Hartleys Research: Altona Mining price target 0.33 AUD

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ALTONA MINING LIMITED (AOH)

SRIG JV signed, fully funded for 34% of Little Eva

Altona has concluded negotiations for a binding agreement with Sichuan Railway Investment Group (SRIG) whereby SRIG is to contribute US$213.5m (A$295m) cash and AOH is to contribute the Cloncurry project and US$25m (A$35m) of cash. Altona is to hold 34% of the Joint Venture company and SRIG the remaining 66%. The terms of the agreement differ slightly from the framework agreement with AOH’s cash contribution (reduced from US$38m to US$25m) and AOH’s project interest (reduced from 40% to 34%). The JV will be fully funded into production with a cash position of ~A$330m and a pre-production capex requirement of ~A$294m for the Cloncurry project (2014 DFS estimate).

Altona’s 34% interest is equal to annual production of ~13ktpa Cu & ~6kozpa Au (~15ktpa CuEq) and generates EBITDA (attributable) of ~$20mpa at spot prices and ~$40mpa at consensus prices. We now model the Cloncurry project to commence production in FY19 with a minelife of ~15 years. Our (pre-tax) spot valuation for AOH’s share in the Cloncurry project is A$89m (22cps) and our base case (consensus) valuation is A$190m (35cps).

No funding gap, lower capex = surplus cash = more dividends

With the (operating and capital) cost environment improving significantly since the DFS was completed in 2014 we expect a reduction in the operating costs and pre-production capex requirements for the Cloncurry project. We expect a surplus cash position of up to ~A$60m (~A$20m attributable to AOH) within the JV company after the pre-production capex requirement. The JV has an agreement to return a minimum of 50% of surplus cash to shareholders through dividends.

As well as the continued propensity to return cash to shareholders we see a strong likelihood AOH will use the SRIG deal as a platform to generate further deals whereby the Company will look to acquire base metals development projects at the current depressed (bottom of the market) prices. AOH now has a well-funded partner to collaborate with and take advantage of the cyclical downturn in base metals and build a Company ready for the next cycle. 



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