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MATRIX CORPORATE CAPITAL
BRAEMORE RESOURCES PLC
24 January 2008
Potential, Complexity and Caution
Since we initiated coverage of Braemore with a Buy rating in October, management has made various announcements relating to its future plans for the business. We are lowering our rating to Hold and our target price to 15p given the complexity of these plans and await greater clarification over the coming year.
• We calculate an NPV for Braemore of £580m (45p per share), a 335% premium to the company’s current fully diluted market capitalisation of £173m, but a significant reduction from our initial calculation in October 2007. We then discount our NPV valuation to take into account what we consider to be the main risks and hurdles facing Braemore and reduce our price target to 15p and our rating to Hold until greater clarity is provided. This downgrade is brought about by an increase in capex, a lengthening of lead times and the likely take-up of equity stakes by various potential JV partners. Despite this, we still project substantial net earnings of £200m pa by 2016, albeit some two years after our original forecast. Recent announcements have led us to increase our capex estimates to over $650m, spread across six years, six projects and two continents. In addition, our previous assumptions of 100% ownership of the operating assets are no longer valid as a series of JV announcements has led us to dilute the various revenue streams among several Australian and South African partners. Although the business is generating revenue now from its small smelters in Johannesburg, we do not expect the company to report significant profits until 2011 when we forecast net earnings of £75m, increasing steadily to £200m by 2016. Over a 20-year operating life, we think Braemore has the potential to generate over £3bn of gross operating revenue (net of capex). Long lead times to production leave the company exposed to commodity price moves. Our current NPV valuation is based upon metal prices 45% below current spot levels, and by using current prices this valuation increases to over £1bn (81p per share). Braemore’s proposed South African PGM smelters are dependent on a reliable electricity supply – something that is not currently available in the region. We remain concerned about the ability of Eskom to meet growing demand.
Rating Target price (12m) (p) Price (23/01/08) (p) Market cap. (£m) Sector Reuters/Bloomberg AIM
HOLD 15 16.75 115 Mining and Metals BRR.L/BRR LN 949
BRR £'000s Year Cu $/t Ni $/t Pt $/oz Cu t Ni t Pt oz Sales EBITDA EBIT Tax Net Earnings EPS p 2007 6,000 20,000 1,000 0 0 0 0 (1,191) (1,191) 0 (1,191) (0.12) 2008E 6,000 20,000 1,000 0 0 0 0 110 110 0 1,011 0.09 2009E 6,000 20,000 1,000 0 0 0 0 (890) (890) 0 (139) (0.01)
52 week range Free float (%) Number of shares (m) Daily volume (m)
6.1-24.25 60 688 500000
20 Pence 15 10 5
0 Oct-06 Feb-07 May-07 Nov-06 Dec-06 Mar-07 Oct-07 Jan-07 Jun-07 Nov-07 Aug-07 Dec-07 Jul-07 Sep-07 Apr-07
Performance over Absolute (%)
Research Brad George firstname.lastname@example.org +44 (0) 20 7925 3334
Sales John McMillan Gavin Haywood +44 (0) 20 7925 3243
Matrix Corporate Capital LLP is authorised and regulated in the United Kingdom by the Financial Services Authority
Please see important disclosures at the end of this document
Metals and Mining
We initiated coverage of Braemore Resources on 15 October 2007 with a Buy rating and a target price of 20p. Since peaking at 24.25p on 14th November 2007, the share price has fallen back and traded in a range of 16-20p. However, since we initiated coverage of the stock, the complexity, scale and revenue horizon of the Braemore story has developed to such an extent as to lead us to reduce our NPV valuation significantly. Recent changes, coupled with a large degree of uncertainty related to the exact operating costs and commercial arrangements yet to be finalised in the South African businesses, gives us cause to lower our rating to Hold and our target price target to 15p – at least until greater guidance is provided by the company over the course of 2008.
Scale and complexity of developments now gives us pause for thought
At the time of our initiation note, Braemore was a small company looking to develop a medium to large nickel (Ni) operation in Australia and a variety of platinum group metal (PGM) facilities in South Africa. On the back of recent company announcements, however, Braemore is now a small company looking to build one very large Ni operation and a second smaller Ni operation in Australia, as well as two or three large PGM/base metal smelters, a PGM/Ni mine and possibly a base metals refinery in South Africa. The company could therefore be looking to develop six or seven large industrial operations on two continents with four or five different JV partners and a capex requirement that we forecast to be in excess of $650m. While we retain confidence in management’s ability to pursue these developments, we have become concerned that the scale and complexity of the proposed operations may overstretch the capacity of the team to deliver these projects on time and on budget in a operating environment in which all personnel and material inputs are in tight supply. Since October, Braemore has made several announcements that have required us to significantly increase our capex assumptions, push back revenue projections and increase our level of uncertainty of our revenue projections. • BHP Billiton. The company has made public the terms under which BHP Billiton has the right to take a 50% equity stake in the Western Australian Ni developments. Tharisa. The company has signed an MOU with Tharisa Minerals to examine the feasibility of constructing a smelter to process PGM-bearing ferrochrome concentrate. This proposal seems to be a significant deviation from Braemore’s original focus on high chrome UG2 concentrate. Not only does such an arrangement introduce a dilutionary effect by virtue of Tharisa’s likely equity stake in such a smelter, but the economics of such smelting are not covered by the guidance that Braemore has provided to date and therefore our cost and revenue assumptions are uncertain. Pan Palladium. Braemore has entered into a binding heads of agreement with Pan Palladium Ltd to carry out a feasibility study into the development of the Grass Valley Platreef project in the Northern Bushveld. We view the investment as a positive step in terms of providing some security of supply of concentrate, but we forecast the capital cost to Braemore to be c$90m above what we initially estimated for its South African business. Leinster. The company has announced that it is considering doubling the size of its initial Ni development at Leinster as well as adding an additional processing step to produce final metal rather than an intermediate sulphide product. We estimate this could increase the capex requirement at Leinster from $200m to $450m and push back production by at least 12 months.
Metals and Mining
NPV valuation of 45p per share
As a result of these developments, we have significantly downgraded our NPV valuation to £580m as our capital cost estimates have increased and our revenue projections have been pushed back as a result of the larger and more complex developments. On our assumed fully diluted equity base, our NPV valuation equates to 45p per share. This reduction in NPV is largely a timing issue, brought about by an increase in the scale of the proposed Ni developments that we think will push revenue back by 12 months, and by an extended timeline in the development of the South African PGM business such that three smelters are constructed over six years rather than four years as we assumed earlier. However, on a positive note, our NPV is based on commodity price assumptions 45% below current spot prices. If current price levels hold into the medium term, our NPV could increase to over £1bn.
Peak net earnings £216m
We forecast revenue commencing from Braemore’s first 10MW PGM smelter in 2010 and from its Australian Ni operation in Q3 2010. However, we do not expect large cash flows until 2011 when the Leinster Ni operation is predicted by Braemore to be in full production and a second 10MW smelter is commissioned in South Africa. We have forecast net earnings of £8.5m in 2010 (0.7p per share), increasing to £75m (5.8p per share) in 2011 and ultimately to £216m (16.6p per share) in 2017 when all businesses should be in full production. Our peak net earnings projection of £216m in 2017 is 22% below the peak of £280m that we forecast in our initiation note, primarily as a result of increased costs and outside equity in the operations. However, perhaps more importantly, we now expect earnings to peak some three years later than we had originally forecast, as Braemore has since proposed larger and more time-consuming developments. It is this delay that has largely driven the NPV reduction.
Braemore lacks personnel to undertake planned expansion
Braemore is a small company with a core team of technical specialists, but as yet without the engineering and management resources required to undertake such a large and diverse expansion. Such a team will need to be assembled and we assume that it will. However, in the current tight labour market evident across the mining industry, this could prove difficult and expensive, and we await updates from the company. We also remain cognisant of the external risks that Braemore may have to deal with. Primary among these is the electricity supply situation in South Africa. The ConRoast DC Arc smelters that Braemore is proposing, are, as the name suggests, electric arc furnaces that require substantial and reliable electricity supplies. South Africa is currently in electricity deficit, with supply cuts a regular occurrence. We would need to see evidence that capacity expansion is being planned and implemented so that the proposed smelters will have a stable and secure supply. Our other major concern is the unknown terms of offtake agreements that would need to be negotiated as a key plank of the company’s South African strategy. Current offtake agreements are by and large kept secret between the parties with little information released publicly. Given this secrecy, the fact that the introduction of ConRoast technology changes the economics of UG2 PGM mining, and given recent announcements by Braemore relating to the processing of Platreef and chromite reef ore, the offtake terms that we have used in our model are assumptions at best, with significant room for error. Smelting generally operates on finer margins than mining and thus these businesses are sensitive to small variations in offtake terms; we would expect to see these terms discussed further by Braemore during the year. Despite these concerns, we think that Braemore has the potential to generate over £3bn in gross operating revenue (EBITDA less capex) over 20 years and so retain our view of the company as a future cash cow. Although Braemore is still an early-stage development play, with significant risks ahead of it, it continues to attract our attention for a number of reasons:
South African electricity supply is a concern
Offtake agreements are key
£3bn in cash over 20 years
Metals and Mining
• • • • • • • •
It is sitting on a large resource base; It has the potential to become very large and move out of the junior ranks. It should operate within the lowest quartile of the cost curve for both of its businesses. Its assets are in politically stable jurisdictions. We think the primary technical risks are manageable. The management team is of the highest quality, in our view. The company is currently sitting on an early part of the value curve, providing the opportunity for significant uplift as the business develops. The business could be viewed as a takeover candidate for the major miners because of its size, cost advantages and politically stable jurisdiction.
We expect further announcements during 2008 related to additional JVs in South Africa and firming of financial details related to previously announced JVs. Such announcements may enable us to increase our confidence in our assumptions and projections, but the fact remains that Braemore is probably four years away from significant profits.
Potential takeover target
Therefore while we urge caution, this caution stems from our need to see the many unknowns filled in rather than from any lack of faith in the company’s longer-term potential. We think the company could become a potential takeover target, especially given BHPB’s assumed equity position.
