Alphamin Resources — Mpama South continues the charge

Alphamin’s Q421 financial results were released in the context of known operating results, which were announced on 11 January. Subsequently, on 4 April, Alphamin announced its operational performance for Q122. Both are summarised in the table below relative to prior quarters.

Alphamin’s underlying financial results for Q421/FY21 are provided in Exhibit 2, below. A number of features of both its operational and financial performance are noteworthy:

Exhibit 2, below, provides an analysis of Alphamin’s underlying financial results for Q421 relative to both Q321 and our prior expectations:

At the time of its Q221 results, Alphamin updated its guidance for the remainder of FY21 and H122. In the light of the lower grades encountered in Q221, it expected to mine lower tin grades averaging 3.2–3.5% in H221 and into Q122, which, at higher plant recoveries of 78% (including the fine tin recovery plant) and monthly throughput of 36,000t, suggested contained tin production of 900–1,000t per month. The grade of ore mined was then expected to increase to an average of 4.0% from Q222 onwards. As per Alphamin’s Q421/FY21 production update of 11 January, contained tin production and sales guidance for the financial year ending December 2022 remains 12,000 tonnes (cf Edison’s prior forecast of 11,711t).

Quarterly estimates for Alphamin in FY22 in the light of Q421 financial results and Q122 operational results are provided in the table below, with the caveat that the quarterly results of junior mining companies can be prone to material volatility relative to both historical results and analysts’ forecasts. At the time of writing, the current three-month price of tin is US$42,793/t and, for the purposes of forecasting, we have assumed this price will prevail for the remainder of the year. As noted previously, in this case, Edison has also attempted to forecast the likely effects of the application of ongoing superprofits tax assessments on Alphamin’s financial performance for the remainder of the year.

Among other things, readers should note that we are forecasting a sharp decline in interest expenses as debt (all of which is due within 12 months) is paid off. In addition, all outstanding warrants as at end-December 2021 are now reported to have been exercised in January 2022 with the result that the customary quarterly warrant charge incurred by Alphamin should also now disappear from Q222.

Assuming the current three-month price of tin (US$42,793/t cf US$39,020/t previously) prevails for the remainder of Bisie’s life (ie adopting the current tin price as our long-term price), we calculate a valuation for Alphamin (based on Mpama North only and excluding any blue-sky exploration potential) of 95.19 US cents (cf 86.1c previously), or 120.3 Canadian cents (cf 109.7c previously) per share. Note that this valuation assumes the execution of the Bisie life of mine schedule according to plan and applies a 10% discount rate to forecast dividends.

A key sensitivity for Alphamin is its exposure to exploration success. Alphamin’s processing schedule follows its mining schedule closely. As this drops away towards the end of the life of the mine, so too do production, earnings and cash flow. To the extent that Alphamin is successful in its exploration at Mpama North and Mpama South in keeping its plant in full production at FY27 levels into the future (see Alphamin’s latest announcements: Alphamin announces maiden mineral resource estimate and positive preliminary economic assessment for Mpama South, released on 8 March 2022, and Alphamin reports high grade exploration assay results at Mpama North mine and Mpama South development project, released on 22 March, and below), our valuation of the company (calculated at the prevailing tin price) would increase as follows:

For the purposes of this valuation, we have assumed an ongoing exploration commitment at Alphamin of c US$20m initially, dropping back to US$2.7m per year to achieve the replenishment of reserves and resources required to keep the mine operating at full capacity.

On average, therefore, each additional year by which the plant is maintained at full capacity (in the short term) adds an average of 5.69 Canadian cents per share to our valuation of Alphamin (at the prevailing tin price). In the limiting case in which exploration success is sufficient to maintain production at FY27 levels indefinitely (which, for these purposes may be taken to mean c 52 years), our valuation of Alphamin rises to US$1.98/share (cf US$1.92/share previously), or C$2.487/share (cf C$2.408/share previously).

