of good quality thermal coal that was discovered earlier in 2013 on an adjacent tenement held by others. Analytical results of WKT’s coal are awaited. Discussions are underway to consolidate WKT’s area and the other party’s tenement area and then undertake further exploration and investigation on a joint basis. Kigoma Copper Project now focused on sulphide targets The company has been actively exploring its Kigoma Copper Project for about a year. High grade oxide copper mineralisation occurs extensively but somewhat erratically in amygdaloidal basalts and flow-top breccias at Kigoma where it is locally exploited by artisanal miners. Sulphide copper mineralisation is also quite widespread but has only been mined on a relatively small scale to date. WKT has negotiated several low-cost joint ventures with exploration rights holders in the Project area, which is located about 80km south of the town of Kigoma on the shores of Lake Tanganyika in western Tanzania. These agreements give the company interests of between 75% and 100% in the exploration tenements. WKT had divided the exploration targets into two types – one being in a localised area for copper oxide and the other one being for more of a regional focus on sulphide copper. The company’s reconnaissance reverse circulation (RC) drilling program of the copper oxide mineralisation achieved disappointing results leading to the recent decision to relinquish 55 of the 111 PMLs it held at Kigoma and to focus on the sulphide copper mineralisation. It has been encouraged by the discovery late last year of several shear-hosted sulphide mineralised quartz stockworks. Drilling by WKT in December 2013 intersected separate narrow intercepts of copper, silver and zinc mineralisation, representing the first significant sulphide occurrences in the area. WKT is well underway with planning for the 2014 field season due to start after the long wet period in April 2014 and which is likely to involve ground magnetic surveys to help define drill targets in the Malagarassi North Zone and close to a large shallow magnetic high. Seeking partner for the Makete Platinum Group Metals Project The company has not conducted any field work on its Makete Platinum Group Metal (PGM) Project for several months as it seeks a partner to fund exploration. The major ultramafic complex at Makete contains PGM-gold enrichment that has previously been explored by others and particularly Lonmin, which drilled a zone of PGM mineralisation in 2007 containing numerous intercepts including an intersection of 1.67m averaging 26.8g/t 2PGMs+gold and another of 17.6m averaging 4.9g/t 2PGMs+gold.
  • 4. Page 4 Walkabout Resources (WKT) 1 April 2014 Valuation We have increased our assessed value of the company’s Takatokwane coal interests to reflect the impact of the recent signing of the agreement for the TKR and taken account of the recent $0.54M (90M shares at $0.006) placement to fund the Takatokwane PFS. Our base case valuation is based on completion of the Takatokwane PFS which shows that the deposit warrants further development studies because it would have potentially significant value. We have reduced the valuations for the Kigoma Copper Project after disappointing results from the recent drilling of the copper oxide mineralisation but we note WKT will now solely focus on the sulphide project. The base case valuation only has a notional value for the CTG, Lindi and Makete Projects. Our upside case valuation assumes that the BFS is completed for Takatokwane and a starter mine is established that demonstrates technical and financial viability for larger scale development and that significant results are obtained for the CTG, Kigoma and Makete Projects that warrants further more detailed development and /or exploration and evaluation. Table 3 - Summary of valuations of WKT Assets Base Case Upside Case $ M 1 ¢/share 1 $ M 1 ¢/share 1 Takatokwane Coal (40 - 75%) 2 22.5 2.8 78.7 9.8 Kigoma Copper (Earning 75 – 100%) 0.7 0.1 2.7 0.3 Other Exploration Assets (CTG, Lindi, Makete Platinum) 0.7 0.1 5.9 0.7 Total Exploration Assets 23.8 3.0 87.2 10.9 Corporate (2.4) (0.3) (2.4) (0.3) Net Cash 3 0.8 0.1 0.8 0.1 TOTAL ASSETS 22.2 2.8 85.6 10.7 SOURCE: BELL POTTER SECURITIES ESTIMATES NOTES: 1. MAY NOT ADD DUE TO ROUNDING AND DILUTION EFFECTS 2. WKT CURRENTLY OWNS ABOUT 67% OVERALL 3. BASED ON BALANCE AT 31 DECEMBER 2013 LESS ESTIMATED EXPENDITURE PLUS NET PROCEEDS OF RECENT PLACEMENT WKT has the majority interest in a very large coal deposit in Botswana that makes the company particularly well placed to take advantage of the proposed TKR development. We note that WKT’s market capitalisation of around $9M is still very modest and significantly less than its comparable peers. We believe that even our upgraded valuations for WKT are relatively modest in comparison to its peers and to