Metals and Mining
Western Australian Nickel Tailings
Low grade but low cost – and large tonnage
Braemore’s prime asset is the right to process the historical Ni tailings dumps of BHPB’s mines in Western Australia (Kambalda, Leinster and Mt Keith). This option was purchased from the previous operator of the mines, Western Mining Corporation (WMC), prior to it being taken over by BHPB, and at a time when the Ni price was $8,500/t (it is now $27,000/t). Resource estimates across the three operations are still being assessed, but historical metallurgical reconciliation records from WMC indicate that close to 500,000t of Ni was deposited into the dumps, and on the basis of current and future production an additional 500,000t could be added over the remaining life of the existing sulphide mines. The Leinster tailings have been drilled, sampled and converted to a JORC-compliant resource that was in close agreement with the mill reconciliation reports. This provides us with comfort that a similar level of agreement can be reached when the remaining dumps are drilled in 2008.
Figure 1. Resource estimates Deposit Leinster tailings – JORC compliant Kambalda tailings – mill reconciliation Mt Keith tailings – mill reconciliation Total Source: Braemore Resources Tonnes 29,610,000 32,640,757 101,984,221I lo Ni grade % 0.46% 0.41% 0.21% Ni tonnes 135,000 132,452 218,306 485,758
All three mines remain in operation with additional tailings being deposited into the dumps. At Leinster, BHPB is currently operating its mill at 3Mtpa throughput, achieving a 86% recovery of Ni. From our calculations, this would equate to 13,000tpa of Ni being deposited into the Leinster dumps. At Mt Keith, BHPB reports concentrator throughput to be 11.5Mtpa with low recoveries of between 60% and 70%, suggesting upwards of 25,000tpa is being deposited on these dumps. At Kambalda, mining is undertaken by independent companies, the majority of which transport their ore to BHPB’s central mill and concentrator in Kambalda under offtake agreements. We understand that tailings from this concentrator are still being deposited onto the Kambalda dumps, but because of the complexity of the various ore sources, no information is available to allow us to readily estimate the recharge. However, we think it is likely to be in excess of 10,000tpa.
Cliffs could add to tonnage
Braemore has also recently flagged the possibility of BHPB adding tailings from its planned Cliffs deposit to the Leinster tailings facility. Cliffs is a small, highgrade deposit near Mt Keith that would probably be processed at the Leinster mill. A resource of 2.5Mt at 4.3% Ni has been reported by BHPB, which if processed with the same recovery as Leinster ore, could result in an additional 15,000t being deposited on the dumps.
Metals and Mining
In 1965, WMC discovered Ni at Red Hill approximately 60km south of Kalgoorlie in Western Australia. Mining commenced 18 months later and the town of Kambalda was constructed to service the operation. This was in effect the birth of WMC as a major mining company. This was followed in 1979 by development of the Leinster Ni operation 400km north, and finally Mt Keith in 1994, a further 50km north. The three mines were operated as a vertically integrated Ni business, feeding Ni concentrate to a central smelter in Kalgoorlie and from there to a refinery at Kwinana, south of Perth. By the late 1990s the Kambalda ore bodies had become small, deep and complex, which, when coupled with low metal prices, made them marginally economic for a major miner such as WMC. WMC therefore commenced the process of selling the mines to juniors – so that now all of the Kambalda mines are operated by smaller companies, with offtake agreements in place to feed ore into a central concentrator.
Option purchased at a time of low Ni prices
In 2004, WMC sold the rights to the Ni contained in the tailings dams at these three operations to Western Consolidated Nickel Pty Ltd (WCN), a private Australian company. WCN was subsequently folded into Braemore in May 2005. BHPB took over WMC in June 2005 and absorbed the Ni business into its Stainless Steel Materials division. BHPB continues to operate the Kambalda concentrator, taking toll feed from the surrounding mines, while operating both the Leinster and Mt Keith operations alone.
Figure 2. BHPB Australian Ni Project Locations
Mt Keith Leinster Kalgoorlie Perth Perth/Kwinana Kambalda
Source: Matrix Corporate Capital
Metals and Mining
Chemistry – Sulphides
Original mining was sulphides
The Kambalda and Leinster ore bodies are both high-grade sulphide systems, with the majority of the Ni locked up in iron-sulphur compounds, predominantly pentlandite (Fe,Ni)9S8. The concentrating plants at these two operations are standard flotation plants; ore is ground to fines, mixed into a liquid slurry, and agitated so that a bubbly froth is formed. The chemistry of the solution is such that the sulphide minerals stick to these bubbles, which are then skimmed off, thickened and dried to produce a Ni/Fe concentrate that is fed into a flash smelter in Kalgoorlie. In these two reasonably simple mineralised systems, the flotation process is quite efficient, with upwards of 85% recovery of Ni. However, while most Ni is in sulphide form, a minor amount is contained in silicate compounds not recoverable by flotation. These minerals along with the residual proportion of sulphides not recovered during the flotation process are directed to the tailings dams, resulting in the grades that Braemore has published. Mt Keith in contrast is a very different ore body – much larger than either Leinster or Kambalda, but lower grade and more complex metallurgy. Ni recovery at the Mt Keith concentrator is lower (at 65%), but the lower inherent head grade still results in a lower grade tailings resource. As a result, Braemore has stated its intention to concentrate on the Kambalda and Leinster operations before moving to the more complex Mt Keith resource in later years.
Ni contained in silicates cannot be extracted by flotation
Ni contained in silicates cannot be extracted by flotation but can be readily recoverable by dissolution in sulphuric acid. Previous attempts at acid leaching in Western Australia in the 1990s were related to the processing of large laterite Ni deposits at projects such as Murrin Murrin, Bulong and Cawse. Although large, the mineralogy of these deposits is dominated by secondary silicates and oxides and is far more complex than the Braemore tailings – secondary referring to minerals that result from the process of weathering. Extraction of Ni from these minerals requires the application of high-pressure acid leach (HPAL) technology. Unfortunately the high temperature, high pressure, concentrated sulphuric acid slurry proved to be extremely corrosive and resulted in the underperformance or even complete failure of these plants and the subsequent write-down of some A$4bn of invested capital. HPAL technology has improved but remains expensive and risky – BHPB is nearing the completion of its Ravensthorpe Ni project in Western Australia, the total capital cost for which will approach $3bn .
Extraction from tailings is easier than from laterites
We take the view that these failures had previously led to the market undervaluing the Braemore opportunity by erroneously linking it with these failed HPAL projects. The Ni contained in the BHPB tailings has very different metallurgy from laterites and can be extracted by low temperature (90°C) atmospheric acid leaching, which is cheaper and simpler to construct and does not suffer from the same corrosive problems of HPAL. The processing of the tailings material is relatively straightforward compared with traditional hard rock mining as no actual mining or milling is required. The material is simply dug with a front-end loader, screened to remove any extraneous material, and delivered to the processing plant via conveyor or slurry. The tailings are then mixed in a leach tank with sulphuric acid at the appropriate temperature and concentration, and agitated for several hours until most of the metals are dissolved in the acid, forming a ‘pregnant liquor’. This acidic solution can then be neutralised and metals extracted via precipitation of a sulphide compound, or further processed via SXEW to produce pure metal cathodes.
Metals and Mining
The process is reasonably generic in its general application but requires tuning of specific variables that has been the subject of considerable testing by Outokumpu Technology in Finland. Ni recovery increases with time in the leach tanks, but longer times require larger tanks or reduced throughput and so a compromise must be reached. Results released by Braemore in 2007 suggest that recoveries in excess of 95% are achievable after 24 hours; however, 93% recovery after eight hours was considered an optimal compromise during the testing phase.
None of the technologies are new
None of the technologies involved in this process are new or untested – all currently exist in large-scale operations around the world. However, the testing has only been done at the pilot plant scale, and so execution risk remains.
Commercial Arrangements – BHPB
BHPB can take 50%
Contained within the original tailings agreement between Braemore and BHPB is the right for BHPB to take a 50% equity stake in the project. This stake can be taken in one of two ways: 1. For free, within 120 days of Braemore submitting a bankable feasibility study (BFS) to BHPB. In this case BHPB would be required to provide 50% of the capital funding, but Braemore would remain the manager and operator of the project. Braemore has indicated that it expects the BFS to be completed and submitted to BHPB in December 2008, suggesting a deadline of early 2009 for BHPB to make this decision. At any time within three years after commencement of production at an NPV valuation.
We take the view that the first of these options is the most likely and have developed our financial model accordingly.
Braemore has the rights to all historical and future tailings from the three BHPB operations. The terms of the agreement as they currently stand are for Braemore to pay BHPB a royalty equivalent to 5% of LME for the contained Ni in the tailings. After processing of the tailings, BHPB would then have the right to purchase a Ni sulphide product from Braemore at 70% of LME – Braemore in effect receiving approximately 65% of LME.
Offtake to be renegotiated
This commercial arrangement was predicated on Braemore converting the tailings to an intermediate Ni sulphide product containing between 60% and 70% Ni, which would then be processed to final metal in BHPB’s existing Ni refinery at Kwinana. However, we understand that this arrangement does not actually bind the company to producing a Ni sulphide product. Recent work by Braemore has pursued the avenue of constructing an SXEW plant to extract pure metal from solution. On this basis, Braemore has stated that it is in discussions with BHPB to form a new agreement that could result in a significantly higher offtake percentage accruing to Braemore. The company has commented publicly that given BHPB’s likely equity in the project, better than 90% of LME could be achievable, and we have used this in our model.
Metals and Mining
Other metals do not come under the offtake agreement
In addition to Ni, the tailings dumps contain trace amounts of other metals such as copper (Cu), zinc (Zn), cobalt (Co) and possibly gold (Au). Test work by Braemore has shown that these metals are readily extracted from the tailings during the Ni treatment process for little additional cost. It is our understanding that these by-product metals are not covered by the agreement between Braemore and BHPB. However, two uncertainties exist with this additional revenue stream: 1. 2. The actual amounts of contained by-product metals are not known, and As these metals fall outside the existing offtake agreement and given that this agreement is currently being renegotiated, it is not yet known if the byproduct revenues would accrue to Braemore or to the project JV (50% BHPB).
These questions should be answered during the ongoing BFS and JV negotiations; however, for the purpose of our modelling, we have assumed that the by-products will add an additional 15% to metal sales, and that this revenue will accrue to Braemore rather than to the JV.
Final capital costs for development of this business are subject to completion of a BFS due in late 2008. Preliminary cost estimates released by Braemore suggest a capex of $350m to construct an integrated plant capable of processing 7.2mtpa of tailings to produce upwards of 26,000tpa of Ni metal in an intermediate sulphide product.
Increase capex to allow for SXEW
We have increased this figure to $450m in our model to allow for cost inflation and for the construction of an SXEW plant to produce final metal as Braemore has indicated is likely. We have also assumed an additional $250m to develop a second plant at Kambalda to produce 15,000tpa of Ni metal.
