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Exploration A Catalyst For Independence Group

Australia | May 01 2019

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After record nickel production in the March quarter, brokers are looking for exploration success to extend and add value to Independence Group's Nova mine.

-Main value generation outside of higher metal prices lies with exploration
-Tropicana gold grades affected by higher throughput at the new mill
-Securing higher payability terms a key catalyst, as the company reviews potential downstream nickel production


By Eva Brocklehurst

The Nova nickel mine achieved a record March quarter for Independence Group ((IGO)), which more than offset a softer-than-expected result from the Tropicana gold mine. Stronger copper, nickel and cobalt prices helped, amid a catch-up of sales volumes relative to production

Mined grades outpaced reserves and operating expenditure was down -23% in the quarter, with cash costs down to $1.50/lb. Copper and cobalt production was 30% above UBS forecasts. UBS now forecasts production of 30,400t in FY19, ahead of guidance at 30,000t. Nova benefited from a much higher ore grade than brokers expected and is delivering on tonnage and grade, while copper recovery of 87% has been sustained.

Tropicana was weaker than most brokers expected. Gold production was -10% below UBS estimates and costs were 14% higher. Grades were the culprit. After the SAG mill was commissioned in November 2018, throughput and recovery have only marginally risen. This is attributed to coarser grind size with higher throughput. Citi suspects the intention was to trade off recovery against increased throughput.

The company and its partners have formally approved the Boston Shaker underground and declared a maiden reserve. Guidance is for Tropicana production to be maintained at 450-500,000 ozpa over the next five years.


The main value for Nova, outside of supportive metal prices, is exploration success, Credit Suisse asserts, in order to leverage the high quality and long life of the mill infrastructure, and considerable resources are being deployed to this end.

The company has a record $51m exploration budget for 2019, largely slated for finding the next 'Nova' in the Fraser Range or within the Nova mining lease. The company believes the Fraser Range hosts a belt of other greenstone deposits just waiting to be found, and the discovery of a nickel-copper-cobalt orebody nearby by Mark Creasy appears to support this view.

Macquarie upgrades to Outperform from Neutral, suspecting Nova will beat production guidance for FY19. The broker also finds recent exploration results encouraging, with a successful discovery offering material upside to base case forecasts.

UBS assesses exploration success could be materially accretive and extend Nova's mine life beyond the current six years. The broker agrees value has re-emerged, as the share price is now pricing in a US$5/lb long-term nickel price and a -10% discount rate on Tropicana.

The broker calculates the stock is trading on a 10-18% free cash flow yield for FY19-21 estimates and remains net cash. The broker upgrades to Buy from Neutral, believing the -10% decline in the share price in April has provided an opportunity for exposure to a high-quality, low-cost nickel producer.

Sulphate option

Current concentrate offtake contracts expire in 2020 and UBS models payability lifting to 80% for nickel and 45% for cobalt. The broker believes the scarcity of nickel and cobalt concentrate in the context of growing demand from electric vehicles will mean strong competition from smelters. However, some of the bullish long-term price estimates need to be pared back in terms of electric vehicles, UBS advises.

Independence Group is investigating investing in downstream nickel sulphate production. Macquarie considers the sulphate study, due for completion at the end of 2019, presents upside risk for nickel payability. The broker does not currently include the project in forecasts, expecting key concentrate customers will lift payabilities to match the potential returns on the project, given the scarcity of nickel concentrate.

Still, securing higher payability terms is a key catalyst. Having extended the pre-feasibility to the December quarter, Credit Suisse believes the company is buying time for offtake agreements to be negotiated, in order to replace expiring contracts in December 2019 and June 2020 for an undefined period up until a conceptual project could, potentially, be operating.

The company appears to be leveraging higher nickel payability from smelter customers, insinuating that it may soon have a commercial option for in-house conversion. Credit Suisse is reminded the company's current role in the nickel supply chain ends as a 13% nickel concentrate seller.

This ties in with exploration success at Nova, as the current mine life could potentially decline to just four years by the time a conceptual sulphate plant starts up, and maybe only three years by the time it achieves nameplate.

FNArena's database shows three Buy ratings and three Hold. The consensus target is $4.76, suggesting 3.7% upside to the last share price. Targets range from $4.10 (Credit Suisse) to $5.30 (Ord Minnett).

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