Centaurus Metals – Investment Thesis

CTM, MC – $185m, Cash – $25m, EV – $160m

Centaurus is one of the stocks I am most bullish about long term yet it doesn’t seem to get the attention I think it deserves. I think part of this is that Australian investors have a fear of Brazil as a jurisdiction because some have had poor experiences. The flip side of this is that North Americans like LATAM and I think this will eventually drive price even if Aussie’s don’t fully appreciate the story. This can be shown by the fact that both Sprott and Dundee Goodman have taken sub-holder stakes in Centaurus.

Centaurus flagship project is the Jaguar Nickel project in Brazil. I originally dismissed this project to my peril because I assumed something was wrong with it given Vale swapped it out for an unproven asset in the Salobo West licence. This was definitely my mistake though as CTM are proving that Jaguar is a tier 2 project with possible tier 1 ability (people throw tier 1 status around far to loosely).

Jaguar is already globally significant in terms of it’s size and grade properties for a sulphide project and it’s still early. Being a sulphide project has significant implications in terms of the economies of the project compared to a laterite peer.

CTM have made a lot of progress with Jaguar since taking over the project. In June this year they announced their maiden JORC as follows:

Within this lies a higher-grade component:

This makes Jaguar an already significant project but is just the start. The resource remains open, particularly at depth and looks like a giant system.

The company is in the early stages of a 75,000m drill program that will run through until the end of next year which is focussing on 3 prongs:

1. In-fill to increase confidence intervals and feed into a scoping study in Q1 2021.

2. Extensional drilling to expand the resource, and

3. Testing regional targets that have been identified via geophysics.

Based on information to date I suspect this will end up being a 100Mt project at 1% Nickel for 1Mt of contained metal. This would be in the upper end of sulphide projects that contain economical grades.

So what does this all mean? Let’s talk some possible economics.

Jaguar is in the enviable position that it has what is a perfect starter pit that makes the project extremely viable. This starter pit would take approximately 1.65 years to mine assuming throughput of 2.5Mtpa which is my base case assumption for the project.

Now I will steal some numbers from my man @respculator as there is no point in reinventing the wheel.

At spot this moves to US$406m and at US$20k/t Nickel price which is what many analysts have deemed to be the long run incentive price for Nickel this would become $US530m.

These numbers are obviously pre-tax but calculating tax at this point is difficult. Brazil have tax concession schemes available for this type of project but these are unable to be applied for until projects reach production.

Nevertheless, given we are talking a 1.65-year period these are some incredible numbers.

My estimate is that a 2.5Mtpa plant will cost in the realms of US$250m so this starter pit (even on a post-tax basis) should cover these costs.

This in my opinion allows CTM a big available step-change which is to build a POX plant for ore mined post this starter pit.

If we assume that CTM mine an average grade of 1.3% at the upper end of the spectrum at 80% recoveries through a 2.5Mtpa plant this would give us 25-26kt of contained metal. At a 16% con grade this is approximately 165kt of con. So, this would be the front-end size of a POX plant. My estimation is that this might cost roughly the same amount as the plant. So another US$200-250m with the upshot of this being payability would move from 75% to 100%.

So re-using @respeculators input table and spot prices. If we have 1.2% grade, 100% payability and spot Nickel prices $/t ore becomes US$147. Costs will increase post starter pit as strip ratios increase etc. So I will use $50/t. I will also allow $10/t for POX costs. So total costs moving from $34/t to $60/t.

This still gives us margins of US$87/t over a 2.5Mt plant for EBITDA of US$217.5m p.a over what I suspect will become a 20-year mine life.

It also gives huge leverage to price rises, especially with payability at 100%.

This is why I think this stock has incredible upside and is worth people doing their own research and/or taking another look.

Disclaimer: I was not paid or commissioned by Centaurus to write this report. I do own shares in the company. This is not and should not be taken as investment advice. I am providing no target prices for the company.

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