Lower sustaining capital
Typical mining operations, once established, require a significant degree of sustaining capital for such things as continued underground development, prestripping, pit cutbacks, etc. We expect and have assumed a lower level of sustaining capital would be required for the tailings operations because of the ease of the earth-moving exercise – no mine development, no pre-strip and no cut-backs are required. Once constructed, little additional capital should be required other than for repairs and maintenance of equipment and plant.
Low cash costs
The BHPB tailings dams contain low grade (<0.5%) Ni, but production costs should be very low compared with the underground mines from which the tailings originated because of the ease with which the material can be excavated and processed. Published results from companies operating the old underground WMC mines at Kambalda show a current cash cost of production of between $5/lb and $8/lb of Ni (source: Mincor Annual Report). Braemore in contrast has undertaken pre-feasibility studies that suggest that a cash cost of less than $1.60/lb of Ni in sulphide should be achievable.
Metals and Mining
Given Braemore’s stated intention to examine moving beyond this intermediate stage to produce final metal (requiring an additional processing step), and given the cost pressures affecting the whole mining industry, we have assumed a cash cost of $2.50/lb to produce final Ni metal.
Braemore has released preliminary schedules based on commencing development at the Leinster operation, before moving to Kambalda, with Mt Keith third in the queue. The choice of Leinster as the first stage is driven largely by logistical issues such as availability of land and utilities and the greater degree of control over the site as the entire area is managed by BHPB. In contrast, mining operations at Kambalda are undertaken by a number of independent miners with added complications from Goldfields Ltd which operates the St Ives Gold operations which are interspersed among the Ni mines.
Figure 3. Project Milestones Milestone Complete resource definition Complete pilot plant test work Update project costs Commence Kambalda and Mt Keith evaluations Complete Leinster BFS Financing completion Commence construction Produce Ni at Leinster Commence production at Kambalda or Mt Keith Source: Braemore Resources Schedule March 2007 November 2007 March 2008 Q1 2008 December 2008 March 2009 June 2009 Q3 2010 2012 Status Complete Complete
Kambalda to be funded by cash flow from Leinster
The primary implication of this staggered development schedule is that investment in Kambalda and Mt Keith could be largely funded by cash flow from Leinster, thus reducing the requirement for additional equity and debt funding. We have, however, taken a more prudent view and have not included any production from Mt Keith in our model. Although potentially the largest of the tailings dumps in terms of contained metal, the grade is less than half of that found at Leinster and Kambalda and therefore more sensitive to lower Ni prices.
We assume Mt Keith will not proceed
Life of Mine
At the mining rates proposed by Braemore, taking into account the additional Ni tailings likely to be deposited onto the Leinster dumps by BHPB’s ongoing mining operations, we have forecast a 10-year life of the Leinster tailings operation. This could be extended by addition of material from BHPB’s Cliffs deposit (scheduled to come into production in 2009). However, Cliffs is small and the total amount of Ni added would be likely to be less than one year of production from the Leinster dumps. We have a assumed a lower mining rate at Kambalda, which when coupled with the additional material likely to be deposited at Kambalda, allows us to use a mining life in excess of 15 years.
Metals and Mining
South African Platinum Business
Braemore has advanced its South African PGM business proposal along two lines: • • By continuing technical development of the process; and By entering into JV negotiations aimed at securing concentrate feed for its proposed smelters.
Potentially three different types of ore
Braemore’s business plan was originally predicated on taking PGM and base metal concentrates of two distinct geological types: high chromium PGM concentrate from the UG2 horizon sourced from the east and west limbs of the Bushveld, and Ni-rich PGM concentrate from the Platreef on the northern limb of the Bushveld (see Appendix III). However, the company recently signed an MOU with Tharisa Minerals to examine the potential of constructing a smelter to process chromium (Cr) ore from the lower Cr seams in the Western Bushveld. Management has also flagged the possibility of developing a base metals refinery.
Require JVs to underpin offtake
Key to the development of smelting technology is the requirement for reliable supplies of concentrate by way of either offtake agreements or vertical integration via direct equity in mining operations. Braemore seems to be of the view that some form of equity participation is required – both to increase potential returns and to provide a reliable feed source. To this end, it has recently announced several agreements or understandings that might, if successful, move to formal developments that could supply feed to Braemore smelters.
In November 2007, Braemore announced a non-binding MOU with Tharisa Minerals to investigate the potential of jointly developing a smelting plant to process PGMs. Tharisa is a private South African company formed by the former executive team of Eland Platinum led by Loucas Pouroulis. Little information is available about Tharisa, although we understand that the company is looking to develop a ferrochrome project near Rustenburg, based upon production from the MG Cr reefs of the Western Bushveld.
Tharisa JV would probably be limited to smelter investment
The MG reefs sit beneath the Merensky and UG2 PGM reefs in the Bushveld stratigraphy and are the traditional source of Cr production in South Africa. However, these reefs also contain PGM credits enhanced by higher levels of rhodium (Rh) that have historically not been accessible via traditional smelting methods. The revenue stream that could accrue to Braemore is unclear as this would be a different process from UG2 smelting, being more closely related to the smelting of Cr revert tails that is currently being undertaken by Braemore using the small Mintek smelters in Johannesburg. The financials of this process are not known as they have not been released by Braemore. Until further details are provided, we have assumed for our model that Tharisa will contribute 50% to the construction of a 10MW ConRoast smelter in the Western Bushveld and that revenues will be split accordingly. We have further assumed that the economic returns of this smelter would be equivalent to that provided by the smelting of UG2 concentrate.
Metals and Mining
Pan Palladium JV
In December 2007, Braemore announced a legally binding heads of agreement with Pan Palladium Ltd (PPD), to form a JV for the evaluation and, if feasible, the development and mining of the Grass Valley Platreef project.
Braemore to become a miner?
Pan Palladium is an Australian-based, ASX-listed company that is advancing two base metal projects based around the Platreef on the northern limb of the Bushveld complex – the Grass Valley project and the Aurora project. The Grass Valley project is the more advanced of the two, with the Aurora project being larger, but lower grade.
Figure 4. Resource Figures Inferred Resource Grade Pt+Pd+Au Ni Cu Metals Pt+Pd+Au Ni Cu Source: Pan Palladium 71 mt 1.23 g/t 0.11% 0.03% 3.4moz 100,000t 28,000t
Braemore would earn a 50% interest in PPD’s 75% interest in the Grass Valley project upon completion of a pre-feasibility study within 18 months, and a definitive feasibility study within 30 months. Braemore proposes to solely fund these studies and has projected the cost to be ZAR55m (A$9.2m). The remaining 25% stake is currently held by Impala. In addition to funding the studies, Braemore would take an equity stake in PDD by way of an initial subscription for shares plus options over the following five years exercisable at a steadily increasing price: Shares • • Subscribe for five million shares at A$0.20 each upon shareholder approval of the arrangement (A$1m) – passed at the December 2007 AGM. Braemore would be issued with 10 million shares upon successful completion of the Grass Valley BFS, with another 10 million shares issued for completion of a BFS for the Aurora project should that project progress.
Options • • • •
An effective 54% ownership stake in the Grass Valley project
20 million within two years at A$0.30 (A$6m) 20 million within three years at A$0.40 (A$8m) 20 million within four years at A$0.60 (A$12m) 20 million within five years at A$0.80 (A$16m)
A de facto takeover
If all of these options are exercised and PPD seeks no additional equity, Braemore would own 44% of the issued equity of PPD. When combined with its direct 37.5% stake in Grass Valley, this stake in PDD would lift Braemore’s effective equity in Grass Valley to 54%. Given this degree of ownership of the company, the effective majority control of the main asset and the right to appoint a new CEO, we see this transaction as a de facto takeover of PDD by Braemore. In May 2006, PDD published preliminary feasibility studies of the Grass Valley project that have formed the basis of our model for this component of the business.
Metals and Mining
Figure 5. Reserve and Proposed Mining figures, May 2006 Reserves Grade – PGM g/t Grade – Ni/Cu Recovery Mining rate (ktpa) Milling rate (ktpa) Concentrate (ktpa) Concentrate PGM (kozpa) Concentrate Ni-Cu (tpa) Capex Mining costs Processing Total cash Cost Source: Pan Palladium 28.5mt 1.43 0.152 71.3% 16,740 3,600 64 120 3,860 $108m $15.7/t $6.2/t $15.7/t
As shown in Figure 5, PDD has forecast a total capex requirement of $108m to develop a mining and milling operation to produce 120,000 oz pa of PGMs and 3,860 tpa of Ni and Cu, in a mixed concentrate.
Additional feed would be required
Braemore on commercial arm’s length
The level of concentrate output from the Grass Valley project would provide less than a third of the potential feed to a 35MW ConRoast smelter that Braemore has suggested it might construct on the northern limb on the Bushveld in order to process Platreef concentrate. We think Braemore would then probably have to look at significantly scaling up the size of the Grass Valley project, and/or to source additional feed. The pre-feasibility cost estimates provided by PDD are over 18 months old and are likely to have increased; however, any increase in scale could have the effect of bringing unit costs back towards this May 2006 level. Therefore, at this early stage, we have used the size and cost numbers outlined by PDD in the May 2006 study. We have further assumed that concentrate from Grass Valley is sold to Braemore on an arm’s length basis on offtake terms roughly equivalent to those in force elsewhere, and that the necessary additional feed is obtained on similar terms.
South African Offtake Agreements
Offtake agreements kept secret
A smelter is an intermediate processing step in the production of PGMs. The four major producers in South Africa are vertically integrated from mining to final metal, but the smaller miners can only produce a PGM concentrate on site that they must then sell to a smelter under an offtake agreement. However, most of the smelters require, as a condition of any offtake agreement, that the commercial terms remain confidential. Therefore, most of the smaller PGM producers that have an offtake agreement in place book the entire value of the contained PGMs to their accounts and in effect treat the offtake as Treatment Charges and Refining Charges (TCRCs) which are rolled in the cash operating cost figure and not separately disclosed. One of the few exceptions is Eastern Platinum, which has published the market basket price against its realised basket price. The accounts published by Eastern suggest that an offtake of c80% of the market basket price was achieved.
