Why the revival of Rex Minerals demands a revisit
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Six months ago Rex Minerals was described as a stock that “had burned a lot of investors with its 98.5 per cent share price fall”.
Today it can be described as a stock which has delivered a 110 per cent gain for some investors.
The big percentage switch has a lot to do with the way numbers can be manipulated — especially when a stock rises off a low base. That’s where Rex (ASX:RXM) was for much of the past few years having plunged from a peak of $3.05 in 2011 to 4c in mid-2016.
Since hitting that low point Rex has been climbing out of a hole as confidence grows in its Hillside copper and gold project on South Australia’s Yorke Peninsula.
When Stockhead took a close look at Rex last November it had managed to reach 7.5c.
After that report Rex went for a run, peaking at 22c in mid-February thanks in part to the lodging with the SA Government of a keenly-awaited 2500-page Program for Environmental Protection and Rehabilitation, a start on financing discussions and perhaps in reaction to the Stockhead report on a thinly researched company.
Known for its low-key management team — and bruised by an earlier failed attempt to develop Hillside, a project designed to produce three minerals (copper, gold and iron ore) — the new approach focuses on copper and gold. Low-grade magnetite iron ore is returned to the proposed open-pit mine as fill.
Stripping Hillside back to a simpler and smaller operation has not affected its potential financial returns and status as one of the biggest undeveloped copper projects in Australia.
In its latest reports to the stock exchange Rex said Hillside was would be able to produce to around 35,000 tonnes of copper a year and 24,000 ounces of gold at what it describes as a competitive cash cost of $US1.61 per pound of copper equivalent (a combination of the copper and gold).
The all-in cost, which is more important than the cash cost, is estimated to be $US1.88/lb, but even at that higher cost level Hillside is poised to generate around $US1.20/lb profit based on the latest copper price of $US3.09/lb and a gold price of $US1294 an ounce.
Potential future annual pre-tax profit, if the copper price is around $US3/lb, is estimated to be $A123 million, an interesting number given that Rex is valued on the stock market at just $37 million with the difference explained by the need to finalise funding for Hillside.
If copper rises to $US3.25/lb Rex’s potential pre-tax profit rises to $A147 million. Copper at $US4/lb boosts the pre-tax profit number to $A220 million.
How a funding package might be put together has not been revealed by Rex but most new mining projects involve a mix of debt and equity, with investors always wary of how much value a company might give to banks and financiers and how many new shares might be issued in the equity component.
What Rex needs is at least $A480 million with the construction, equipment and early mine work costing around $440 million, plus $40 million in reserve for contingencies.
The proposed mine, located on a hill overlooking the wheat export port of Ardrossan, would be relatively shallow with the orebody averaging 0.62% copper and 0.16 grams of gold per tonne.
The optimistic outlook for copper held by most investment banks is one reason to see the stock as being able to arrange funding for Hillside.
In its March quarterly report Rex noted that the Canadian bank, RBC, expected copper to be trading at around $US3.25/lb by the end of the year, rising to $US3.75 in 2021 as the global copper market experienced annual supply deficits.
Another reason for following Rex is that its Hillside project is located in a broad geological structure that runs up the Yorke Peninsula all the way to BHP’s giant Olympic Dam copper mine, a stretch which also includes the Prominent Hill mine of OZ Minerals and its new development at Carrapateena.
While the past six months have seen the re-awakening of Rex the next six months could be even more interesting as final government permitting is secured and financing for Hillside is arranged, clearing the way for construction to start next year.