Bannerman Resources Ltd 16 Dec 09

High operating costs in the PFS lower the valuation of the company.

Bannerman is going to proceed to a Definitive Feasibility Study (DFS), despite reporting higher than expected costs in the Preliminary Feasibility Study (PFS). Over the life of the mine the operating cost is expected to average US$41/lb. The Base Case NPV is US$431m but this assumes US$70/lb for U3O8. At the current price of US$45/lb this project would not get off the ground.

The numbers in the PFS were a negative surprise for the market.

Technical Comment

Fat Prophets initially recommended buying Bannerman at 71.5 cents in August (Fat Mining 40). Our last review of this stock was in November (Fat Mining 201).

Our last coverage saw Bannerman trade at $1.25, since then the technical picture has taken a turn to the downside. Prices broke below the lower boundary of the consolidation at 92.9 cents formed since April. Generally, price breakouts from consolidations result in an acceleration in the direction of the breakout. As evident on the daily chart, this has been the case for Bannerman. 

There is an increase in downside risk over the coming weeks, should prices continue to head south, the next level of support is located at the February low of 61.5 cents.

At US$60/lb U3O8 the Base Case shows an NPV of only US$59m, and at US$80/lb the NPV is US$802m. Bannerman has 201.7m shares on issue. At US$60/lb the NPV is US$0.29 or A$0.32 at an exchange rate of 0.9114. At the higher end of the scale the NPV valuation is around US$4.00 per share or $A4.36. The Base Case valuation is $A2.34 per share.

The project highlights for the company’s 80% owned Etango project are shown below. The basic problem is that compared to Paladin’s Langer Heinrich deposit, the grade at Etango is relatively low at around 220ppm U3O8.

The lower grade requires a higher uranium price to make the project fly.

News flow from exploration has been very good and more inferred resources will be converted to indicated and measured status. There are plenty of pounds of uranium to mine but unless the price of U3O8 rises apace the deposit will not get developed.

Production was a possibility in 2013 but will depend on a strong recovery in the price of uranium. The general belief is that beyond 2013, the gap between supply and demand will begin to widen and the price of uranium will rise to over US$60/lb.

Bannerman’s Etango project (160m lbs of U3O8) has an excellent address. The project forms a triangle with Rossing South (267m lbs) to the northeast, and Paladin’s Langer-Heinrich (164m lbs) to the southeast. Etango is the closest major uranium project to the Walvis Bay port.

240,000m of drilling has been completed over a strike length of 6km. Half the resource is in the indicated category. The indicated resource base is 231mt at a U3O8 grade of 207ppm. The measured resource only contains 2m lbs, but total of measured and indicated resource is 107.7 m lbs.

Bannerman has indicated that it is considering introducing a strategic partner to help with financing – this helps minimise share dilution. Significant share dilution would have been a fact of life if the company tried to develop the US$555m Etango project on its own.

The preliminary feasibility study is being based on annual production of 5 to 7Mlb of U3O8 per annum. Production will come from an open pit mining with a mine exceeding 16 years.

Many highly prospective nearby targets have not been drill tested.

A new mineralised zone named Hyena has been located 1km south of the Anomaly A deposit.

The Hyena zone was discovered pattern drilling south of Anomaly A. Two lines of RC holes were drilled and each line intersected significant uranium mineralisation in up to two or three separate zones.

The best result was 16m grading 1,021 ppm U3O8. The other results reported ranged between 201 and 314 ppm. Step-out drilling to test the extent of mineralisation is underway.

A significant challenge for the company is to find higher grade ore at prospects close to Etango so that ores could be blended to increase the overall head grade.

Etango is a huge resource and at higher uranium prices is a valuable asset. If Bannerman’s share price falls further a takeover bid cannot be ruled out, particularly from a party that can afford to wait and see if the industry forecasts of a price recovery post 2013 come to fruition.

At the end of the September quarter the company had cash reserves of $A30m and is more than adequately funded for the time being.

Waiting for the uranium price to move significantly higher is in the realms of pure speculation. Over the short- to medium-term the risk to reward ratio is unfavourable unless a bidder appears on the horizon and pays a hefty premium for Etango. We do not advise Members to hold companies solely on the basis that a takeover might eventuate.

Each month there is growing evidence that a global recovery is underway. Now is the time to focus on those commodities that are highly leveraged to an economic recovery in the USA, and to the extraordinary growth in China. To this end copper, iron ore, coking coal and oil provide that leverage. BHP Billiton is leveraged to all these commodities.

We have changed our view of the stock following the release of the PFS. However, we will review Bannerman in a new light should the price of uranium start rising apace.

We are changing our recommendation on Bannerman from HOLD to SELL. A good switch would be into BHP Billiton or for Members who are comfortable with more risk, we would recommend Aurora Minerals.


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