Metals and Mining
Greater PGM recovery is possible with ConRoast
While this figure is useful as a base level, it is necessary to understand the impact that the proposed Braemore smelters may have on the smaller PGM miners. Independent miners selling a UG2 PGM concentrate to a third-party smelter are contractually constrained in most cases to a chromite content in their concentrate of less than 1.5% (see Appendix IV). Because UG2 ore is high in chromite (roughly 30%), these companies must reduce the metal recovery from their concentrators below what could otherwise be achieved in order to meet their offtake contracts – they must in effect send approximately 20% of their otherwise recoverable PGMs to the tailings dumps. The introduction of smelting technology that is immune to chromite should allow the UG2 producers to claw back much of this previously discarded metal, which could then translate into more favourable offtake terms being available to Braemore.
The output from a DC ConRoast smelter is an iron-rich PGM alloy that must then be refined to final metal. Braemore has stated its intention to examine the potential of building a PGM and base metal refinery; however, this is yet to be confirmed. Such a refinery would probably be of similar design to others already in existence in South Africa, as Braemore possesses no particular technological advantage in refining. Building of a refinery would therefore simply be an economic decision that would hinge upon an in-house facility providing greater return above selling smelted material to a third-party smelter.
We assume no refinery
We take the view that such an investment would be likely to be a low priority given the scale and complexity of the smelter developments, and the likely marginal return that may flow. We have therefore not included a refinery in our models and have assumed that the metal alloy from its smelter will be sold on to a third-party refinery at 92% of contained metal content in line with what it is achieving from its small-scale smelters in Johannesburg.
Black Economic Empowerment (BEE)
The Black Economic Empowerment Act (2003) was designed to provide a framework for greater economic participation in new and existing businesses for the historically underprivileged and disenfranchised component of the South African population.
South African subsidiary will be
empowered, not the parent company
As with all new businesses, Braemore would be required to become BEE compliant; however, this is not simply a question of reaching the necessary level of black ownership. BEE compliance is measured against a scorecard that contains such considerations as ownership, management control, employment equity, skills development, preferential procurement, enterprise development, and socio-economic factors. Despite the complexity of the scorecard, there is in general an underlying ownership requirement by black interests of 15% by 2009, increasing to 26% by 2014. Braemore has indicated that it is in discussions with various potential BEE partners and we therefore expect announcements on this issue early in 2008. However, as a first pass, we have assumed the following basic BEE structure: • • • BEE is limited to Braemore’s South African subsidiary Independence Platinum (InPt). A BEE partner would take a 26% stake in InPt at no cost, but would contribute capex in proportion to its equity. No BEE discount is applied to Braemore’s equity in the Grass Valley project JV with Pan Palladium, as this empowerment would be more likely to come through direct ownership in PDD.
Metals and Mining
We think the second of these assumptions is unrealistic as a BEE partner would more than likely be required to buy its equity stake; however, the terms remain unknown.
Although Braemore has published a development plan, we take the view that it is a guide only as the ultimate structure and schedule will be driven by the market and the progress of offtake agreements and equity involvement in mining operations such as PDD.
Neither the Tharisa nor PDD JV
address the UG2 issue – we assume a third smelter
An important consideration is that a smelter constructed with Tharisa would be based on the processing of ferrochrome while a smelter built with PDD would be based on Platreef. Neither of these addresses the issue of processing UG2 concentrate on which the primary commercial advantage of the ConRoast process is based. We are therefore of the view that additional JVs are likely to be announced in the coming months that will result in the construction of a third smelter dedicated to processing of UG2 material. We have assumed that Braemore will construct three ConRoast smelters: 1. A 10MW PGM smelter on the eastern limb of the Bushveld, funded 100% by Independence Platinum and taking third-party UG2 concentrate from smaller miners. A 10MW PGM smelter on the western limb of the Bushveld, funded as a 50/50 JV with Tharisa, exclusively to smelt chromite reef concentrate from the Tharisa development. A 35MW PGM and base metals smelter on the northern limb to process Platreef concentrate from the Grass Valley project and other sources.
Braemore has provided some guidance on a likely development timeline.
Figure 6. Indicative Project Milestones Milestone Small 2MW commercial smelter First PGM alloy tapped Complete UG2 smelter DFS Complete 10MW UG2 smelting facility Complete full 35MW ConRoast DFS Decision to construct refinery Commission first full ConRoast smelter Commission first base metals refinery Source: Braemore Target August 2007 October 2007 March 2008 Early 2010 October 2010 Q1 2009 Late 2010 Late 2011 Status Complete Complete
However, we do not see this timeline as being consistent with recent JV announcements, and therefore use it as a guide only. We have assumed a different timeline that we think, at least for the moment, better reflects the likely outcome given the announcements to date.
We assume a different timeline
We take the view that development of a ConRoast facility for the smelting of UG2 concentrate remains the first priority. However, such a smelter would be equally able to smelt Platreef concentrate and so we have examined the possibility that concentrate from the Grass Valley project is initially processed in a 10MW UG2 smelter before the later construction of a dedicated 35MW Platreef smelter when additional feed and electricity supplies are secured. We have therefore assumed that Grass Valley and a small 10MW smelter would be the first developments, followed by a JV Cr smelter with Tharisa and finally a larger 35MW Platreef smelter.
Metals and Mining
Our assumed timeline is shown in Figure 7.
Figure 7. Alternative Timeline Milestone Complete 10MW UG2 smelter DFS Complete Grass Valley DFS Commission 10MW UGS smelter Commission Grass Valley Commission second 10MW Cr smelter with Tharisa Commission 35MW Platreef smelter Source: Matrix Corporate Capital Target March 2008 End 2008 Early 2010 Early 2010 Early 2010 Early 2013
Details should be further developed during 2008; however, we have assumed the following financial and contractual figures for the various South African developments Braemore is proposing.
Figure 8. Operating Assumptions 10MW smelter Capex Operating cost per tonne Offtake, % of PGM value On selling, % of PGM value PGM in concentrate Recovery PGMs produced 35MW smelter Capex Operating cost per tonne Offtake, % of metal value On selling, % of metal value Recovery Cu in concentrate Ni in concentrate PGM in concentrate Cu produced Ni produced PGMs produced Source: Braemore, Matrix Corporate Capital $200m $150/t 75% 95% 95% 1% 5% 60g/t 2850 tpa 14,250 tpa 550,000 oz pa $100m $200/t 75% 95% 100g/t 95% 245,000 oz pa
Metals and Mining
We have based our model on the figures released by Braemore at its annual general meeting in December 2008. However, we have made some modifications on the basis of our view of how the market might develop.
Commodity Price Assumptions
Despite recent lower prices across the board for most metals, we maintain a bullish view for longer-term metal prices due partly to our expectation of continued growth from the developing world, but mainly from ongoing supply-side tightness. We think Braemore could generate revenue streams from several metals.
Braemore could produce a basket of PGMs, all trading at different prices, higher or lower than that of Pt. The ultimate price received by the company would then be based on the mix of this basket. However, until this mix has been resolved, we have used the Pt price as a substitute, as we think the value reduction from lower priced metals such as Pd would be likely to be offset by higher priced metals such as Rh.
Strong PGM price growth in recent years
The platinum price has increased by over 300% over the past five years and is now trading at over $1,500/oz. However, we remain wary of the longer-term demand/supply balance in light of possible production increases and by advances being made by the major automobile manufacturers aimed at reducing the amount of PGMs required in catalytic converters. We have therefore taken a more prudent stance and assume an ongoing long-term price of $1,000/oz.
Ni is currently trading at around $29,000/t ($13/lb).
Ni price has come off May 2007 highs
Ni prices have fallen by 50% from a high of $55,000/t reached in May 2007, due to a combination of relaxation of extreme supply tightness at that time and concerns of demand reduction brought about by expansion of the supply of lower quality stainless steel.
Figure 9. Historical Ni Price
$60,000 $50,000 $40,000 Price/t $30,000 $20,000 $10,000 $0
Feb-06 May-06 Feb-05 May-04 May-05 Feb-07 May-02 May-03 May-07 Feb-02 Feb-03 Feb-04 Nov-04 Nov-03 Nov-05 Nov-01 Nov-06 Nov-02 Aug-04 Aug-03 Aug-05 Aug-06 Aug-02 Aug-07 Nov-07
Metals and Mining
Swing Ni producers are high cost, currently under pressure
The Ni price came off its May 2007 highs largely on the back of expansion of Chinese pig iron production (a low quality Fe/Ni alloy that could be fed directly into the Chinese stainless steel mills). Expansion of the pig iron market in China was fed primarily by direct shipping of high grade Ni laterite ore from South East Asian regions such as the Philippines. Such material is generally very high cost, and was thus only economic at high Ni prices. While accurate information is not readily available on these swing suppliers, anecdotally we understand that they have been under pressure since the Ni price fell back below $40,000/t. Concern has also been raised about demand growth because of expansion of the production of low Ni 200 series stainless steel in China (Appendix II). Again, however, this low Ni steel was developed in the face of very high Ni prices, but it remains a lower quality steel with limited applications and, in our view, limited growth potential. We take the view that expansion of these developments should be curtailed by the recent fall in the Ni price. We continue to remain concerned about the ability of the mining industry to meet increases in demand without having to rely on high cost sources such as Philippine laterites, and therefore use a long-term Ni price of $20,000/t as our base level.
“A royalty is defined as a payment made to government to compensate the community for the extraction of a non-renewable resource which it owns!” (Source:
Dept of Industry and Resources, of Western Australia)
Mineral royalties are ubiquitous, although terms vary across jurisdictions.
Western Australian royalties are fixed and stable
In Australia, the management of the resources industry is the responsibility of the individual states rather than the federal government. In Western Australia, royalties for most base metals are a flat percentage of metal value, although the actual percentage varies according to the product produced (metal or an intermediate concentrate). However, the base case is 2.5% of metal value. Western Australian royalties do not include any provisions for the taxation of excess profits and there are currently no plans to do so.
In South Africa, the mining industry is governed at the central government level, administered by the Department of Minerals and Energy.
South African royalties influx and profit linked
The royalty system in South Africa is currently in a state of flux. Historically, the South African royalty system was similar to that in Australia where a flat rate was levied against the value of metals. However, a draft royalty bill is currently in circulation that would change this to a profit-based system. The proposed formula is as follows and is scheduled to be in place by late 2009: Royalty % = EBITDA/(gross sales x 12.5) x 100 An added complication exists with Braemore because of its position as an intermediate processor of minerals, and the question of whether it is liable for royalties at all. Our understanding of the legislation as it currently stands is that royalties are payable by the miner rather than the downstream processor, and we have assumed this in our model until further clarification. We have assumed that this new royalty system will be in place and have applied it to Braemore’s equity component of revenue from Grass Valley, but not to its smelting operations.
