Jubilee Platinum - going for broke with Tjate

It's been all go at Jubilee Platinum this year. Having successfully bid for Braemore Resources, you might have thought it had done enough for a while - but it's now announced a tie-up with Sylvania Resources, too, changing the game plan and potentially bringing forward commercial exploitation of its key Tjate prospect.

If you'd looked at Jubilee back in 2006-7 you would have seen a whole cupboardful of different prospects in South Africa and Madagascar, though it was already becoming evident that Tjate was the flagship prospect. Now, the focus is firmly on developing Tjate, while the chrome and nickel interests in Madagascar have been curtailed in order to concentrate on getting Tjate into production.

Jubilee owns 63% of Tjate in the eastern Bushveld of South Africa, which has an estimated 70m ounce resource of PGM and gold - a combined indicated and inferred resource of 13.25m tonnes of ore at a combined grade of 5.24g/tonne. That suggests a sales value of £19 billion, before expenses [ref] Growth Company Investor, 4 June 2009: http://www.growthcompany.co.uk/news/1050277/resource-boost-for-jubilee.thtml [/ref] ; the NPV of Tjate was put at USD 800m back in 2007, on estimated production of 262,000 ounces a year, and that was before the latest update to resources [ref] Mining MX, 'Jubilee's Tjate ups capex', 20 September 2007: http://www.miningmx.com/news/platinum_group_metals/574082.htm [/ref] .

The scoping study carried out in 2007 showed it could be economically feasible to build a mine at Tjate, at a cost of around $470m, producing a mix of platinum with nickel and copper. The primary platinum resource there would support large scale open pit mining.

One research report went as far as to suggest that the company could be worth getting on for £600m. [ref] Fleet Street Invest, 30 November 2007: http://www.fleetstreetinvest.co.uk/commodities/mining/jubilee-platinum-mining-lessons-00044.html [/ref] However, the shares fell back rapidly after reaching a peak of 125p in mid 2007, as it was unclear where the financing would come from.

The geology looks good - Tjate is downdip of existing productive mines, Marula and Twickenham. It also looks to have a high contained value per tonne of ore, second only to Northam, and well ahead of other mines such as Amplats and Eastplats [ref] Minesite  presentation, p 7: http://www.jubileeplatinum.com/releases/presentations/jubilee_minesite_sept09.pdf [/ref] , while being a comparatively shallow resource it should have lower costs per tonne than most [ref] Idem, p 8 [/ref] - it's 600 to 1,200 metres in depth compared to as much as 2,000 metres at Northam and Impala deeps, and against an average 1,800 metres at the majors' new shafts.

So far, the company has been using cash flow from mining the tailings dumps to fund development. That's the mining equivalent of two men in a garage running a software company, I think. CEO Colin Bird has managed  to keep the project moving ahead despite, for many years, a lack of interest from the market - he's a real veteran of the sector, with  long experience as a mining engineer, having worked in Saudi, the UK, and Canada, as well as Africa, and in diverse resources.

In June 2009 Jubilee shocked the market by entering into negotiations with Braemore Resources, a company which owns the ConRoast smelting technology. Shares were knocked backwards in both companies - market was amazed by the deal, but actually it's quite a sensible corporate move - it brings cash flow that much closer. Braemore hadn't got the funding to commercialise its ConRoast technology - so Jubilee was coming to the rescue, and didn't have to pay a premium to acquire the shares [ref] MX Mining, 3 July 2009: http://www.miningmx.com/news/platinum_group_metals/jubilee-platinum-bids-for-braemore.htm [/ref] .

Former Braemore CEO Leon Coetzer has joined the board of Jubilee as an executive director, and will become managing director of the smelting and refining operations.

The key to the deal is understanding the nature of the Tjate deposit. There are two types of platinum resource in the area of the Eastern Bushveld - Merensky reefs which have high sulphur content and are easy to smelt, and UG2 reefs with high chrome content. High chrome content platinum basically breaks the smelter by clogging it up, so conventional smelters charge a premium for processing it. And Jubilee has quite a bit of UG2 to get rid of. The ConRoast process,then, will be the key to exploiting Jubilee's resource commercially. Braemore already has smelter supply deals with Anglo Platinum and Northam Platinum, and will be processing tailings dumps in the short term to generate cash.