Coincident with its Q421/FY21 results, Alphamin announced both a maiden resource estimate at Mpama South and the results of a simultaneous PEA for the project. Mpama South’s maiden resource was then updated (and upgraded) once again, on 29 March. At the same time, the company also announced a decision to start the development of the project in order to capitalise on the current favourable tin market fundamentals and its ability to self-fund the project.

A summary of the (updated and upgraded) resource at Mpama South within the context of the existing resource at Mpama North is as follows:

The initial maiden mineral resource was estimated from 79 drillholes totalling 23,109m (average 293m per hole) and was reported at a base case tin grade of 1.0%, which satisfied the requirement for reasonable prospects for economic extraction. However, it excluded the substantial quantity of subsequent drilling completed since September 2021 in Phases 4 and 5 of Alphamin’s exploration campaign, which yielded similarly positive results (see below) with characteristic high-grade visual cassiterite in many of the drillholes. Over 40 drillholes and over 10,000m were subsequently drilled beyond the limits of the maiden mineral resource in Phase 3 of Alphamin’s campaign and further updates will be released throughout the year as the drilling phases progress and assays are received. Compared with the original maiden resource however, which was delineated from 79 drill holes (at a rate of c 35kt resource tonnage per hole), the subsequent update on 29 March (of 1.48Mt) was delineated from a further 21 additional holes (at a rate of c 70kt per hole). Pro rata therefore, the remaining 26 holes for which assays have yet to be received could add a further 1.8Mt to resources at Mpama South when Alphamin’s next update is released. Either way however, it is notable that, in terms of tonnage, the resource at Mpama South is now comparable to that at Mpama North and it therefore might be supposed would support a mine life of comparable duration.

According to the International Tin Association’s Tin Industry Review 2020, Mpama South’s maiden resource (prior to its upgrade) ranked it as the second highest grade publicly reported CRIRSCO tin mineral resource globally and one of the largest in terms of contained tin.

Alphamin’s resource multiple immediately prior to its Mpama South maiden resource announcement was US$5,573 per tonne of attributable in-situ tin. On this basis, the value of Mpama South to Alphamin would be US$494.6m (or 38.9 US cents per share).

However, US$5,573/t as an in-situ resource (based on Mpama North) is likely to over-state the value of Mpama South’s resources as it is a post-investment valuation. In this case, we calculate from Alphamin’s balance sheet that the company was required to make a (fully consolidated) investment of US$1,093 per tonne of in-situ resource (including exploration) in order to achieve this valuation. Netting this investment off against the original valuation suggests a pre-investment valuation for Mpama North of US$4,480/t. On this basis, the attributable value of Mpama South to Alphamin would be US$397.6m (or 31.3 US cents per share). This may be seen within the context of the evolution of valuation of Mpama North’s resources as the mine transitioned into production in H219:

By this measure, Mpama North’s resources were of relatively little pre-investment value to the company before they were put into production (in 2019). That is to say, they were worth approximately what the company had invested historically to both find them and develop them. This may also be seen from the company’s share price, which traded around net asset value prior to FY20. However, this value subsequently increased very sharply – to US$5,573/t – as those same resources were brought to profitable account. This US$5,573/t value may also therefore be interpreted within the context of the selling price of Alphamin’s tin (of US$30,629/t in FY21) and its all-in sustaining cost of sales of US$14,173/t in FY21. In the meantime, in Mpama South’s favour is the fact that Alphamin’s management has already proved that it is capable of building a mine and successfully bringing it into production in North Kivu – thereby lowering risk.

In the immediate aftermath of its Mpama South maiden resource announcement on 7 March, Alphamin’s resource multiple fell from US$5,573/t to US$4,191/t. It remained at approximately this level until its resource update on 29 March. All other things being equal however (and with no pro rata adjustment in its share price), in the wake of its 29 March update, at Alphamin’s current price and forex rates, it will have fallen to US$3,947/t (or 9.2% of the prevailing price of tin cf Alphamin’s gross margin of 60.8% in FY21).