Metals and Mining
Share Capital and Debt
Braemore currently has almost 690m shares in issue, with 50m options and warrants outstanding, all of which are in the money. In addition, the largest shareholder, Atomaer, holds the right to be issued with 305m performance shares upon development of the Western Australian Ni business.
Current fully diluted share base of 1,032m shares, 50% above current issued capital
We have assumed that all options, warrants and performance shares will be exercised, and therefore work on a fully diluted basis of approximately 1,032m shares, a level 50% above the current issued capital. At the current share price, this equates to a market capitalisation of c£173m. If all of the outstanding options were exercised, revenue to Braemore would equate to c£5.2m; however, we have not included this in our model, as we cannot predict the timing of such transactions. By our calculations, Braemore is committed to over $650m in capital expenditure. Because of the staggered nature of the developments, cash flow from early developments could be used to fund construction of later projects, therefore reducing the requirement for external funds. We have forecast that Braemore could require c$280m in additional funds and have assumed the debt-to-equity split would be roughly 70:30.
Assume £40m capital raising in late 2008
We have therefore assumed a £40m equity raising in late 2008, with an additional £100m in debt being required from external sources. We have assumed this additional equity is raised at 15p per share.
We have modelled Braemore’s three proposed business investments separately to calculate gross profits and capex requirements, and then consolidated these into Braemore’s cash flow according to the likely equity attributable to Braemore. In each case, although we have assumed that Braemore maintains a controlling stake in each business, we have only included our assumed level of Braemore’s equity into its balance sheet. We have calculated cash flows of all businesses in US dollars and converted them back to sterling in the Braemore accounts.
Western Australian Ni Business
Ni revenue expected to commence in Q4 2010
On the basis of our commodity price and cost assumptions, we forecast gross operating profit from Ni production at Leinster in Q4 2010 of $105m, increasing to $420m in 2011 when full production is achieved. We forecast this to increase to over $600m in 2013 when additional production from Kambalda brings total Ni production to over 40,000t. We have only assumed production from Leinster and Kambalda, and therefore have taken into account the Leinster dumps being exhausted by 2019, resulting in a significant reduction in production and cash flow. Braemore has suggested that production from Mt Keith could be brought on line to supplement the production profile, but the grade of these tailings has led us to assume that this will not be the case. Taking into account additional revenue from by-product metals and BHPB’s likely 50% stake in the business, we forecast gross revenue attributable to Braemore to be $72m in Q4 2010, increasing to $290m in 2011 and to over $400m in 2013, remaining at that level before falling away in 2020 when we forecast Leinster to cease production.
$400m pa gross profit by 2013
We forecast Braemore’s contribution to capex at both Leinster and Kambalda to be $350 over five years to 2012, with a $2m annual sustaining requirement.
Metals and Mining
Figure 10. Western Australian Ni Tailings Cash Flow projections WA nickel business US$'000s Ni price LME $/t Cash cost /lb Capex - Leinster Capex - Kambalda Total Capex Leinster Mtonnes processed Leinster Grade Recovery Ni produced t Kambalda Mtonnes processed Kambalda Grade Recovery Ni produced t Total Ni produced Offtake % of LME Sales revenue Ni Less production costs BHP royalty at 5% LME Less government royalty Gross Ni profit By product credit % of Ni By product sales Less government royalty Gross by product sales BHP project equity (Ni only) Braemore gross profit (inc by products) Braemore capex Source: Matrix Corporate Capital estimates 10,000 90,000 50% 50% 7,452 90% 134,136 (18,630) (6,707) (3,353) 105,446 15% 20,120 (503) 19,617 50% 72,340 125,000 29,808 90% 536,544 (74,520) (26,827) (13,414) 421,783 15% 80,482 (2,012) 78,470 50% 289,361 51,000 29,808 90% 536,544 (74,520) (26,827) (13,414) 421,783 15% 80,482 (2,012) 78,470 50% 289,361 76,000 0.41% 90% 0.41% 90% 0.41% 90% 3.50 0.41% 90% 12,915 42,723 90% 769,014 (106,808) (38,451) (19,225) 604,530 15% 115,352 (2,884) 112,468 50% 414,734 2,000 3.50 0.41% 90% 12,915 42,723 90% 769,014 (106,808) (38,451) (19,225) 604,530 15% 115,352 (2,884) 112,468 50% 414,734 2,000 3.50 0.41% 90% 12,915 42,723 90% 769,014 (106,808) (38,451) (19,225) 604,530 15% 115,352 (2,884) 112,468 50% 414,734 2,000 3.50 0.41% 90% 12,915 42,723 90% 769,014 (106,808) (38,451) (19,225) 604,530 15% 115,352 (2,884) 112,468 50% 414,734 2,000 1.80 0.46% 90% 7,452 7.20 0.46% 90% 29,808 7.20 0.46% 90% 29,808 7.20 0.46% 90% 29,808 7.20 0.46% 90% 29,808 7.20 0.46% 90% 29,808 7.20 0.46% 90% 29,808 20,000 180,000 250,000 20,000 180,000 2008E 20,000 2009E 20,000 2010E 20,000 2.50 250,000 2011E 20,000 2.50 2,000 100,000 102,000 2012E 20,000 2.50 2,000 150,000 152,000 2013E 20,000 2.50 2,000 2,000 4,000 2014E 20,000 2.50 2,000 2,000 4,000 2015E 20,000 2.50 2,000 2,000 4,000 2016E 20,000 2.50 2,000 2,000 4,000
Metals and Mining
South African PGM
Braemore is currently producing PGMs from the small ConRoast smelters it has leased from Mintek in Johannesburg. The material that is being smelted is high Cr revert tails from a third-party ferrochrome smelter, but Braemore has not disclosed the source or PGM content of this material. We are therefore unable to calculate returns from this operation, and so use the figures presented by Braemore of c$3m gross profit per year.
Forecast first large-scale revenue in 2010, increasing to over $100m in 2013
We have assumed that Braemore would first develop a standalone UG2/Platreef smelter in conjunction with the Grass Valley mining project, followed by a Cr smelter in JV with Tharisa and a large 35MW Platreef smelter. On these assumptions, and taking into account a 26% BEE equity requirement, we forecast significant attributable revenue commencing in 2010 of $21m from the first smelter, increasing to $105m in 2013 if the third smelter is brought on line. We forecast a capex requirement for Braemore of over $260m by the end of 2012.
Metals and Mining
Figure 11. South African PGM Projected Cash Flow – Independence Platinum (InPt) SA Ni/PGE business US$'000 Mintek trial smelter InPt equity Gross profit 100% 2,000 100% 3,000 100% 3,000 100% 3,000 100% 3,000 100% 3,000 100% 3,000 100% 3,000 100% 3,000 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
#1 smelter 10MW InPt equity Capex Operating cost $/t Tonnes processed PGM grade in con g/t Recovery PGMs produced oz Offtake percentage On selling percentage Sales Less operating Gross profit 100% 30,000 100% 70,000 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 100% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677
#2 smelter 10MW (JV) InPt equity Capex Operating cost $/t Tonnes processed PGM grade in con g/t Recovery PGMs produced oz Offtake percentage On selling percentage Sales Less operating cost Gross profit Source: Company data, Matrix Corporate Capital estimates 50% 50,000 50% 50,000 50% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 50% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 50% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 50% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 50% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677 50% 1,000 200 80,000 100 95% 245,161 75% 92% 41,677 (16,000) 25,677
Metals and Mining
Figure 11 (cont’d). South African PGM Projected Cash Flow – Independence Platinum (InPt) 2007 #3 smelter 35MW InPt equity Capex Operating cost $/t Tonnes processed Cu grade in con % Ni grade in con % PGM grade in con g/t Recovery Offtake % On selling % Cu produced t Ni produced t PGM produced Sales Less operating cost Gross profit 95% 75% 92% 95% 75% 92% 100% 100,000 100% 100,000 100% 2,000 150 300,000 1% 5% 60 95% 75% 92% 2,850 14,250 551,613 145,131 (45,000) 100,131 100% 2,000 150 300,000 1% 5% 60 95% 75% 92% 2,850 14,250 551,613 145,131 (45,000) 100,131 100% 2,000 150 300,000 1% 5% 60 95% 75% 92% 2,850 14,250 551,613 145,131 (45,000) 100,131 100% 2,000 150 300,000 1% 5% 60 95% 75% 92% 2,850 14,250 551,613 145,131 (45,000) 100,131 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Totals Capital expenditure InPt Gross Profit InPt 30,000 95,000 26,000 25,677 101,500 38,516 101,500 38,516 3,500 138,647 3,500 138,647 3,500 138,647 3,500 138,647
Braemore equity BEE % Braemore capex ($'000s) Braemore revenue ($'000s) 2,000 Source: Company data, Matrix Corporate Capital estimates 0% 26% 22,200 2,220 26% 70,300 2,220 26% 19,240 21,221 26% 75,110 30,722 26% 75,110 30,722 26% 2,590 104,819 26% 2,590 104,819 26% 2,590 104,819 26% 2,590 102,599
Metals and Mining
Pan Palladium JV
Although a feasibility study still needs to be completed before a decision on whether to proceed with the Grass Valley project can be made, we have assumed in our model that it will proceed as per the pre-feasibility study published by PDD in mid-2006.
Production expected to commence in 2010
We take the view that the second of PDD’s projects (Aurora) is still too early stage and assume it will not proceed and thus ascribe no value to it. As a result, we assume all of the equity issues and options related to the Grass Valley investment are exercised, and that the final issue of 10 million shares predicated on completion of the Aurora BFS are not issued. We have assumed that Braemore would make a contribution to the required capex in proportion to its 37.5% direct equity in the project, and would receive revenues net of cash operating costs in the same proportion. We have booked Braemore’s capex contribution to its consolidated balance sheet and depreciated it against its consolidated revenue.
Only assumed revenue from Braemore direct equity in the project – no revenue from PDD
If PDD were to issue no further shares, Braemore would own c42% of PDD in addition to its direct equity in the Grass Valley project. However, given that we cannot predict how PDD’s revenue will be applied, or how it will fund its share of developing Grass Valley, we have assumed that no revenue from PDD will flow to Braemore. Using the figures provided in the PDD pre-feasibility report, we forecast the project has the potential to generate a gross profit of $83m pa from 2010 for eight years, of which $31m pa would flow directly to Braemore.
