The Speculator

PORTFOLIO POINT: Shares in heavy minerals developer Image Resources are tipped to double in price within 12 months.

I have long been positive about the outlook for Image Resources (IMA). Now an enthusiastic assessment released last week has a couple of investment analysts predicting the company’s share price will more than double within 12 months.

Before the analysts’ report was released on April 20, Image shares last traded at 32c, down from a 12-month high of 63.5c. The analysts now see a price range within 12 months of between 66c and 87c a share.

The analysts – Richard Badauskas and Andrew McCrea, from Perth-based Proactive Investors Pty Ltd – focus on Image’s intention to fast-track the development of its North Perth Basin project, which hosts one of the largest high-grade undeveloped heavy mineral resources in Australia, covering more than 2080 square kilometres.

As this column pointed out on February 29, Image has appointed one Peter J Davies, of ISOC Pty Ltd, as project manager to complete a feasibility study following an extremely positive scoping study that evaluated six of the company’s eleven defined resources in the North Perth Basin.

Davies has extensive operational experience in the mineral sands industry, having been general manager for Tiwest’s mineral sands processing and synthetic rutile production. He was also previously director of European operations for Kerr-McGee Chemicals/Tronex for titanium dioxide pigment manufacturing.

Image’s resource inventory in the North Perth Basin now stands at 7.9 million tonnes of heavy minerals (HM) in 11 separate, JORC-compliant resource deposits, with current drilling programs directed at shallow high-grade resources containing 3.1 million tonnes at an average grade of 6.5% HM that are rich in zircon.

The initial scoping study, aimed at processing 3.6 million tonnes a year of the mineral-bearing sands, estimated a capital cost of $83.8 million over a 12-year mine life and an extremely positive internal rate of return of 47.7%-58.6%, with capital payback within less than 16 months. It assumed an exchange rate of $A0.90-$A1.00 to the US dollar.

The company’s present feasibility study is aimed at commencement of mining in 2014. It is assessing a processing rate of 170,000-200,000 tonnes a year, which the analysts say “will define Image Resources as one of the richest global producers of heavy minerals from its peer group of new producers”.

With a share price of just 32c at the time the report was released on April 20, Image carried a market capitalisation of $32 million. That equates to an enterprise value (EV) of $8.80/tonne of JORC-compliant heavy minerals resources in the North Perth Basin project for 3.1 million tonnes of high-grade resources.

The analysts add: “We have taken into account the excellent infrastructure deployment that services the West Australian mineral sands industry, the high quality of the resources that the company is fast-tracking towards development, and assign an EV of $66 million, or $21.30/tonne. That equates to $0.66 per Image Resources ordinary share, and is the EV per JORC Resource tonne of heavy minerals that the market applies to Base Resources (BSE) and its development of the Kwale deposit in Kenya.”

Furthermore, the EV "does not account for substantial resource accretion that may flow from ongoing resource development drilling programs, as the addition of every 1 million tonnes of heavy minerals at an EV of $21.30/tonne adds $21.30 million or $0.21/share to the target share price."

The research report also ignores any value on Image’s Cyclone Extended project on the Eucla Basin.

The North Perth Basin feasibility study is due for completion by the end of 2012 and is expected to act as a catalyst for the predicted re-rating of Image’s share price to the target range of 66c to 87c.

-The Speculator portfolio, as at April 24 (1200)
Company	ASX	No of shares	Bought	Purchase price	Current price	Current value
Image Resources	IMA*	15,000	31/12/2010*	0.362 av	$0.370	$5,550
Viralytics	VLA	19,995	20/12/2011	$0.308	$0.380	$7,598
Robust Resources	ROL	6,000	31/12/2010*	$1.49 av	$1.250	$7,500
Scotgold Resources	SGZ	27,500	31/12/2010*	5.5 av	$0.083	$2,283
Coalworks	CWK	10,000	31/12/2010*	$0.830	$0.850	$8,500
GoConnect Ltd	GCN	250,000	31/12/2010*	0.034 av	$0.026	$6,500
Minemakers	MAK	20,000	25/01/2011*	0.425 av	$0.230	$4,600
Platsearch	PTS	20,000	8/02/2011*	$0.130	$0.081	$1,620
Broken Hill Prospecting	BPL	20,000	22/02/2011*	$0.160	$0.095	$1,900
Austpac Resources	APG	40,000	2/03/2011*	$0.060	$0.038	$1,520
Potash West	PWN	11,050	30/03/2011*	$0.200	$0.270	$2,984
Cortona Resources	CRC	20,000	13/04/2011*	0.146 av	$0.125	$2,500
Golden Gate Petroleum	GGP	408,500	20/04/2011*	0.0145 av	$0.019	$7,762
TNT Mines	TNT	4,440	22/07/2011*	$0.000	$0.250	$1,110
Quickstep Holdings	QHL	20,000	23/11/2011*	$0.185	$0.175	$3,500
Orpheus Energy	OEG	19,250	17/08/2011*	0.164 av	$0.105	$2,021
Black Mountain Resources	BMZ	10,000	17/04/2012	$0.300	$0.290	$2,900
Total value of portfolio						$70,347
cash at bank						-$16,950
Total						$53,397
Portfolio change since January 3, 2012 (started with $50,000)						6.79%
All Ordinaries change since January 3 2012 (then 4155.22)						6.62%
*Shares held from previous year, carried at their December 30, 2011 closing price.

Positive report on Scotgold’s Cononish project

A positive update on Scotgold’s Cononish gold/silver project has underpinned a modest rise in the share price from a low of 7.6c last week to 8.3c today.

Australian Mining Consultants (UK) Ltd has delivered the results of a commissioned development study on Scotgold’s (SGZ) 100%-owned Cononish gold/silver project in the Grampian highlands of Scotland.

It suggests “robust project economics” using a conservative base-case gold price of $US1100/oz, with £23.4 million ($A35.7 million) pre-tax cash flow over the life of the mine, a pre-tax internal rate of return (IRR) of 24.8% and a net present value (NPV) of £10.8 million ($A16.2 million).

But with a gold price of $US1655/oz (at the time of releasing the report late last week) it projects a pre-tax cash flow over the life of the mine of $A100.7 million, a pre-tax IRR of 62.5%, a NPV of $A61.9 million and payback after 18 months from the start of production. The world gold price has slipped slightly since then to $1634/oz.

Projected operating costs of $A575/oz leave a wide margin for a positive cash flow in both gold price scenarios.

An infill drilling program is underway, with results due next month when Scotgold also expects to be granted a Crown mining lease, after which the present development study will be updated.

The present “mine inventory” (derived from measured, indicated and inferred resources) has been estimated in accordance with the JORC (Joint Ore Reserves Committee) by Snowden Mining Industry Consultants Pty Ltd. It stands at 427,900 tonnes grading 10.2grams/tonne gold and 37.1 g/t silver with a cut-off grade of 3.5g/t gold. It may not strictly comply with the JORC code.

Provided the world gold price doesn’t suddenly tumble, Scotgold’s share price can look forward to further recovery following the granting of the mining lease, further project updates and the aim, subject to finance, of a start on development in the last quarter of calendar 2012. It will then be Britain’s only producing gold mine and retains targets around the present project for further discoveries.

David Haselhurst writes a monthly column for Money magazine. Please note that he is not able to provide personal replies to emails.