Berkeley Mineral Resources: Lead & Zinc in the Name but Gold is the Game!

BMR’s Zambian project should transform BMR into a much bigger company – soon 

Berkeley Mineral Resources (LON:BMR) is in the final stages of due diligence to acquire assets in Zambia which promise substantial profits – starting in only a few months time – in return for what some might think is a cost that is too good to be true. The company has just conditionally raised another £2m (at 1.5p) to add to the £1.8m it has already raised over the past year, to enable completion of the purchase of  the high quality zinc and lead tailings dumps at the old Kabwe mine. For a total outlay which (with borrowings) will have totalled only around £11m, BMR is developing a business that should earn revenues approaching £250m over the next eleven years, at margins that should generate over £80m of profits. Once its $3m option to acquire the last of the dumps and their IP is exercised (BMR says by the end of August), it should be able to start selling unprocessed material from one of the dumps at little cost to give it an £200,000 per month net income and, after modest further spending on the required beneficiation plant to process the bulk of the resource, will be able to earn some £1m pre-tax each month (at current metals prices) from about 15 months later. At a current market cap (at 2.0p) of only £11.7m, the fully diluted PER by then will be less than 2 times.

‘Tailings’ are sometimes sniffed at by mining investors. But these are very high quality metals residues in waste material from the mine workings at Kabwe, built up during 90 years when it was Africa’s largest producer of zinc and lead, and so inefficient were the methods used before the mine closed in 1994 that large amounts (over 9% by volume) of zinc and lead are still in the dumps. Modern processes to recover it are well understood and relatively simple, so that BMR can sell the product at much higher margins than can those who have to get raw zinc and lead out of the ground by traditional mining methods.

BMR has been able to acquire the dumps cheaply because their existing owner (S African listed Metorex Ltd) after financial problems wants to concentrate its remaining resources on its other African businesses. Not least another reason is that the Zambian government has been bringing together various experienced groups, including the local consultants whom BMR has known for some time and has used to research the potential, to dispose of the dumps which they see as a pollution problem.

Zinc and lead prices are now double than when Kabwe closed, and our figures are based on preliminary costings and exploitation plans provided by the consultants, so stand to be confirmed by the due diligence and a JORC compliant resource analysis now in progress. Our projections over the eleven year project life assume zinc (and lead) at the recent market low price of $1,900/tonne, although it is now back over $2,000 and some well regarded industry consultants forecast that because mines are running out, and Chinese demand will continue strong by any standard, these metal prices will rise considerably higher earlier rather than later this decade. 

Even though BMR will have more than doubled shares in issue by the time it has raised a (probably modest) further amount needed to complete the main plant, fully diluted assets per share will be substantially higher than the current 2p share price. Assuming 650m share in issue after exercise of warrants accompanying the latest placing, we have calculated a net present value per share of  projected profits over the next eleven years (at a conservative 12.5% discount rate that is only appropriate for much more risky projects than Kabwe) of between 8.5p at a $1,900/tonne zinc price, and 15.0p at the $3,000 that is supported by the long term forecasts. In only the first five years, BMR will have earned a cash inflow of over £30m from Kabwe even if taxed at 35% in Zambia, which it probably won’t be.

With the company only months away from earning a substantial income from the first of the dumps, from customers who have already tendered their interest, BMR’s current £11.6m market capitalisation could soon be left far behind.

(This note has been based on a more detailed review prepared by analyst John Cornford of FourSquare Research that has been commissioned by BMR and which will be published shortly). Disclosure: The author hold shares in Berkley Mineral Resources.