Metals and Mining
Figure 12. Grass Valley Project Projected Cash Flow Grass Valley project US$'000 Mining rate (ktpa) Milling rate (ktpa) Concentrate (ktpa) Concentrate PGM (koz pa) Con PGM grade (g/t) Con Ni-Cu (tpa) Con Ni-Cu (%) Outgoings on feasibility Capex Cash cost $/t ore Opex Payable % in con Sales PGM Sales Ni Total sales Gross profit Royalty % Less royalty Gross profit net of royalty Braemore outgoings Equity in Grass Valley BFS cost Direct share of capex Total capital investment Outgoings on option payments 5,000,000 20,000,000 20,000,000 20,000,000 20,000,000 Total equity investment Braemore gross profit Source: Matrix Corporate Capital estimates (1,000) (6,000) (8,000) 31,154 (12,000) 31,154 (1,000) (6,000) (8,000) (12,000) (16,000) (16,000) 31,154 31,154 31,154 31,154 31,154 (9,000) 37.50% (9,000) (41,250) (41,250) (750) (750) (750) (750) (750) (750) (750) (750) (750) (750) (750) (750) (750) (750) 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 9,000 110,000 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2,000 16 57,600 75% 90,000 57,900 147,900 90,300 4.88% (7,224) 83,076 2008E 2009E 2010E 16,740 3,600 64 120 58 3,860 6.03% 2011E 16,740 3,600 64 120 58 3,860 6.03% 2012E 16,740 3,600 64 120 58 3,860 6.03% 2013E 16,740 3,600 64 120 58 3,860 6.03% 2014E 16,740 3,600 64 120 58 3,860 6.03% 2015E 16,740 3,600 64 120 58 3,860 6.03% 2016E 16,740 3,600 64 120 58 3,860 6.03%
Metals and Mining
Our analysis of Braemore is undertaken on the basis of the cash flow generated by its equity in the various operations it is proposing to develop. We have assumed that all businesses are developed independently with a variety of JV partners, but are funded centrally by Braemore with assets, debt, depreciation and taxes all brought back to its consolidated books. We expect the company to show minor net earnings of £1m in 2008 stemming from earned interest and revenue from its small trial smelters in Johannesburg. We have predicted first revenue from the main Ni and PGM assets in 2010, showing net earnings of £8.5m (0.66p per share) increasing gradually to over £216m (16.6p per share) in 2017 when all of the operations should be on line.
Over half of total capex could be funded from early cash flow
Our model shows a total start-up capex requirement (Braemore’s equity share) of approximately £325m ($650m) spread over five years. However, given this length of time, and that the fact that capex might be spread across up to six projects, cash flow from the early projects should be able to fund the later projects. On this basis, our model suggests that Braemore might be able to fund more than half of its capex requirement from internal cash flow with an additional £140m of external capital required. We have assumed a £40m equity raising in 2008, with debt being added in 2009, reaching a peak of £102m (including capitalised interest) next year, and being paid off by 2013.
Capital raising in 2008
Metals and Mining
Figure 13. Income Statement Profit and loss £'000s Administrative expenses Share options expensed Gross revenue from operations EBITDA Per share Less depreciation EBIT Tax charge Interest payable Interest receivable Net earnings Per share (p) Dividends paid Retained earnings Dividend cover PE at 20p Source: Company data, Matrix Corporate Capital estimates 29 3.3 3.7 1,011 (139) 8,536 74,685 67,036 901 1,011 0.09 751 (139) -0.01 119 8,536 0.66 (1,074) (1,191) 110 (890) (1,074) (1,191) 2006 (523) (551) 2007 (934) (257) 1,110 110 0.00 1,110 (890) 0.00 62,358 59,358 0.05 (47,879) 11,478 (3,061) 175,618 172,618 0.14 (60,765) 111,853 (32,008) (5,551) 391 74,685 5.75 175,618 171,618 0.14 (76,151) 95,467 (28,730) (1,914) 2,212 67,036 5.16 275,353 271,353 0.22 (76,885) 194,468 (60,694) (123) 7,969 141,620 10.90 (47,207) 94,413 3 1.74 275,353 270,353 0.22 (77,619) 192,734 (62,734) (132) 16,512 146,380 11.27 (48,793) 97,587 3 1.68 275,353 270,353 0.22 (39,177) 231,176 (76,734) (141) 24,745 179,046 13.78 (59,682) 119,364 3 1.38 274,243 269,243 0.22 (20,458) 248,785 (84,305) (151) 32,384 196,712 15.14 (65,571) 131,142 3 1.25 2008E (1,000) 2009E (2,000) 2010E (3,000) 2011E (3,000) 2012E (4,000) 2013E (4,000) 2014E (5,000) 2015E (5,000) 2016E (5,000)
Metals and Mining
Figure 14. Balance Sheet Balance sheet £’000s Assets Non-current assets Intangible assets Plant and equipment Investment in subsidiaries (Pan Palladium) Trade and receivables Capitalised interest on long term debt 30,822 Current assets Trade and receivables Cash and equivalents Total assets Liabilities Current liabilities Trade and other payables Non current liabilities Long-term project debt Total liabilities Net assets Equity Issued capital Share premium Merger reserve Other reserves Minority interest Retained profits/losses Total equity Source: Company data, Matrix Corporate Capital estimates (896) 34,638 848 4,734 29,395 557 977 11,990 29,395 814 17 (1,823) 41,370 1,177 51,790 29,395 814 17 (812) 82,381 1,177 51,790 29,395 814 17 (951) 82,242 1,177 51,790 29,395 814 17 7,585 90,778 1,177 51,790 29,395 814 17 82,270 165,463 34,798 41,370 792 82,381 82,800 83,592 82,242 109,296 110,088 90,778 54,847 55,639 165,463 160 792 792 792 792 792 54 3,922 3,976 34,798 322 8,570 8,892 42,162 322 27,478 27,800 83,173 322 2,564 2,886 165,834 322 1,484 1,806 200,866 322 12,055 12,337 221,102 33,270 55,373 43 30,812 10 33,191 36 34,191 20,639 500 43 35,191 124,214 3,500 43 2,800 162,948 28,953 162,564 7,500 43 9,296 199,060 22,515 172,667 13,500 43 14,847 208,725 2006 2007 2008E 2009E 2010E 2011E
Metals and Mining
Figure 15. Cash Flow Statement Cash flow statement £’000s Operating activities Operating profit/loss Non-cash adjustments Depreciation Foreign exchange adjustment Share options expensed Working capital Increase in debtors Increase in creditors Tax Net cash flow in operating activities Investing activities Exploration costs (intangible) Payments to acquire plant and equipment WA nickel capex SA PGM capex Pan Palladium capex Pan Palladium equity investment Payment for investments Loan to controlled entities Payments to acquire intangible assets Interest received Net cash flow from investing activities Financing activities Net proceeds from issue of shares Net cash acquired on acquisition of subsidiary Debt drawdown Debt repayment Dividends paid Net cash flow from financing Net change in cash Cash at beginning of period Cash and equivalent at end of period Source: Company data, Matrix Corporate Capital estimates 7,404 4,648 3,922 8,570 40,000 18,908 8,570 27,478 80,000 (24,914) 27,478 2,564 20,000 (380) 2,564 2,184 (60,000) 11,271 2,184 13,456 80,000 20,000 (60,000) 0 0 61,571 13,456 75,026 (47,207) (47,207) 168,684 75,026 243,710 (48,793) (48,793) 173,068 243,710 416,778 (59,682) (59,682) 156,416 416,778 573,194 (65,571) (65,571) 149,494 573,194 722,688 7,404 40,000 (1,643) 268 (1,402) 901 (21,199) 751 (104,024) 119 (77,376) 391 (70,039) 2,212 (82,718) 7,968 4,298 16,512 12,842 24,749 21,079 32,397 28,727 (27) (1,000) (20,600) (5,000) (11,100) (4,500) (500) (1,000) (100,775) (45,000) (35,150) (20,625) (3,000) (1,000) (72,495) (62,500) (9,620) (375) (4,000) (1,000) (63,430) (25,500) (37,555) (375) (6,000) (1,000) (75,930) (38,000) (37,555) (375) (8,000) (1,000) (2,670) (1,000) (1,295) (375) (1,000) (2,670) (1,000) (1,295) (375) (1,000) (2,670) (1,000) (1,295) (375) (1,000) (2,670) (1,000) (1,295) (375) (1,354) 107 (890) (48) 97 (311) (67) (3,061) 56,296 (32,008) 140,610 (28,730) 142,889 (60,694) 210,659 (62,734) 207,619 (76,734) 193,619 (84,305) 184,938 2 27 551 1 (43) 257 (3) (1,074) (1,191) 110 (890) 59,358 172,618 171,618 271,353 270,353 270,353 269,243 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
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As we have discussed in previous notes, we think that a resource company could expect to be valued in different ways at different points in its life. We have argued that, in the pre-development stage, the most appropriate approach would be to value the company in terms of the NPV of projected future cash flow, discounted for the risks and hurdles that it has yet to overcome. Once the company is nearing production, when most technical hurdles have been overcome and price and cost assumptions are becoming more certain, we would expect valuation to more towards a PE basis, with the relevant multiple being set by the market in relation to the company’s peers or with regard to its potential as a takeover target.
No soil has been turned on any of the proposed Braemore developments, and indeed no bankable feasibility studies yet exist. The company is therefore clearly in the NPV stage, with many questions yet to be answered.
NPV of £1,065 at current metal prices
Our model indicates an NPV valuation (10% discount rate) of £580m (45p) on the basis of our commodity price assumptions. The NPV is very sensitive to commodity price assumptions, and by using current market prices, our NPV valuation increases to over £1bn.
Figure 16. NPV Sensitivity to Commodity Prices Commodity price assumptions Model -20% Model Model +20% Current market Source: Matrix Corporate Capital estimates NPV £350m £580m £800m £1,065m Per share 27p 45p 62p 82p
We have also considered the impact of delaying the South African PGM developments because of problems with electricity supply. We find that the NPV impact is not large, as we had already forecast the PGM business to start slowly and in a small-scale way with a 10MW smelter.
