ALLIANCE MINERAL ASSETS: 50-c target, 2 upside opportunities

Excerpts from Canaccord Genuity's report

Analysts: Reg Spencer & Larry Hill

Simplified ownership of the Bald Hill lithium operation: Post Merger, AMAL now has 100% ownership of the Bald Hill hard rock lithium operation, located in Western Australia.

The project has an initial Reserve life of +9 years (from total Resources of 26Mt at 1% Li20), and was commissioned in Mar 18 with initial spodumene concentrate production capacity of 155ktpa (2018e production 77 kt).

Production is contracted to HK-listed Burwill Holdings in JV with China based EV maker Jiangte Special Electric Motor Co for construction of a 15 ktpa chemical converter plant in China), with a fixed price offtake for 2018/2019 of US$880/t for SC6. 

Upside opportunity #1 - plant upgrade: Studies were recently completed for a low capex (A$10-12m) plant upgrade at Bald Hill.

We estimate that this will increase concentrate production by 67% to +26Oktpa through plant debottlenecking and treatment of fines material. Works are expected to commence in early 2019, with increased concentrate production expected from mid'19.

Upside opportunity #2 - mine life extension: Reserves support a mine life at the current production rate of +9 years.

At Bald Hill: Pegmatites (rock-like objects) are mined and go through the plant facility to be processed into lithium concentrate. Photo by KGI ResearchHowever, we see good opportunity for further increases through infill drilling/conversion of Inferred Resources, as well as extensional drilling of multiple untested targets within the immediate project area (Exploration Target of 30-50Mt).

Exploration activities have been limited in recent times as focus has been on mine development, but with operations now being bedded down, plus a stronger balance sheet (see below), we anticipate drilling activities to ramp up in 2019.

Balance sheet - stronger post merger: We estimate AMAL to have a cash position of +A$45m by end CY18, with funding flexibility provided through additional undrawn debt facilities of A$20m (drawn facilities total A$33m).

We anticipate solid operating cash flow moving into FY20, which combined with the healthy balance sheet provides sufficient capacity for funding plant upgrade works and exploration activities.

Analyst Reg SpencerValuation & Recommendation: Our project model is based on an 11-year, ~260ktpa spodumene concentrate operation (+30ktpa LCE), with average LOM costs of A$509/tnet of tantalum credits), from which we derive a project NPV 10% of A$609m. Our target price of A$0.50/sh (rounded) comprises our estimated NPV 10% for the Bald Hill lithium operation, net of corporate and other adjustments. Our target price implies a potential return of +50%, supporting our SPECULATIVE BUY recommendation.