“Project pipeline materialising” to quote the company
Jabiru Metals has released its December 2010 Quarterly Activities Report with the company pushing ahead with its key exploration projects with important milestones ticked off during the quarter. The company’s Jaguar zinc and copper operation experienced lower metal production rates in the December Q10 period, but remains in line to meet full year production guidance. Zinc cash costs remain negative (after by-product credits) in the quarter, placing Jaguar in the 1st quartile of the cost curve for zinc. Activity at both the Bentley and Stockman projects brings each a step closer to production. The company maintains a strong cash position with cash flow generated from product sales. The following figure shows the location of the company’s volcanogenic massive sulphide (VMS) projects (Bentley is located at Jaguar).
The company’s key Jaguar operation produced lower metal concentrates for the December Q10 period, compared to the September Q10 period. Production of zinc concentrate fell 15.6% to 9,024 tonnes, while copper concentrate production was also lower, falling by 27.3% to 2,088 tonnes. The primary driver behind the lower production numbers in the December Q10 period was a slowing in mine operations from a record pace for the September Q10 period. The company has indicated production remains on track to meet full year production targets for both zinc and copper.
We view the zinc market as having less favourable investment fundamentals than copper at the moment which is reflected in the price movements seen over the past 12 months. The following figure shows the price of zinc and copper.
The nature of the ore body being a VMS mineralisation prohibits the extraction of the individual metals. The company is not able to switch between zinc and copper production to match which commodity has the higher price. As Jaguar is a zinc mine, zinc demand has been less dynamic than we have seen for copper. Hence, we consider the slowdown in the mine operations during the December Q10 period may reflect this.
Cash costs as a result of the slowing in operations also rose in the December Q10 period, but remained negative. Cash cost for the December Q10 period was negative US40 cents per pound (approximately negative US$881 per tonne) compared to negative US59 cents (approximately negative US$1,300 per tonne) in the September 2010 quarter. A cash cost can be negative when by-product credits are used to lower the costs to produce the primary metal. In the case of Jaguar, the credits come from the sale of copper which is not reported separately. This is a common practice in the industry.
Taking into account the copper credits, Jaguar falls into the 1st quartile of the zinc cost curve. This makes the company’s Jaguar mine a very high margin operation. The following figure shows current zinc cash cost curve.
Additional drilling at the Bentley has allowed an upgrade of the joint ore reserve code resource for the prospect, with a new total resource of 3.1 million tonnes showing 9.8% zinc, 2.0% copper and showings of gold, lead and silver. The resource upgrade has allowed the company to expand the future capacity of the concentrator at Jaguar from its current 365,000 tonnes per annum to 450,000 tonnes in 2011 and then to 560,000 tonnes in 2012.
In our view, with the inclusion of the new resources for Bentley and the by-product credits in the resource, we consider the Jaguar operation will be highly profitable and able to withstand any major decline in the price of zinc. Although, we have not forecast a 2011 zinc price, we do believe its price may improve as industrial production across the globe is showing stronger signs of growth. A rise in the US Dollar may act as a headwind and curtail any major price increase.
The company’s Stockman copper, zinc and silver project is to progress to a definitive feasibility study (DFS) which is due for completion in March Q12. The DFS is based on a mining operation of 950,000 tonnes per annum to produce 126,000 tonnes of copper, 4.2 million ounces of silver, 96,000 ounces of gold in copper concentrate and 206,000 tonnes of zinc in zinc concentrate. Stockman is anticipated to have an initial life of between seven and eight years. The project is expected to have a capital cost of A$185 million and generate free cash flow of approximately A$70 million per annum.
To this end the company was granted a mining lease over the tenement during the December Q10 period and has had the Native Title agreement approved. The focus of the company’s drilling at Stockman will be to better delineate the mineralisation body and especially the higher grade domains within the VMS deposit. We expect news flow will be positive and we look forward to the life of the Stockman project being extended as further exploration is carried out.
Jabiru Metals formed a bullish moving average cross in October 2010, which suggests broader term momentum to favour the upside. This in effect saw Jabiru break above the September 2009 high of 48.5 cents. This bullish breakout saw Jabiru Metals reach a recent high of 72 cents in early January.
The almost vertical move in price resulted in the RSI surging into overbought territory. This is a sign of an exhaustion of the upward move. As expected Jabiru retraced a small portion of the advance to find support at the 59 cents region. Once this pause in trend is complete, we would expect a continuation of the upward move.
The weekly chart reveals the breakout from a broader ascending triangle formation. Coupled with the strengthening uptrend as evident from the weekly MACD, bodes well for a continued move higher over the longer term towards the psychological $1.00 level.
As a junior mining company Jabiru Metals stands out as it generates a robust cash flow from Jaguar and has significant growth and exploration appeal at both Jaguar and Stockman.
Jabiru Metals will remain firmly HELD within the Fat Prophets Portfolio.
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