Figure 17. NPV Sensitivity to PGM Development Delay PGM timing As planned Delayed 1 year Delayed 2 years Source: Matrix Corporate Capital estimates Lower target price to 15p NPV £580m £572m £564m Per share 45p 44p 43.5p
Our current base-case NPV valuation of 45p per share requires time and significant investment and is thus not without risk. In our initiation note, we discounted this NPV figure to 15% to allow for the technical risks associated with the developments and our lack of understanding of how the business would develop. However, our enhanced understanding of the technical aspects, simplicity and robustness of all the developments, coupled with the NPV upside evident in the current metal prices, we are prepared to double this risk factor to 30% and subsequently reduce our price target to 15p. We expect further announcements during 2008 relating to additional JVs in South Africa and firming of financial details relating to previously announced JVs. While such announcements might increase our confidence in our assumptions and projections, we remain of the view that Braemore is probably four years away from significant profits.
Metals and Mining
Our price assumptions are 45% below current spot prices
Like any mining company, Braemore is subject to the vagaries of commodity prices. Although we remain bullish on medium-term metal prices, in our model we have assumed prices c45% below current spot prices in order to reduce this downside risk. Even in the event of a drop in prices, by virtue of its low cost base, we think Braemore should remain a favoured stock among its peers.
Debt markets would need to settle
We have assumed a 70:30 debt to equity mix to meet Braemore’s capex needs. However, given the current global debt crisis, the company’s ability to obtain this level of debt at reasonable terms may be questioned. However, given that debt would probably not be required until 2009 or later, and the main assets are in reasonably safe jurisdictions, we have assumed that this debt will be sourced in time.
Braemore is a small company proposing to construct two large Ni mines and three large smelters on two continents at a total capital cost of over $650m.
Staff are required
At the moment the company maintains a small staff and does not, in our view, have the internal capacity to manage these projects. The company would be required to staff up, and we have assumed it will do so, but we remain cognisant of the staff pressures currently prevalent in the industry.
Cost Inflation Risk
Capital and operating costs have increased by over 50% in the past five years across the mining industry and show no signs of stabilising. Given the lead times of the proposed projects, the risk of cost overruns exists. In this instance we have assumed the company has already taken a conservative stance on its published cost estimates, which we have then inflated again by roughly 10% to provide an additional buffer. This risk remains and will need to be monitored as the developments progress.
Technology is not new
Very little of the technology associated with the proposed development of the smelting operations is new – the primary component of the Mintek intellectual property lies in the combination, fine tuning and application of various pre-existing technologies to specific metallurgical problems. DC Arc smelters have been in existence for several decades and several large units are currently being constructed in southern Africa to smelt titanium concentrates. The ConRoast component of the process is also reasonably simple – a fluid bed roaster is a large steel vessel in which hot air is blasted through a fine metallic concentrate. It is simple and robust, with few moving parts. Braemore has claimed that the entire processing stream is less complicated and less risky that the existing six-in-line smelter processing stream as fewer stages are required and those stages are in themselves less complicated and more robust.
Metals and Mining
Risks, however, will stem from execution and sourcing of equipment. The mining industry is under pressure on all fronts and access to skilled labour and material is our prime concern. Technical risk is shown in many ways, however several concern us: 1. Specialised components. Although most of the technology is reasonably simple, a major component of DC arc furnaces are large-scale DC rectifiers that convert external AC power to the DC form required by the smelters. Power rectification at the very high power levels required by a furnace is a specialised field with few global suppliers. Braemore has started ordering such components in order to attempt to overcome this issue Quality. A furnace operating at 15,000°C requires robust construction of its main components. There have been recent examples of furnace failure due to poor workmanship of key components – the most recent being at the International Ferro Metals Cr smelter in Rustenburg, where a poorly manufactured pressure seal resulted in complete shutdown of the smelter for several months. Electricity. South Africa is currently suffering severe power shortages, especially in the industrialised north of the country, as expansion of demand from mining and industrial users outstrips generation capacity. Arc furnaces are huge consumers of electricity and are particularly vulnerable as furnaces cannot simply be turned on and off – loss of power for any length of time during the process could result in cooling of the molten slag and matte and result in days of stand down as the smelter is emptied and restocked. We would like to see expansion of supply in South Africa and long-term price and supply security agreements in place with Eskom. Leaching of Ni from tailings consumes large quantities of sulphuric acid. Acid prices have increased markedly in recent years due to increased demand from mining and agricultural users. Braemore plans to construct an acid plant on site to manufacture acid from sulphur if raw sulphur supplies can be sourced. Acid supplies will remain under local pressure as the nearby laterite Ni producers consume large quantities; however, risks could be reduced by having BHPB as a JV partner as it produces large quantities of acid from its smelters at Kalgoorlie and Olympic Dam.
On our assumed capital raising requirements, Braemore’s largest shareholder, Atomaer, would own roughly 50% of the company. While this might arguably be viewed as an inappropriate overhang in the market and therefore have a depressing effect on the share price, we do not see this having any impact on the ability of the company to execute its plans. We take the view that Atomaer, as the effective founder of Braemore, has a vested interest in seeing the value of the company increase, and would expect its shareholding to be reduced in an orderly fashion without an overly negative impact on the market.
Metals and Mining
Platinum Group Metals
The platinum group metals (PGMs) or platinum group elements (PGEs) comprise six chemically similar elements within the Group VIII Transition Metals of the Periodic Table, namely: • • • • • • Platinum (Pt) Palladium (Pd) Rhodium (Rh) Rutherium (Ru) Iridium (Ir) Osmium (Os)
These elements often occur with copper (Cu) and nickel (Ni) and, at times, gold (Au).
Once refined, individual metals are priced and sold separately, but prior to refining, a concentrate or smelted product is valued according to a ‘basket price’ based on the relative concentrations of the contained PGMs. Although there are six PGMs, three – platinum, palladium and rhodium – account for the bulk of the value. Depending on the constituents, basket prices are generally quoted as either: • • 2E (platinum + palladium); or 4E (platinum + palladium + rhodium + gold).
Metals and Mining
Much of Braemore’s future revenue stream is based on Ni, the price of which is almost entirely driven by its use in stainless steel. However, the quantity of Ni contained in stainless steel varies with the various stainless grades, and so the demand for Ni is driven not only by the total stainless production but also by the mix of grades. Ni does not make steel stainless to any significant degree. The property of being stainless (resistant to corrosion) stems primarily from the addition of chromium (Cr), with other elements such as Ni added to modify the durability and workability of the steel to create different grades of stainless for a variety of applications. Stainless steel can be divided into five basic categories: • • • • • Austenitic Ferritic Duplex Martensitic Precipitation hardening
The first two of these categories account for over 90% of total production.
Ferritic versus Austenitic
The most fundamental stainless division is based on crystal structure, and it is the addition of Ni that determines this distinction. In a purely ferritic steel, the Fe and Cr atoms are arranged on the corners of a cube and at the centre of that cube (body-centric cubic structure). The addition of Ni changes this structure such that the Fe, Cr and Ni atoms are arranged on the corners of the cube and the centre of each face (face-centred cubic structure).
Figure 18. Body-Centred Cubic versus Face-Centred Cubic
Source: Key to Steels
While the difference may appear minor, it is fundamental on an atomic level and profoundly affects the physical properties of the steel. As shown in Figure 19, austenitic stainless is tougher, more ductile and more readily welded than ferritic stainless, and therefore a more desirable metal for almost all applications.
Metals and Mining
Figure 19. Stainless Properties Properties Toughness Ductility Weldability Thermal expansion Stress corrosion cracking resistance Magnetic properties Source: Key to Steels Austenitic Very high Very high Good High Low Non-magnetic Ferritic Moderate Moderate Limited Moderate Very high Ferro-magnetic
While the ferritic-austenitic division is a metallurgical distinction, commercially, stainless steel varieties are designated by a numbered series, describing the wide variety of alloy compositions for specific applications. Historically, austenitic stainless varieties were referred to as the 300 series, while ferritic types were named the 400 series. Because of lower Ni content, the 400 series alloys are more brittle and have been limited to lower value or less critical applications, while the 300 series alloys have commanded the bulk of the market. However, while Ni is the element that most readily brings about the ferritic to austenitic transformation, other common elements such as nitrogen (N) and manganese (Mn) also have this property, albeit requiring a more complex process, and have been used in stainless production since the 1930s. Such CrMn steels are referred to as the 200 series. Due to reduced Ni concentrations, the 200 series is cheaper than the 300 series; however, the series suffers from reduced corrosion resistance and malleability, and is therefore regarded as an intermediate product between the 300 and 400 series.
Figure 20 . Stainless Steel Series – Approximate Constituents Series Cr % 200 series 300 series 400 series Austenitic Austenitic Ferritic 14-20 14-20 14-20 Ni % 1-6 7-10 <1 Mn % 5-10 <2 <1
Source: Matrix Corporate Capital
Prior to 2000, little 200 series material was produced as the 300-400 demarcation was sufficient to cover the variety of applications and the price of Ni was too low to warrant investment in the 200 series. Significant production did not begin until 2000, as the price of Ni began to increase and the demand for stainless from within the Chinese market expanded rapidly, exceeding the domestic Ni supply. The price of Ni reached an all-time high of $55,000/t in May 2007, bringing about an increase in investment for the production of 200 series. However, the Ni price rapidly fell away to levels roughly half the May peak, removing much of the commercial driver for further 200 series expansion. Production of 200 series stainless is a different process from that of 300 series, and thus it could be argued that this investment in Chinese production capacity, once made, will not come off line, and the high levels of 200 production will be here to stay. However, the combination of the greatly reduced Ni price and the inherent lower quality of the 200 series could put a cap on further expansion. Anecdotally, there is resistance in western markets to 200 series, because of the degree to which it can be unknowingly substituted for better quality 300 series stainless in high-end applications. Separating 300 series from 400 series is relatively straightforward as 400 series is magnetic and 300 series is not. However, 200 series is an austenitic stainless and so also non-magnetic and thus largely indistinguishable from 300 series on visual inspection.
Metals and Mining
The Bushveld Complex
The Bushveld Igneous complex in South Africa and the Sudbury Basin of Canada are by far the two largest layered igneous complexes on the planet. Although fundamentally similar in gross geology, the underlying chemistry differs so that Sudbury is the largest Ni source in the world, while the Bushveld contains the majority of the world’s Cr and PGMs. The Bushveld is situated approximately 50km north of Johannesburg and is a 500km-wide layered mafic intrusion containing numerous well-defined mineralised horizons (reefs) within the Rustenburg Layered Suite. The complex is divided into two southern limbs (East and West Limbs) that have historically formed the basis of the majority of South African PGM and Cr production, and a smaller northern limb, which is emerging as an important Ni province.
