The under-performance of the Nifty copper mine Metals X Ltd. bought in 2016 has shredded the company's value to its lowest ebb this year, but the company believes the asset is well on its way to being cash positive on the back of a recently announced reset plan.
Metals X has already made significant progress since announcing its two-phased reset plan on May 1 to further access new mining areas it has discovered since acquiring the asset, debottleneck existing underground services and infrastructure, reduce costs and boost productivity, and target further resource extensions.
Phase one aims to achieve 2 million tonnes throughput in the first quarter of 2020 at an annualized rate of 28,000 tonnes of copper in concentrate at all in sustaining costs of between A$6,800/tonne and A$7,300/t, before ramping up to 2.5 million tonnes for a 35,000 tonnes per annum annualized rate with AISC of between A$6,400/t and A$6,900/t.
All this will be funded from a mix of cash flow and debt facilities. Metals X has an undrawn, uncommitted borrowing base debt facility of US$20 million and has been talking to financiers to ensure sufficient minimum liquidity.
While Metals X purchased Nifty to take advantage of the installed infrastructure, substantial copper endowment and the geological upside, Managing Director Damien Marantelli acknowledged May 1 it had a number of legacy issues, and that the mine suffered from lack of planning and focus, poor decision making and poor execution.
By March 26, its share price had hit 21 Australian cents per share, its lowest point, from A$1.82/share in August 2016.
Metals X also acknowledged its original Nifty plan post-purchase depended too heavily an "unreliable" central zone, the historic mining area, leaving critical operational issues and infrastructure bottlenecks unresolved.
In particular, the company conceded there were inadequate planning and insufficient development and geological models outside the central zone, and not enough ventilation and paste distribution. It will now focus on the ore body's east, west and northeast areas.
Financial services firm Bell Potter Resources Analyst Peter Arden said Metals X's initial poor execution led to "a fair bit of pain" for shareholders. Yet he believes there is "clear evidence" that the ore body is better than the market is recognizing, and that Nifty has now "turned the corner."
Marantelli told S&P Global market Intelligence that the company had worked hard to cut costs from about A$19 million a month at Nifty in the fourth quarter of 2018 to about A$13 million currently through a number of efficiency measures including shedding 100 employees.
He said Metals X's share price fall since it bought Nifty was due to its under-performance against constant promises it would deliver 40,000 tonnes, which led to lack of confidence in management.
Nifty's team is now led by Russell Cole, who brought the Kalgoorlie Super Pit's production from 300,000 ounces to 700,000 ounces and managed the joint venture between Newmont Goldcorp Corp. and Barrick Gold Corp..
Marantelli said Metals X still has much hard work ahead, but believes Nifty will be cash neutral when production reaches about 24,000 tonnes of copper.
While copper has just suffered its fifth straight week of weekly losses, with prices falling to about US$2.70 per pound during the week ending May 24, Arden believes it will cross US$3/pound by mid-2020, which would make Nifty "very profitable."
Marantelli cited analysis from CRU, a commodities-focused market intelligence firm, suggesting a supply deficit will hit in 2021; while financial services firm Canaccord Genuity said in a May 27 note that copper had now hit its "correction price target" of US$2.75 per tonne.
He said Metals X has done a significant amount of close-spaced infill drilling around the discoveries they made in the past two years outside of that central zone — in the east and west — which suggests the ore body extends further with "reasonably good grade."
Arden said a key component of Nifty's recovery revolved around Metals X fixing negative culture perceptions at the mine around poor worker pay and safety issues.
He said the increase in grade and lowering of costs should be able to sustain strong production at 35,000 tonnes, and believes Metals X's "single-minded focus" on improvement has also given it a buffer to low copper prices.
"It's more important than ever that Metals X did the Nifty reset plan, because without it, the general view was that it was facing oblivion, and I'm sure there are still lots of doubters out there," Arden said.
Broker Hartleys still rates Metals X as a speculative buy.