Mirabaud: MRC’s growth is twofold as Tormin expands

The below post is a direct extract from the report released by Mirabaud on the 29th of April. The full report can be downloaded in full below

During March quarter MSR (MRC’s 50% owned South African subsidiary) concluded the financing arrangements (a loan facility provided by the GMA group – MSR’s garnet off-take partner) for the garnet stripping plant (GSP) at its Tormin mineral sands project in SA. The plant has been budgeted at US$4.5m and is planned for an early Q3 2016 commissioning.

The GSP, which will be installed in front of the existing secondary concentrator plant (SCP), will enable MRC to produce a higher-value garnet concentrate by stripping out the garnet prior to the SCP, improving the grade of non-mag feed into the SCP. That, coupled with the commissioning of the tailings scavenger plant (TSP – will re-treat the PBC tailings stream increasing the PBC’s throughput by ~15%), will boost overall zircon recoveries to >75% from current levels of ~55% as well as yielding a higher grade garnet by-product.

Moreover, the granting of the offshore prospects and the prospecting rights to the north of the current beach operations is an important step towards achieving an increase in the resource base, which in our view could re-rate the company’s share price

New resource replaces tonnage mined

MRC has recently announced (26 April) an updated inferred JORC resource of 2.7Mt which indicates that since mining started (early 2014) the action of the sea has replaced the entire mined volume (2.7Mt over a period of two years). However, resource replenishment is happening at a constantly diminishing grade particularly after the third time an area is mined.

Thus, we have now adopted a declining grade profile for our Tormin model, which assumes a 15% annual reduction in the HM grade from 2017 onwards (see p5 – for 2016 we are maintaining our grade assumption). However, a further understanding of how the replenishment happens and its likely future pattern can only be confirmed after the finalisation of the offshore exploration (early 2017).

Maiden dividend makes MRC more attractive

As a result of the strong annual results, the company declared a maiden dividend of A$0.01/share which offers a very attractive yield of ~7% (based on MRC’s current share price). That would put MRC at the top of the select group of those few mineral sands producers paying a dividend.

Valuation update

We have updated our model mainly by adjusting our (more conservative) Tormin LoM grade profile according to the company’s new resource estimate as well as our operating assumptions according to the Q1 2016 results. Our revised valuation has also been impacted by a short-term correction of our assumed product prices as well as by a ~9% strengthening of the A$ since our last note (2 September 2015). Our TP is now A$¢17.1 (~4% down from A$¢17.9 previously) offering >20% upside to MRC’s current share price and we thus retain our stance on the stock at SPECULATIVE BUY.

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