Figure 21. Bushveld Igneous Complex
Source: University of Witwatersrand, Department of Geology
The intrusion was emplaced as molten material and slowly differentiated into four main zones as it cooled – lower zone, critical zone, main zone and upper zone. In terms of metal potential, it is the critical zone that is of interest as it contains all of the economic Cr, PGM and Ni/Cu. Of primary interest to Braemore is the upper sections of the critical zone containing the Merensky and UG2 reefs that are the focus of current PGM attention on the east and west limbs. The rich Cr seams that produce the bulk of the world’s Cr lie beneath these two PGM reefs.
Metals and Mining
Figure 22. Merensky and UG2 Reefs
Source: Northam Platinum
The Merensky and UG2 reefs are roughly similar in their metal content and value per tonne as shown in Figure 23, although the UG2 has a slightly higher per tonne value by virtue of its higher Rh grade. However, the primary difference between the two relates to their respective positions in the stratigraphy – the Merensky reef sits higher and is hosted within a silicate matrix, while the lower UG2 is hosted within a chromite matrix. As explained in Appendix IV, the valuable metals can be easily removed from a silicate matrix, but the chromite matrix of the UG2 causes serious smelting problems. As a result, while the UG2 has a higher in-situ value, it is the Merensky that has always formed the overwhelming bulk of Bushveld PGM production.
Figure 23. Reef Comparisons – Average Metal Content Metal price $/oz Platinum Pt Palladium Pd Rhodium Rh Ruthenium Ru Iridium Ir Osmium Os Gold Au Total PGM+Au $/lb Nickel Ni Copper Cu Total Value $/t Chromite content % Source: Mintek 12 3 0.13 0.08 $34.32 $5.28 $250.41 0.1% 0.07 0.018 18.48 1.188 $279.90 30% 0.36 0.18 95.04 11.88 $204.05 1445 345 6800 50 425 380 800 Merensky reef g/t 3.25 1.38 0.17 0.44 0.06 0.04 0.18 $/t $151.49 $15.36 $37.29 $0.71 $0.82 $0.49 $4.65 $210.81 UG2 reef g/t 2.46 2.04 0.54 0.72 0.11 0.1 0.02 $/t $114.67 $22.70 $118.45 $1.16 $1.51 $1.23 $0.52 $260.23 Platreef g/t 1.26 1.38 0.09 0.12 0.02 0.02 0.1 $/t $58.73 $15.36 $19.74 $0.19 $0.27 $0.25 $2.58 $97.13
The move from Merensky to UG2 is being driven on two fronts: first, by the existing major producers whose Merensky resources are becoming deeper and less economically attractive and therefore need to move into UG2 production to maintain their revenue streams; and second, by emerging junior miners who are developing new resources.
Metals and Mining
The northern limb differs from the east and west limbs in that the critical zone is largely absent. PGM and base metal concentrations instead occur in a unit termed the ‘Platreef’ at the base of the main zone. The Platreef has lower PGM levels than either the Merensky or UG2, but has significantly higher Ni grades. Most importantly, the reef is much thicker and therefore amenable to cheaper open-pit mining operations. The Platreef has seen little historical development as it has been overshadowed by the far greater in-situ value of the two PGM reefs. However, this is beginning to change with several developments being considered.
Metals and Mining
Most metallic minerals that exist in economic concentrations were formed at depth in the earth’s crust, at high pressures, high temperatures and in the absence of oxygen. The chemistry of such a reducing environment dictates that these metals often have a particular affinity for sulphur and thus most of the major metallic minerals, such as chalcopyrite CuFeS2 and bornite Cu5FeS4 (copper), pentlandite (Fe,Ni)9S8 (nickel), galena PbS (lead), sphalerite ZnS (zinc), etc, exist as sulphide compounds. Although the PGMs do not in themselves readily form sulphide compounds, on the periodic table of elements they belong to the Group VIII transition metals with iron, copper and cobalt and therefore show similar chemical properties and a close geological affinity. In its simplest terms, smelting of PGM ores is the application of heat and chemical additives to separate the PGMs and other valuable sulphide metals from the waste oxide and silicate minerals (gangue). The metallic sulphide minerals tend to have a lower melting temperature and higher density than the gangue minerals and therefore melt first and sink to the bottom of the furnace – this ‘phase separation’ results in two separate liquid layers that can then be tapped off at different points in the furnace, the sulphide melt being tapped from below as ‘matte’ for further processing, while the top ‘slag’ layer is removed and discarded. Most PGM smelting in South Africa takes place in ‘six-in-line’ smelters, a form of submerged arc furnace. Six large graphite electrodes are lowered into the smelting material and a large AC voltage applied across them. Depending on the resistance of the material, a current of perhaps 30,000 amps will flow between the electrodes either as an arc or by direct flow, generating a temperature of approximately 1700°C, sufficient for smelting of Merensky ore.
Figure 24. Six-in-Line Smelter
Source: Matrix Corporate Capital
The matte output from this process is a more concentrated material, rich in metal sulphides (especially iron, nickel and copper), which act as a collector phase for the PGMs. After being removed from the furnace, this matte is further processed in a ‘converter’ – a large crucible through which superheated air is blown, to oxidise and thus remove most of the sulphur and much of the iron – leaving a low iron metal alloy that is then sent to a refinery to be broken down into its constituent metals.
Metals and Mining
This smelter-converter combination works well for low-chromite Merensky ore and will in general recover in excess of 95% of the contained PGMs. However, there are two primary problems: chrome and sulphur.
The Problem with Chrome
Problems with the six-in-line furnace arise when attempting to smelt concentrate from the UG2 reef. Chromite (Cr2O3 or FeCr2O4) is a problem in these smelters, because it has a higher melting point than either the matte or slag phase (roughly 2200°C) usually seen in the Merensky operation, but has a density lying between the two phases.
Figure 25. Typical Melting Temperatures and Densities of PGM of Smelter Components Material Typical PGM matte Typical PGM slag Chromite Source: Matrix Corporate Capital Melting point °C 1050 1500 2200 Density g/cc 6.5 3.5 4.5
The result is that, at normal six-in-line operating temperatures of 1700°C, the chromite does not melt, but forms a solid layer between the slag and the matte phases, or coats the furnace walls. The intermediate layer greatly impedes tapping of the matte and slag phases and is in itself difficult to remove, while coating of the smelter walls will in time reduce the volume and efficiency of the smelter, ultimately requiring a major overhaul. Under normal operating conditions, up to 1.5% chromite in smelter feed can be tolerated. The only way that higher chromite levels can be tolerated in a six-in-line smelter is to increase the operating temperature of the furnace so that chromite melts and is absorbed into the overlying slag. However, the impact of this is superheating of the underlying matte, which reduces its viscosity so that it then invades and ultimately destroys the furnace lining. Attempts have been made to mitigate this by the addition of copper cooling plates in the furnace, but these have proven unreliable, resulting in several major smelter failures. To date therefore, the limit of 1.5% chromite remains in place and is strictly enforced in offtake agreements with concentrate suppliers.
The Problem with Sulphur
A typical Bushveld concentrate is formed by floating the sulphide minerals plus the PGMs from the ore to form a material high in metals with perhaps 30% sulphur, 30% iron, plus gangue materials such as SiO2 and MgO. Sulphur is removed during various stages of the smelting process, but if allowed to escape to the atmosphere as sulphur dioxide (SO2) it will readily combine with hydrogen to form H2SO4 (sulphuric acid) and then fall as acid rain. This is no longer acceptable and current environmental regulations require +95% sulphur capture. Captured SO2 can be diverted to an acid plant to create liquid sulphuric acid which can be onsold; however, for this to work efficiently, SO2 must be given off in a constant stream at a sufficiently high concentration. Of the sulphur that enters the smelter in a typical Merensky system, roughly 5% goes to the slag, 15% remains in the matte to the refinery, 20% is given off as SO2 in the smelter, and 60% is given off as SO2 in the converter. It is the last two gaseous components that are the issue and both present different challenges. SO2 is given off as a constant stream in the smelter but generally only constitutes 0.5% of the total furnace gases, which is too low for efficient recovery.
Metals and Mining
SO2 given off in the converter constitutes more than 4% of total converter gases which is high enough for efficient capture, but the gas is not given off as a constant stream as the converter is a batch process (one load at a time) and storing the gas during the short but violent reaction is difficult and expensive. As a result of these shortcomings, the capture of sulphur from this traditional smelting process is complicated, expensive and inefficient as multiple capture technologies are required.
ConRoast – DC Arc Smelting
The process being proposed by Braemore addresses these two issues by a combination of technologies. The two key components of the process are: 1. Almost all the sulphur is removed and captured up front, largely eliminating the environmental issue. This pre-smelter sulphur removal provides a different feed material to the smelter, such that the output is a metal alloy rather than a matte, which allows the chromite issue to be dealt with.
The first stage of the process is to ‘dead roast’ the concentrate. Dry fine concentrate is fed into a ‘fluidized bed reactor’ – a roasting vessel through which superheated air is blown to oxidise most of the sulphur that is then given off as a continuous stream of high concentration SO2 which is readily captured and run through an acid plant. Feed to the smelter therefore contains less than 1% S, compared with 30% in a typical matte process.
DC Arc Furnace
DC arc furnaces were originally designed 20 years ago to smelt fine material in the chrome and titanium industries. These systems differ from the six-in-line design in two fundamental ways: 1. 2. The furnace uses DC power rather than AC; and The electrode(s) are suspended above the slag rather than being immersed in it. Most heat is therefore generated by the arc formed from the electrode tip to the top of the slag.
The arc is not submerged as in a six-in-line smelter, and therefore operates at a far higher temperature (15,000°C) sufficient to melt the chromite and thus prevent any build-up in the furnace.
Metals and Mining
Figure 26. DC Arc Furnace Schematic
Source: Matrix Corporate Capital
Combine ConRoast and DC Arc
Although a DC arc furnace can melt chromite, if such a furnace were used with a normal high sulphur feedstock, the same problem of superheating of the underlying matte would occur and would cause damage to the furnace walls. ConRoast removes the sulphur, bringing environmental advantages, but also changes the chemical composition of the furnace material such that the underlying metal phase is a low sulphur metal alloy rather than a high sulphur matte. This alloy will still be superheated by the DC arc, but does not suffer from the same decrease in viscosity as a matte and thus does not become invasive and corrosive to the smelter walls. It is therefore the combination of ConRoast with a DC arc furnace that provides the primary technical advantage.
Metals and Mining
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Metals and Mining
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