what a successful full scale development of its proposed plans for the Takatokwane deposit would yield. Recommendation WKT is an African focused mineral exploration company. It is targeting particular mineral deposits that can rapidly be developed to meet current market needs. The company is leveraging its management’s expertise in Africa and across a range of commodities and has used their experience (from having run successful major mining operations) to identify a number of high quality exploration projects that have been overlooked by others but have potential to become successful mines. The majority owned large Takatokwane coal deposit in Botswana is WKT’s principal focus as WKT is well positioned to benefit from the proposed TKR. We have increased our base case and upside valuations by 65% to $0.028 per share and by 47% to $0.107 per share respectively. From this we have increased our target price for WKT by 12% to $0.028 per share on the basis of the company achieving a very positive PFS on the Takatokwane coal deposit and advancements in its other exploration and development projects. Accordingly we retain our Buy with Speculative Risk recommendation.
  • 5. Page 5 Walkabout Resources (WKT) 1 April 2014 Risks and Drivers We identify the following as the main risks:  Changes to government policy and in particular any major variations to the planned Bi- lateral agreement to build the Trans Kalahari Railway  Inability of the proponents of the Trans Kalahari Railway to obtain adequate funding for its construction and operation  Commodity prices and foreign exchange rates that are different to our forecasts  Lack of exploration success and/or greater than expected geological complexities  Lack of funding to carry out adequate exploration and development  Adverse weather and operational issues  Adverse environmental and other regulatory issues  Cost overruns or operational delays  Adverse acquisitions of other assets that divert management effort and yield inadequate returns We identify the following as the main share price drivers: We have identified many upcoming events that could be significant share price drivers over the next year or so:  Positive outcomes from the PFS and BFS for Takatokwane Coal Project indicating it is capable of being developed in ways that will generate strong economic returns, which may include establishment of a “starter” mine to demonstrate those outcomes and provide valuable test samples of coal for further evaluation in a potentially wide range of applications such as the coal beneficiation (CTG and potentially coal-to-liquids) arrangement with Coalswana  Tangible positive signs of progress with the funding and construction of the proposed TKR and associated export port facility at Walvis Bay in Namibia  Development of other possible new export rail infrastructure for coal such as to South Africa and/or Mozambique (with an associated port option)  Exploration success at its Kigoma Copper Project that validates the company’s revised focus on the sulphide mineralisation and leads to the discovery of significant amounts of potentially economic copper and other forms of valuable sulphide mineralisation  Initial exploration success at the company’s Lindi Coal Prospect establishing the presence of significant coal deposits that warrant detailed exploration and evaluation  Achievement of a satisfactory joint venture arrangement that leads to exploration success at the company’s Makete Platinum Prospect which includes validation of the previous exploration results and extension of them to define further high grade intersections of PGM – gold mineralisation that has potentially economic significance  Identification of additional significant occurrences of mineralisation within its current exploration projects such as Norilsk-style mineralisation at the Makete Platinum Project  Establishment of early earnings and cash flow generation from one or more of the company’s projects using low capital expenditure
  • 6. Page 6 Walkabout Resources (WKT) 1 April 2014 BellPotterSecuritiesLimited ACN250063907721 Level38,AuroraPlace 88PhillipStreet,Sydney2000 Telephone+61292557200 www.bellpotter.com.au Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as ‘Speculative’ a return of >30% is expected. Hold: Expect total return between -5% and 15% on a 12 month view Sell: Expect <-5% total return on a 12 month view Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an exceptionally high level of capital risk and volatility of returns. The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. Disclosure: Bell Potter Securities acted as lead broker to the $4.8M placement in March - April 2012 and the $0.54M placement in March 2014 and received fees for that service. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

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