Metals X Limited

Company Overview: Metals X Limited (ASX: MLX) is an Australian base metals producer with two high quality and long-life operations and a global scale development project-tin producer through its 50%-owned Tasmanian joint arrangement and a well-established copper and nickel-cobalt development project. The Consolidated entity is divided into the segments namely- Renison Tin Operations, Wingellina Nickel Project, Nifty Copper Operations and Maroochydore Copper Project. Renison Tin Operations is engaged in the mining, treatment, and marketing of tin concentrate; Wingellina Nickel Project explores and develops of nickel assets, Nifty Copper Operations is engaged in mining, treatment, and marketing of copper concentrate whereas Maroochydore Copper Project explores and develops of copper assets.

MLX Details

Decent Increase in Revenue and Change in Long-Term Profitability: Metals X Limited (ASX: MLX) is an Australian base metals producer with two high quality and long-life operations and a global scale development project- tin producer through its 50%-owned Tasmanian joint arrangement and a well-established copper and nickel-cobalt development project. As on 17 July 2020, the market capitalization of the company stood at ~$75.3 million. The assets of MLX are high quality and long life, and the commodity focus of copper, tin, nickel, and cobalt is highly leveraged to the forecast growth in electric vehicles and utility scale battery storage systems. FY19 was a period of transformation for Metals X Limited. While the performance of the Renison Tin Operations was decent, the Nifty Copper Operations has undergone significant change to deliver a long-term profitable mining operation. With the completion of the investment in the new crushing circuits, the company continued to report decent geological drilling results in Area 5, Leatherwood and Bell 50 and increased overall Ore Reserves.

During 1H20, consolidated revenue went up to $108.98 million from $92.50 million in the pcp, and the total cost of sales was $131 million. In the same time span, revenue for the Renison Tin Operations went up to $38.5 million from $36.6 million in 2018. This was mainly due to an increase in production, partially offset by a lower tin price. In the same time span, EBITDA for the Renison operations stood at $10.5 million. The company focused on delivering shareholder’s value and maintained operational and financial discipline across the MLX portfolio. It maximized cash flow and extended the mine life of the Renison Tin Operation and maintained the Nifty Copper Operation infrastructure and mine in readiness for operational re-start.

MLX has made progress in reducing costs, improving efficiency, and resolving several legacy issues. It has an increased focus on reducing costs to increase operating margins and is determining a mining plan and infrastructure requirements.

1H20 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Metals X Limited. APAC Resources Ltd is the largest shareholder in the company, with a percentage holding of ~14.4%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During 1H20, gross margin of the company witnessed a YoY increase, and net margin saw an improvement over the previous half. Improvement in gross and net margin indicates that the company is well managing its costs and capable of converting its revenue into profits. In the same time span, current ratio of the company stood at 1.91x, higher than the industry median of 1.81x. This indicates that the company retains decent liquidity to pay off its current liabilities using its current assets. During 1H20, debt/equity ratio of the company stood at 0.56x and assets/equity ratio of the company was 2.68x.

Key Margins (Source: Refinitiv, Thomson Reuters)

$32 Million Paterson Province Exploration JV with IGO Limited: The company has recently announced that it has executed a binding Farm-in and Joint Venture Term Sheet of $32 million with IGO Limited covering 2,394 km². Under the terms of the agreement, Metals X Limited retains 100% rights to Nifty and its associated processing infrastructure and IGO can solely fund $32 million of exploration activities over 6.5 years to earn a 70% interest in the PEP. IGO’s exploration activities are expected to start during the September quarter to benefit from the winter field season.

Nifty Scoping Study Identifies Long Life Open Pit: As a part of the company’s Copper Assets Strategic Review, MLX has identified a 10-year open producing ~26,000 tonnes of copper in concentrate a year with the opportunity for additional copper cathode production from a restart of the heap leach SX/EW facility. It provided a production target of 250,000 - 270,000 tonnes of copper in concentrate at an average annual production rate of ~26,000 tonnes of copper at an AISC of $5,400 to $5,800 per tonne of copper produced. The company has identified several opportunities in future studies, including assessing the impact of the additional mineralization.

Quarterly Update: The company has recently updated quarterly report for the three months ended 30 June 2020, wherein it reported closing cash and working capital of $16.4 million and Citibank N.A. Loan facility balance of $30.5 million. During the quarter, the tin division produced 1,733 tonnes of tin-in-concentrate, bringing the FY20 production to 7,181 tonnes and ore mined was 5.1% higher than the previous quarter. In the same time span, EBITDA and cash flow were improved to $4.15 million and ($1.00 million) from $2.97 million and ($1.47 million) in the previous period, respectively. The company has completed the Area 5 Mining optimization Study, increasing annual production to over 10,000 tonnes of tin per annum from FY25.

During the quarter, MLX reported revenue of $37.45 million at Renison Tin Operations and a decline in C1 Cash Cost to $28.08 million from $31.69 million in the previous quarter. In the same time span, it reported an AISC of $29.40 million.

Renison Tin Operation Production and Costs (Source: Company Reports)

Future Expectations and Guidance: The company has provided guidance for FY2021 and expects to produce 8,200 to 8,700 tonnes of tin-in-concentrate at AISC of $19,000 to $20,000 per tonne of tin produced. The Renison strategy is focused on converting in-mine exploration success into a substantial long-life mining operation and on delivering higher cash margins through an increased mining rate, grade, and recovery. The company is also seeking productivity improvements and reduce costs. MLX is expecting improved cash flow in the coming periods as the grade of mined ore increases with a resultant lift in tin production. For Nifty Copper Operations, the company is likely to incur total care and maintenance costs of $4.2 million in the upcoming quarter. Despite the significant disruption in the economy caused due to the outbreak of the COVID-19 crisis, there has been no significant disruption in the company’s operations, critical supplies, or product logistics.

Key Risks: Investment in the company is subject to certain risks and uncertainties. These include mineral resource estimates, metal prices, capital and operating costs, changes in project parameters as plans continue to be evaluated, the continued availability of capital, general economic, market or business conditions.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: MLX is focused on operational and financial discipline and is experiencing decent demand for portfolio metals from clean energy revolution and technology. The company has modest funding requirements to achieve near term strategic objectives and is likely to witness healthy future cashflow from high value and high margin projects. MLX has the potential to extend mine life with exploration targets and is moving forward with a commitment to clean mining. As per ASX, the stock of MLX gave a return of 6.41% on the YTD basis and a return of 5.06% in the past three months. The stock is also trading close to its 52-weeks’ low level of $0.043, proffering a decent opportunity for accumulation. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and have arrived at a target price offering an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, decent returns in the past three months, positive long-term outlook and decent financial and operational performance despite the softer market conditions, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.081, down by 2.41% on 17 July 2020.

MLX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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