Indonesia-focused resources firm Asiamet (LSE:ARS) is currently making its first significant step towards becoming a low-cost copper producer by completing a feasibility study on BKM, its high-quality, highly-economic copper deposit. Against a background of rising copper prices, which is being fuelled by an approaching global deficit, the business is also making significant progress at its zinc-rich BKZ deposit and its massive copper-gold resource Beutong.
After skillfully manoeuvring a problematic commodities downturn and continuing to develop the flagship BKM project during the lows of the commodities cycle, Asiamet’s shares have more than doubled in the last year rising with the copper market in general as well as being rewarded for delivering against some outstanding achievements to date.
However, the firm could still be undervalued, and with a wave of game-changing news flow on the horizon, this might be remedied soon especially as it considers itself to be perfectly positioned to take advantage of high copper prices not only as it develops the mine but ultimately brings production onstream. Asiamet boasts a highly experienced management team and ambitions to become a large Asian mining player. As a result, the company’s current 9.9p share price could provide a good entry point before the market fully wakes up to its true potential.
Asiamet has been rapidly delivering robust and positive news flow from its three main sites. If all the potential on offer is achieved, then there is no reason that it cannot become a major low-cost producer with several substantial revenue streams. At 10.5p on the bid the business is currently worth £75m, so how much scope for improvement is there?
The firm’s main focus is a large copper deposit called BKM, which is part of its 100pc-owned KSK Project. The site boasts an impressive measured and an indicated resource of 711.3Mlbs of copper, which would be worth a whopping $2.2bn (£1.6m) on the market at current copper prices of $3.1/lb. It has an initially expected mine life of eight-years, during which Asiamet will target production of 25,000 tonnes per annum. BKM is also well into its bankable feasibility study, making it Asiamet’s most advanced site. This feasibility study has been fully funded to its completion by a £6m fundraise carried out by Asiamet in August last year. Getting the project to this stage was no mean feat given the difficult copper climate of recent years. If all goes to plan, Asiamet expects BKM’s feasibility to be completed and published in the next six months. Following this, the business plans to carry out project funding discussions and obtain final permits for BKM before construction and commissioning begin in 2019. Production is then expected to start at the end of 2019 or the beginning of 2020. This will mark a significant step in Asiamet’s transition from an exploration-development company into a low-cost copper producer.
Another key opportunity for Asiamet is its BKZ site, located just 800m away from BKM. During extensive exploration carried out towards the end of 2017, this poly-metallic site returned grades of zinc on par with the highest-grade zinc development projects globally. This discovery comes as zinc prices hit their highest level since August 2007 after increasing by around 114pc over the previous two years. Drilling late last year also intersected a further high-grade copper zone immediately beneath the zinc mineralisation at BKZ. There are currently no official estimates of how much metal the site contains, but Asiamet is completing its 35-hole definition drill and intending to publish a maiden resource estimate by April or May this year.
Asiamet’s third main project is Beutong, a large, high-quality copper-gold deposit located 60km from a large power station and seaport. Last month the company finally secured a vital 20-year production licence for Beutong. This licence is required to take the project to is development stage. Beutong has not yet been drilled, but it is estimated to have a whopping resource base of 2.4mt of copper, 2.1moz of gold, and 20.6moz of silver and estimated to be a Tier-1 project globally. Unlike BKM and BKZ, where Asiamet has complete ownership, the firm only holds a 40pc equity interest in Beutong. However, subject to meeting certain expenditure and site-based activity milestones, it will be given the option to increase this to 80pc. Since receiving its licence at Beutong, Asiamet has begun efforts to re-commence drilling at the site. It has mobilised a rig with a drilling capacity of at least 600m to the area and recently underwent a site visit to meet with local government and community stakeholders to assess the condition of existing infrastructure. Beutong may currently be the least developed of Asiamet’s three main assets, but its upside could genuinely be huge.
Asiamet’s decision to transition from an exploration-development company into a low-cost copper producer could not have come at a better time. Copper prices hit their highest level in almost four years at the end of 2017, breaking through $7,000 a tonne, and this strength has continued into the New Year. The surge has resulted from a combination of growing demand and the increased risk of a supply deficit. Copper is a robust metal with multiple industrial uses. Indeed, it is a key ingredient in all power generation and transmission. Demand has been boosted by strong global economic growth, an increasing global population, and a healthy market in China – its largest consumer.
Going forward, soaring electric vehicle use is likely to fuel demand even further. Electric vehicles typically require around 100kg of copper compared to just 16kg needed by a car with a traditional combustion engine. At the same time, recovery from the commodity downturn has been slow and has resulted in copper projects, especially those of considerable scale, to be in short global supply. Indeed, global mining companies such as Glencore and Rio Tinto now forecast an impending lack of supply due to a lack of replacement of old mines coming to the end of their lives.
