St. LOUIS () -- Baja Mining [TSX:BAJ] has completed its much anticipated Definitive Feasibility Study (DFS) for the Boleo copper-cobalt-zinc project, originally scheduled for late 2006. The company is very pleased with the numbers, but the market has yet to respond. Here are the highlights.
At its 100%-owned Boleo project in Santa Rosalia, Baja California Sur State, Mexico, Baja forecasts annual production of 55,750 tonnes of copper, 1,535 tonnes of cobalt and 6,300 tonnes of zinc for a mine life of 25 years at an average cash cost of negative $0.07/lb of produced copper, net of by-product credits.
Based on long-term prices of $1.50/lb copper, $15/lb cobalt and $1,200/t zinc, the company estimates after-tax internal rate of return (IRR) of 24.7%, or 46.0% at current market prices, with after-tax net present value (NPV) at an 8% discount rate calculated at $700 million or $2.3 billion at current market prices.
Using the long-term metal prices above, the company would gross $184 million per year in copper, $51 million in cobalt and $21 million in zinc. At an operational cost of $91 million per year at $32.24/t, the earnings before interest, tax and amortisation (EBITA) would be $165 million. Less amortization of $50 million and taxes of $35 million, net earnings would amount to about $80 million per year.
With fully diluted shares at 140 million, this equates to $0.57 per share. Using an industry average price to earnings (P/E) ratio of 10, this puts shares at $5.70 (C$6.30).
With current pricing of $3.50/lb copper, $30/lb cobalt and $1500/t zinc, total earnings would come to $293 million per year or $2.09 per share. At a P/E ratio of 10, shares prices would be closer to $20.90 (C$23.20).
The company also notes an upside potential from its manganese production, which could increase the base case NPV by an additional $302 million. Manganese production could exceed 100,000 tonnes per year at the current design capacity.
The deposit hosts more than 275 million tonnes of measured and indicated resources grading 1.77% copper equivalent and 250 million tonnes of inferred resources grading 1.29% copper equivalent. This is inclusive of 17.6 million tonnes of open cut P&P reserves and 67.4 million tonnes of underground P&P reserves.
"The best part is that at current metals prices, the project is worth about $2-$6 billion ... $2.5 billion is about 10X the current market cap of $255 million," said Jason Hommel, editor of the Silver Stock Report. "Those are some fantastic numbers."
In mid-May, Hommel told subscribers to "double your money quick in Baja Mining" and "longer term, make up to tenfold."
"I believe investors should aggressively buy Baja Stock up to C$2.50," he said. "This is a late-stage project, still priced at early-stage exploration levels."
However, he indicated that the DFS had some unanswered questions. In fact, the market pushed shares down one cent yesterday to close at C$1.93 upon the news.
"What was difficult for me to analyze about this feasibility study is that only about half of the measured and indicated resources were upgraded to proven and probable reserves and the mine life was shortened from 50-100 years down to 25 years, but the annual production did not increase," said Hommel.
He said the company does not need a feasibility study going beyond 25 years, but "this kind of a view reduced the mineralization from the perspective of looking at the minerals as 'leverage,' even though we know there is another 25-75 years more worth of mineralization there that our math models are no longer counting."
The company also raised its estimated Capex costs to $407 million, an increase of 2.5% above the capital costs outlined in the company's January 2007 Updated Preliminary Economic Analysis. This is up nearly 40% from the of $292 million last year.
The project is to be developed as a series of underground mines using conventional soft rock mining methods. Baja believes it can be optimally mined, much like a coal seam or soda ash deposit, using a continuous mining machine.
An Environmental Impact Manifest (EIM) was approved by the Mexican authorities in . The company has also received authorization to commence development of the project within the biosphere. Commercial production is scheduled for 2009.
Hommel noted that Baja would need to raise $500-600 million to start mining, adding that "Baja would be wise to raise most of the money to start mining at about $3.50/share."
Baja said it is working closely with its advisor, Endeavour Financial, which has prepared an Information Memorandum that will be distributed to the commercial bank market. Endeavour Financial noted "very strong interest in the project."
But Hommel said Baja may consider issuing shares to raise the money instead at share prices of above C$2.50.
"This is a clear indication from the company, that it is safe to buy the stock up to $2.50/share, without the company issuing shares in a private placement below that level," he said.
Baja shares are up 2 cents thus far today at C$1.95 on the Toronto Stock Exchange.
"I think Baja has great upside, even from here," said Hommel. "I expect copper prices to rise soon again, too, which will provide more upside."