Readers should note that Alphamin’s calculated discovery cost of US$61.41/t in FY21 probably overstates the cost for Mpama North resources in that Mpama North resources only would have been delineated at that point, but some of the costs associated with Mpama South would also have been recognised on Alphamin’s balance sheet by that time as well. This could be indicative of the fact that, tonne for tonne (of contained tin), Mpama South’s resources are more expensive to discover than Mpama North’s. Either way however, it should be noted that the cost of resource discovery and delineation is negligible within the context both of the overall development of the deposit and its potential value once put into profitable production.

At the same time as it announced its maiden resource, Alphamin also announced the results of a PEA of Mpama South. The PEA encompassed a number of mining, metallurgical, environmental and regulatory studies, which together demonstrated the potential to expand production at Bisie by leveraging the infrastructure at Mpama North (eg power, water, site access, underground infrastructure and personnel) to build a second mine and dedicated second lookalike processing plant and mine portal at Mpama South. The main findings of the PEA were as follows:

The PEA is necessarily preliminary in nature. It included, for example, a portion of the inferred mineral resource that ordinarily would be regarded as too speculative geologically to be considered mineral reserves. In this case however – and in the light of the resource upgrade on 29 March and ongoing drilling – we believe that it might very well prove too conservative and that ultimate resources at Mpama South may well be capable of supporting a mine life in excess of seven years. On this basis, an analysis of Mpama South’s (implied) reserve conversion rate relative to that of Mpama North is as follows:

Readers should note that the ‘possible’ category of reserves no longer exists and has been resurrected in Exhibit 9 merely as an instrument for demonstrating the required conversion of Mpama South’s inferred resources into reserves in order to render the mine schedule assumed by Edison achievable. In this case, it may be seen that while the required overall reserves:resources conversion factor for Mpama South is comparable to that for Mpama North, 68.9% of the resource tonnes and 58.7% of the contained tin in the inferred category of Mpama South’s resources will also need to be upgraded (probably first into the indicated category of resources and then into the probable category of reserves) in order to allow the execution of the mine schedule according to Edison’s assumptions. With this caveat, it is possible to construct a financial model for the project and to derive a valuation for it.

For these purposes, and given the company’s decision to start developing the project, we have assumed that the period of construction will run for 20 months, and that the mine will then enter production late in FY23 or early in FY24, which is in line with company’s guidance. All other parameters are otherwise adjusted to reflect the tin price of US$42,793/t used elsewhere in this report, on which basis it is possible to estimate the income statement relating to Mpama South alone for Alphamin from the start of commercial production in FY24 as follows:

While not shown here, predicted balance sheets and cash flow statements for the Mpama South project have also been calculated, albeit with the caveat that, at the current time, no consideration has been paid to fluctuations in working capital, which is a refinement that will be made at a later stage.

On the basis of the above income statement, it is possible to calculate the following valuations for Mpama South to Alphamin (ie after a 15.86% minority has been accounted for) at Edison’s customary 10% discount rate:

For the purposes of the ‘per tonne’ valuations above, Edison has applied the Mpama South contained tin resource on a 100% (rather than attributable) basis. While this treatment appears irregular, it provides investors with an indication of how much extra value additional tonnes delineated at Mpama South in the future may be worth to Alphamin. Either way, however, it is notable the extent to which the ‘per tonne’ valuations above reconcile with the in-situ valuations calculated previously.

Considering Mpama North and Mpama South together, our consolidated valuation of Alphamin is C$1.5814/share and this valuation changes by approximately ±13.4% for every ±10% that the tin price moves from its current level of US$42,793/t. Alternatively, we calculate that Alphamin’s share price of C$1.15 discounts a long-term real tin price of US$34,055/t, which is 20.4% below the current (three-month) price of tin.

As may be seen from the above graph, tin is the second best performing of 16 metals and minerals since 1 January 2020 (after prime Australian coking coal). Although it cannot be seen in the above graph, it is also the best performing of the same 16 metals and minerals since 1 January 2002.

Drilling at Bisie to date has achieved two important goals:

Alphamin’s success in achieving these two goals creates the potential for synergies between the two deposits and expedited underground access to Mpama South, thereby connecting it to the already existing underground development, infrastructure and services of the Mpama North mine.

