The new management team at Kazera seem to be on quite a roll at the moment. On top of the transformational deal in bringing in a 49% partner at TVM for the company’s lithium resource that values this new SPV at $15m (approx 1.2 pence per share alone), this morning investors learnt that its 60%-owned sub Whale Head Minerals (Pty) Ltd (WHM) has seen off the challenge to its Mining Permit on the Heavy Mineral Sands (HMS) project at the Walviskop mine in South Africaand finally been awarded the permit.
With that out of the way, WHM will now have a clear run at HMS ore production from its JORC compliant resource at the Walviskop mine, which conveniently sits within the diamond mining operations of the company’s subsidiary Deep Blue Minerals. The real story here however is that a positive cashflow from these operations is expected within six months of receipt of the Mining Permit being granted over a 5Ha beach sand deposit at Walviskop, which is subject to the construction of an appropriate processing plant.
This project has always had enviable financials right from the very start. When up and running, Kazera expects monthly production of around 6,000 tons of HMS – which at current prices is expected to result in a gross profit of over US$300,000 per month. Start-up costs of this operation are expected to be covered by cash flows from Kazera’s Alexander Bay Diamond Mine in South Africa and Tantalum Valley Mine in Namibia which have now both turned a corner and are moving into not only self sustaining cash flow but real and growing profits – are rare beast indeed in small cap mining land.
The Mining Permit gives WHM the right to mine a 5Ha beach sand deposit at Walviskop which has a JORC Indicated Mineral Resource of 3.11 million tons of Valuable Heavy Minerals at a grade of 61.2%. where the predominant Valuable Heavy Minerals are Garnet (30.29% Run of Mine (ROM)) and Ilmenite (27.54% ROM). On top of that, are also Zircon and Rutile but these have not been included in the financial modelling.
This HMS project has been independently valued as having an NPV(20) of around £150 million based on current FX rates. Normal discount rates applied to such projects are 5%, 8% or 10%. We tend to use 12% to risk projects because we are trying to be conservative – so 20% – that’s really really tough. However, it does mean that there is plenty of scope for such a cracking project to attract a far higher valuation. It gets better howeverm as WHM has applied for a prospecting right over an adjacent beach which appears to share similar characteristics to Walviskop, and which is something like 34 times larger.
At the time Dennis Edmonds, Kazera’s CEO pretty well said what probably most investors have been thinking, commenting that “This has been an incredible week for Kazera. We have been anticipating being given the right to mine Walviskop since January of this year and to receive this news within a week of us concluding the Lithium investment announced last week is great timing. The rejection of the Appeal reflects our previously expressed confidence that the correct procedures had been followed by the Department in initially approving the Mining Permit.”
But it does in fact get even better as waiting in the wings are international players seeking to get the chance to build a separation plant, allowing KZG’s production to be sold at a price uplift of around 600% more – that’s right a six-fold price increase. Truth is that there are already potential partners queuing up to build and operate the Walviskop processing plant at their own cost to separate out the various component minerals, and which would considerably increase profitability to WHM without increasing the overhead.
In our view, the HMS operations have always been the main event at Kazera and a true “company maker” with all the rest merely being a sideshow. The HMS content in this part of North West SA has some of the best grades globally. Just south of Kazera’s licence area Mineral Commodities have successfully been mining the Tormin fields for some years now and making very nice returns indeed. That big £150 million NPV(20) valuation is just for Walviskop jowever and there is one hell of a lot more here than simply Walviskop. As we read this morning that adjacent beach which WHM is also in the process of applying for a Prospecting Right over apparently bears all the hallmarks of having similar characteristics to Walviskop – but as mentioned, is reckoned to be 34 times larger. To save you reaching for your calculators, 34 x £150 million = £5.1 billion.
If that wasn’t enough, as a by-product of the HMS operation, DBM is expected to generate around 300 carats per month of additional diamond production from the HMS operation. Importantly, beach diamonds tend to be bigger and better quality than those found inland and so we are talking about higher prices being paid at auctions. Whilst inland diamonds typically attract prices around US$250 per carat, Kazera are fairly confident that they can sell these larger, better quality diamonds for more than US$750 per carat.
There is no doubt that rapid progress is being made right across each and every one of Kazera’s operations. This week investors have enjoyed very welcome newsflow indeed. This is due to the long hours and diligent work done by a small team of experienced experts headed by CEO Dennis Edmonds and who seemingly don’t leave any stone unturned. In this game you make your own luck and by working hard and being diligent gives you a lot better chance of getting things right which can create material value as we suspect the market will start to really appreciate over the coming months.
We initiated coverage on Kazera with a Conviction Buy stance in August 2020 at 0.70p with a target price of 2.50p. Last week, we reappraised the company and increased our target price to 4p. On the HMS we risked massively valuing Walviskop and Perdevleui (thats the 34x Waklviskop play) separately. A financial model was developed for Walviskop and NPV attributable to Kazera was calculated to be US$17.38 million. On Perdevleui we made some bold assumptions here and multiplied the NPV attributable to Kazera for Walviskop (US$17.38 million) by 34 which gives US$590.92 million.
With so many unknowns at this stage concerning grade, geology and timing of production we chose to heavily risk this figure by an arbitrary 97.5% which gives US$14.76 million. Added together the valuation for Walviskop and Perdevleui came out at US$32.14 million which was then further risked by 50% which reflects waiting for the licence to be granted giving a figure of US$16.07 million. Well, there is now no need now be so cagey with the pretender’s challenge to WHM’s Mining Permit thrown out and thus another 1.3p can be added to our revised 4p price target – remember this is very, very heavily risked still too. At the moment we are working on a full updated research report where we will be revaluating all the recent developments at Kazera. Suffice to say at the current price of 0.95p and still, quite unfathomably, capped at a measly £9 million given the lithium SPV being valued at approx £12m alone quite aside from the growing diamonds ops, tantalum moving towards the key 4000kg of concentrate monthly export on the near horizon, thefour EPL’s that have been overlooked by the market as we laid out HERE, the expected imminent completion on the Kenyan Rare Earths project also detailed HERE and which has an IGV of over $3bn and now the “oven ready” HMS opportunity, it is safe to say that we are more than happy to confirm our Conviction Buy stance.
RISK WARNING & DISCLAIMER
Kazera Global is a research client of Align Research. Align Research is the largest shareholder in Kazera Global and as such cannot be seen to be impartial in relation to the outcome of the Company’s share price. Align Research & its Director are bound to the company’s dealing policy ensuring open and adequate disclosure. Full details can be found on our website here (“Legals”).
This is a marketing communication and cannot be considered independent research. Nothing in this report should be construed as advice, an offer, or the solicitation of an offer to buy or sell securities by us. As we have no knowledge of your individual situation and circumstances the investment(s) covered may not be suitable for you. You should not make any investment decision without consulting a fully qualified financial advisor.
Your capital is at risk by investing in securities and the income from them may fluctuate. Past performance is not necessarily a guide to future performance and forecasts are not a reliable indicator of future results. The marketability of some of the companies we cover is limited and you may have difficulty buying or selling in volume. Additionally, given the smaller capitalisation bias of our coverage, the companies we cover should be considered as high risk.
This financial promotion has been approved by Align Research Limited