ConRoast should also have an independent future value, as the Merensky reefs are being depleted much faster than the UG2 resource. Producers will increasingly have to mine the UG2 reef to keep up their production levels - which means they'll need smelters that can handle high chrome levels. Braemore has been trying to strike deals with junior producers, who don't have smelters of their own.

To buy and integrate Braemore, Jubilee raised £13.25m through an equity issue, placed by FinnCap at a 23% discount to the previous price of the shares.

Jubilee has now announced a joint venture with PGM tailings retreatment firm Sylvania, combining Braemore's ConRoast technology with Sylvania's low-cost retreatment of surface tailings stockpiles [ref] Investors Chronicle, 4 November 2009: http://www.investorschronicle.co.uk/Companies/ByEvent/Risk/Analysis/article/20091104/465a02be-c936-11de-8483-00144f2af8e8/Junior-platinum-miners-reshuffle.jsp [/ref] . This should give Jubilee increased throughput, leading to scale economies, as it can handle incremental ounces of platinum at low cost.

There's a good deal of consolidation going on among the junior platinum producers at the moment - driven by a collapse in the platinum price after it peaked in mid-2008 - so I wouldn't mind betting this won't be the last deal Jubilee does.

The company is currently losing money, though it should have revenues in 2010 which will help narrow the loss. Its £4.1m loss in the year to June 2009 included a £3.8m write-off of the Madagascar assets, following the curtailment of development. Jubilee had £7.6m cash at the end of the year [ref] Annual report 2009: http://www.jubileeplatinum.com/releases/annual_report_310609.pdf [/ref] .

The shares have rallied strongly over recent months after a disappointing performance in 2008. In the last 12 months the price has risen from 7p to a 52-week peak of 55p - the shares are now trading at 31p, valuing the company at £42m.

Institutional shareholders are certainly interested - Prudential has just acquired more shares to take its stake to 14.28%, including those shares held by the M&G investment funds, and JP Morgan Asset Management holds just over 10% [ref] Proactive Investor, 10 November 2009: http://proactiveinvestors.co.uk/companies/news/10044/jubilee-platinum-says-prudentialmg-investments-increases-stake-to-1428-pct-10044.html [/ref] .

Analysts also appear to have been impressed; GE&CR has a strong buy recommendation on the stock, having set a 56p price target in August following the acquisition of Braemore [ref] Proactive Investor, 12 August 2009, http://www.proactiveinvestors.co.uk/companies/news/7245/gecr-raises-stance-on-jubilee-platinum-to-strong-buy-7245.html [/ref] . However, readers should remember that GE&CR produces research on a sponsored basis, paid for by the company which commissions it - so it's not exactly unbiased. (It's also a slight mystery to me why the Jubilee Platinum web site helpfully provides brokers' notes in the investor relations section - but hasn't updated them since 2007.)

Tjate looks far too big for Jubilee to manage on its own, and I suspect the ultimate game plan is to get the resources estimate up to a decent level, get some basic small scale production going, and sell on to one of the platinum majors - Anglo American or Impala, for instance. That might work out nicely, but right now Anglo for one has other things on its plate that need to be dealt with first - and as with all corporate deals, you can't foresee either the timing or the amount any buyer will want to pay.

Meanwhile, I'm a little suspicious that the platinum price could slip back, taking Jubilee's share price with it. Half of the total platinum produced goes to make catalytic  converters for the global automotive industry - which hasn't exactly had the best record over the past couple of years. Government sponsored scrappage schemes have helped sell new cars, but if we face a double dip recession my guess is we'll see another fall in new car sales - and this time governments may feel they have more important things to do with their money than prop up the car makers. That would be a threat to all platinum producers - and remember, the last time the platinum price hit the skids, Jubilee's share price crumbled.