Elementos’ target price hiked by BW Equities after tin resource upgrade exceeds expectations

Elementos Ltd (ASX:ELT, OTC:ELTLF) has received an upgrade in target price from BW Equities after the company exceeded expectations with a 50% increase in resources at its 100%-owned Oropesa Tin Project in Spain to 18.86 million tonnes at 0.40% tin (Sn) at a 0.15% Sn cut-off.

This includes a 78% increase in the measured and indicated MRE to 16.21 million tonnes from 9.34 million tonnes reported in 2018.

Along with the increase in resources, BW Equities has also incorporated a higher tin price of US$30,000/t in its valuation given the very strong spot tin price of >US$37,000/t (LME) to raise Elementos’ target price by 50% to 4.5 cents per share from 3 cents.

The following is an extract from the research update:

Updated Mineral Resource: Following the incorporation of the 44 diamond drill hole program which showed numerous intersections at shallow depths of <100m, ELT has reported a 50% increase to the Oropesa Mineral Resource which now stands at 18.9mt at 0.40% Sn (previously 12.5mt at 0.54% Sn). Confidence in the Mineral Resource has improved with a significant improvement in the Measured & Indicated categorised Resource of +78% to 16.2mt at 0.38% Sn (previously 9.3mt at 0.55% Sn). The reduction in overall grade primarily reflects the incorporation of shallow lower grade tonnes (<100m of surface).

Mine Plan Implications: The larger, shallower resource will form the basis for the mine planning studies and the most likely/significant implications relative to the Economic Study released in May 2020 are (1) a lower overall strip ratio relative to the prior estimate of 11.7:1 and (2) potential for expanded process plant throughput capacity which was previously set at 750ktpa. If we assume a 75% conversion of the current 18.9mt Resource into the mine plan (an approximation based on the conversion factor observed in the prior Economic Study) the potential mine plan inventory is ~14mt. As such we expect that a 10+ year mine life at 1mtpa process plant throughput appears reasonable. If the shallow component (4.97mt) is included in full, at a strip-ratio (SR) of ~3x and the pre-existing 11.7x for the remainder, we derive an overall adjusted SR of ~8.5x.

Revisions: We have revised our mine plan assumptions to incorporate a 1mtpa operation (previously 750ktpa) with a 12-year operation life (13.5 years prior). We incorporate the lower average head grade as per the updated resource, and an 8.5x strip ratio as articulated above, which generates average annual tin production of 3.3ktpa. We assume higher capex of US$75m to reflect the expanded process plant (US$52m prior). We also incorporate a higher tin price of US$30,000/t (US$25,000/t prior) given the very strong spot tin price of >US$37,000/t (LME). Our target price has been revised as a result to AUD 4.5 c/share (AUD 3 c/share prior). At spot tin prices of US$37,500/t our valuation would increase to 7.1 c/share.

Valuation & Recommendation: ELT provides investors with exposure to a tin project in a stable geographic region (Spain), with a defined economic assessment which shows very strong fundamentals at current tin prices. Oropesa has modest pre-production capex requirements (we assume US$75m for an expanded lmtpa process plant) for an open-pit mining operation and conventional processing circuit. The shares trade at a significant discount to our 4.SC/share (AUD) valuation, set using a tin price of US$30,000/t (spot LME = US$37,500/t) and DCF valuation analysis. As such we reiterate our Buy rating. Key risks include the availability of funding, tin prices, permitting/approvals and operational issues.

Story by ProactiveInvestors