As a result of this, analysts at Goldman Sachs predict that the copper market could face a deficit of 130-kilotonnes in 2018, with prices potentially rising to above $8,000 a tonne by 2022. With Asiamet expected to enter copper production in 2019/20, its development timeline is closely aligned with the price of the metal. According to Asiamet, the rise in copper prices has attracted some investors who were not initially interested in the firm during the commodity downturn. With the business successfully navigating this challenging market by continuing to put money in the ground when its peers were forced to pull back, many big players have begun to see its potential.
Some larger mining businesses are even looking to partner with Asiamet in a bid to increase their copper production during the deficit. Sasha Sethi, Investor Relations Executive for Asiamet, said:
‘Bigger players are always looking to add further production especially given that there are a paucity of quality projects of BKM’s size in development at the moment, so projects like ours are becoming very interesting. With the copper market being so strong, we are, however, in a position of strength and are looking looking to take this to production ourselves. There are a number of parties showing interest in the project with a view to potentially partnering and a key part of our strategy is to secure a strong local partner, if this transpires then it would certainly give us other options than just having to go back to the equity markets. There are signs that a range of sophisticated mining investors and institutions have a lot of demand to get involved at some stage so as we advance the project it is just about getting options on the table and moving forward with what is best for the company and shareholders.’
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As broker Optiva points out in the chart below, Asiamet’s share price has been reacting positively to the consistent news flow it has been delivering from its three main sites over the last 18 months. Indeed, with Asiamet’s share price increasing from 1.2p to 10.7p over the previous two years, the stock has been capturing the imagination of some investors and has vastly outperformed the broader copper market. Despite this, Asiamet believes it is still currently trading at a significant discount to its potential NAV and will see a market re-rating as it delivers key milestones in its transition to a low-cost producer. If this turns out to be the case, then the next 12 months could be a blast for the firm, with plenty of news flow due from all its sites.
To recap, Asiamet is expected to post a further resource update and its completed feasibility study for BKM in the coming months. It is also likely to have to deliver news on project funding, remaining permits, and its construction decisions. At BKZ, Asiamet hopes to drill the final eight holes of its 35 hole definition drill this month with a view to publishing a maiden resource estimate by May at the latest. At Beutong, the firm hopes to provide an update on its progress once initial drilling has begun.
Further gains to come?
Looking at the trajectory Asiamet’s shares have already taken over the past two years as excitement around its projects has grown, the significant milestones that the company is on the verge of crossing could increase value greatly. If so, its current share price and corresponding £81.4m market cap may look comparatively cheap. As Sethi puts it:
‘There is a lot of upside. We are focusing upon our core projects, and once we get those going, we can look into some more interesting areas and multiple other high potential prospects within our KSK licences, which will certainly help daylight a lot of further value. We are looking at district scale potential here; not just production limited to one area. And of course we have the Beutong, we are very excited about Beutong, and if not already, the wider market will soon be too.’
‘As this is a relatively new story, it is taking some time for the market to catch on. Investors are looking around, and it is difficult for them to find quality development stories listed anywhere in the world. But Copper is hot at the moment, and as prices continue to rise investors are going to be scrambling. You think we have had a good rise already, but if all goes to plan, then you have not seen anything yet.’
Another string to Asiamet’s bow is the wealth of experience possessed by its senior management team. Executive chairman Tony Manini is a geologist with 25 years of global resource industry experience in over 20 countries. This includes 14 years with Rio Tinto and eight years at successful resources firm Oxiana Limited. Manini took Oxiana from a market cap of $3m to $6bn using a similar strategy to the one he is currently pursuing at Asiamet. Namely, this involves buying good quality assets during bear markets before building them back up and creating shareholder value when the market turns. Manini also has a significant amount of skin in the game, holding a 3.3pc stake in Asiamet, currently worth around £2.8m. Alongside Manini sits chief executive Peter Bird, a geologist of 30 years who has held senior positions at companies like Merrill Lynch, and Stephen Hughes, who has senior geology experience at Freeport and Tigers Realm Group. The high regard held in the market for Asiamet’s management is no doubt helping the business in the institutional space. For example, banking giant JP Morgan now holds an 8.3pc position in the firm after participating in September’s placing.
Asiamet is on the verge of making its first big step towards becoming a low-cost metal producer with its copper-rich BKM asset. It is due to begin producing at a time where a long-term rise in copper prices seems a safe bet due to a looming deficit in supply as demand grows. The business is also making steady exploration progress at its zinc-rich BKZ site and Beutong, its sizeable copper-gold resource. Although these sites will require more work, their potential upside makes them well worth keeping an eye on. With an estimated operating cost of $1.28 a pound of copper, production would offer a healthy margin against current copper prices. Although the firm’s half-year results for 2017 revealed a loss of around $2m, its transition to a producer is therefore likely to improve its financial situation.
Asiamet deftly navigated a difficult copper environment and boasts strong management and ambitions to increase its asset base beyond its three primary resources in the future. All these prospects mean its shares could continue their upward trajectory at an increasingly rapid pace as Retail Investor and especially Institutional interest grows. With that in mind, its current 9.9p share price could be a good entry point.
Author: Daniel Flynn
The author of this piece does not hold shares in the company mentioned.