Exploration at Mpama South throughout 2021 to the present has encompassed c 33,556m of drilling over 126 drillholes (average 266m per hole). Data from 100 holes have contributed to its updated resource. Data from 26 remain outstanding as at the time of writing with exploration ongoing. Selected significant intercepts encountered at Mpama South to date include:

These grades may be directly compared with Alphamin’s Mpama South’s updated resource grade of 2.47% Sn and Mpama North’s reserve grade of 4.01% Sn and its resource grade of 4.60% Sn (itself approximately the equivalent of a gold grade of 1oz/t in terms of the value of contained mineralisation at currently prevailing gold and tin prices). Moreover, visual cassiterite intercepts at Mpama South are now within 40m of the Mpama North mine. A phase 4 drilling campaign at Mpama South remains underway.

Alphamin commenced extensional drilling of the Mpama North orebody in July 2021. By the end of October, approximately 6,167m of drilling had been completed over 12 drillholes (average 514m per hole) and had revealed the existence of a north-east to south-west cross-cutting fault causing a downward and westward offset of the deeper mineralisation. By refocusing drilling closer to the final drill line relative to previous exploration, holes drilled 75m further along strike succeeded in intersecting significant zones of cassiterite mineralisation. Based on its metal content factor (grade x width), for example, drillhole MND019 appears to be one of the two most significant intercept encountered on the property to date:

In this case, it is approximately matched by drillhole MND011, which earlier recorded:

Both visual and assayed thick high-grade tin intercepts at the Deeps target provide a significant opportunity for Alphamin. In particular, the process plant has a targeted feed grade of c 4.0% Sn. Hence, the very high-grade mineralisation intercepted in the Deeps area will need to be blended with substantial quantities of lower grade material – holding out the possibility of adding production from previously unmined lower grade blocks to the mining schedule and potentially adding low-grade areas to the resource with the effect, ultimately, of maintaining a steady feed grade at Mpama North and of extending the life of the mine. In addition, five new holes west of the identified fault have also intersected visual cassiterite providing strike extension potential on the western block in the shallower Oso target. Drilling at the Deeps and Oso will continue to refine Alphamin’s understanding of these mineralised areas with the objective of adding significantly to life-of-mine reserves and resources in due course. In addition, drilling will commence on the down dip eastern target of Mpama North in May 2022, which still remains open and untested.

The Bisie Ridge is 13km long and hosts both the Mpama North and Mpama South deposits. The full length of the ridge was the subject of a follow up geochemical investigation in 2021 confirming tin and other base metal anomalies over the majority of its length. However, only a fraction (c 20%) of the ridge has been intensively drill tested to date. Six high priority drill areas have therefore been identified, with drilling at the first – Marouge – commencing in January 2022.

Between Q419 and Q421, Alphamin paid down financial net debt (ie excluding leases and unamortised fees) by US$161.0m, from US$88.6m at end-December 2019 to a net cash position of US$72.4m at end-December 2021 (equivalent to 5.6 US cents per share). As such, post year end, the company announced a C$0.03/share dividend (aggregate US$29.7m – Edison calculation), which was paid to shareholders on 11 February, as part of its newly devised strategy to balance capital allocations between ongoing exploration drilling, the fast-track development of the Mpama South deposit and shareholder distributions. Net cash was then reported to have improved by a further US$61m to US$129.5m in Q122 (post dividend).

It is not Edison’s practice to forecast net debt or net cash positions on a quarterly basis. However, we note that (excluding leases and unamortised fees) Alphamin increased its net cash position by US$67.9m in Q421 to US$72.4m and then by a further US$61m to US$129.5m in Q122, which is more than sufficient to fully fund Mpama South (which is in line with the company’s announcement to self-fund the development of the project) and pay an increased dividend for the year. Indeed, according to our calculations, an increased dividend of C$0.06/share for the year (Edison assumption) would only become compromised in the event that the tin price were to fall below US$10,000/t in the near future or if the long-term price of tin were to fall to below US$11,750/t – both of which are, to all intents and purposes, impossible.