Small Caps | Nov 19 2012
– OctaPhillip bullish on tin long-term
– Supply side to struggle, demand expected to improve
– Kasbah Resources an emerging tin play
– OctaPhillip upgrades to a Buy rating
By Chris Shaw
The San Rafael tin mine operated by Minsur is the world's largest single source of tin but is expected to shut in 2017. This will take out about 38,000 tonnes per year of supply, which represents about 10% of global tin supply at present.
With this metal out of the market, OctaPhillip is bullish on the long-term outlook for tin, forecasting a long-term price of US$25,000 per tonne. Along with a weaker supply outlook, OctaPhillip expects tin demand will improve in coming years, having been relatively flat since 2006. This flat demand reflects a running down of inventories built up between 2002 and 2006.
OctaPhillip's long-term tin price forecast is a positive for junior tin play Kasbah Resources ((KAS)), which historically has moved in line with the tin price. Kasbah is currently developing the Achmmach project in Morocco, in which it holds an 80% stake.
Production is expected to commence in 2015 at around 5.600 tonnes per year of tin in concentrate, with Kasbah having completed pre-feasibility studies for the project in June of this year. Work continues on a Definitive Feasibility Study, which should be completed in around 12 months time.
In March this year Kasbah announced a resource at Achmmach of 14.6 million tonnes at 0.9%, which equates to 135,000 tonnes of contained metal. Infill drilling is being undertaken to increase this resource, while OctaPhillip expects current drilling of the eastern zone will further increase the total resource. An updated resource statement is expected by March next year.
OctaPhillip notes Kasbah is fully funded through to the financing stage of the project, this as Toyota Tsusho of Japan is moving to a 20% stake in the project via the payment of $16 million. Kasban is expected to need a further $20 million in equity to develop the project, OctaPhillip expecting this will be raised at a discount to the current share price.
In net present value terms OctaPhillip values Kasbah's 80% stake in the project at $177 million. Adding in an expected future capital raising, the broker's base case valuation for Kasbah is 35c per share, rising to 45c per share on an un-risked basis. Risk to this valuation is to the upside, especially given the expectation of an increase in resource from current exploration drilling.
Given significant upside to its price target, OctaPhillip has upgraded Kasbah to Buy from Hold. A market capitalisation of around $65 million means Kasbah receives little coverage in the broader market, as none of the eight brokers in the FNArena database provide research on the company.
Shares in Kasbah today are unchanged, last trading at $0.165. Over the past year the stock has ranged between $0.135 and $0.35.
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