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Special report: Metallica Minerals could be generating positive cash flow as early as the second quarter of next year after striking a lucrative merger deal with Canada-listed Melior Resources.

Metallica’s (ASX:MLM) Urquhart bauxite project and Melior’s Goondicum mineral sands mine are both in Queensland.

The merger will create a diversified Queensland mining company with near-term production and a strong pipeline of future growth opportunities.

The merged entity will have a well-balanced and strong share register with institutional and strategic investors, including Pala as a 30 per cent shareholder.

The Goondicum mine is fully funded, has off-take agreements already in place and is on track to begin production in November this year.

Metallica already has around $6.1 million worth of cash in the bank and with the imminent cashflow from the Goondicum mine restart, the merger puts it in an even better position to further realise value from the Urquhart Joint Venture.

“This is a transformational deal for both companies,” Metallica chairman Peter Turnbull said.

“Melior’s Goondicum ilmenite project shares similar attributes to Urquhart bauxite in that it is fully funded and will be brought into production relatively quickly for a modest capital outlay and will provide a valuable source of near-term cash flow.

“We look forward to combining the respective skills of the two companies to successfully develop those projects and pursue further growth opportunities to build a significant, profitable, mining house generating excellent returns for shareholders.”

High value project

Over $120 million has already been invested in developing the Goondicum project by previous owners.

It is expected to be cash-flow positive in the second quarter of next year, generating $US92 million ($129.5 million) over its nine-year life – with $US51 million of that in the first three years of full operation.

There are also significant exploration opportunities surrounding Goondicum which could nearly double the existing mine life.

Metallica's project locations
Metallica’s project locations

The mine will produce 160,000 tonnes each year of ilmenite, which is a high-growth market that is currently witnessing a shortfall in supply forecast to continue until at least 2022.

Ilmenite is the main source of titanium dioxide (TiO2), a white pigment used in paints, fabrics, plastics, paper, sunscreen, food and cosmetics.

The gap between supply and demand is widening due to a rapid decline in supply from existing mines.

Market forecaster TZMI says that if no new supply is commissioned, the supply gap could reach 900,000 TiO2 units by 2022.

Good looking economics

The Goondicum mine has a post-tax net present value (NPV) of $US46.4 million and internal rate of return (IRR) of 92 per cent and pre-start capital costs of just $US7 million – most of which has already been spent on the project.

NPV and IRR are metrics used to assess the profitability of a project. The higher the NPV and IRR, the more profitable a project will be.

TZMI is predicting long-term ilmenite prices of $US204 per tonne, and Goodicum will be producing at an average cash cost of $US124 per tonne.

“This is a great opportunity for Melior to keep moving forward and positioning itself for real shareholder wealth creation,” Melior managing director Mark McCauley said.

“The merger with Metallica is an attractive and low risk proposition providing a stronger platform for growth via an enhanced pipeline of development assets, a strengthened balance sheet and an ASX listing.

“Goondicum is on schedule to commence production in November and start generating cash by Q2 2019 and there are good prospects for realising value shortly thereafter from the Metallica asset portfolio.”

Terms of the deal

The merger will be implemented via a Canadian court-approved plan of arrangement.

Metallica is offering 20 of its own shares for every one Melior share, which values Metallica at about 4.2c based on Melior’s share price of 84 Canadian cents.

Melior shareholders will own 64 per cent and Metallica shareholders will own the remaining 36 per cent stake in the larger company.

The merged company will have a six-director board comprising three directors from each company – led by existing Metallica managing director Simon Slesarewich, who will be supported by Mr McCauley.

 

This special report is brought to you by Metallica Minerals.

This advice has been prepared without taking into account your objectives, financial situation or needs. You should, therefore, consider the appropriateness of the advice, in light of your own objectives, financial situation or needs, before acting on the advice.

If this advice relates to the acquisition, or possible acquisition, of a particular financial product, the recipient should obtain a disclosure document, a Product Disclosure Statement or an offer document (PDS) relating to the product and consider the PDS before making any decision about whether to acquire the product.