source:
http://seekingalpha.com/article/2332645-south-boulder-mines-h2-2014-update
South
Boulder Mines (H2 2014 Update)
Jul. 23, 2014 8:08 AM ET | About: South Boulder Mines Ltd. (SBMSF)
<
http://seekingalpha.com/symbol/SBMSF>
*Disclosure: *The author is long SBMSF, ALLRF. *(More...)*
Summary
- DFS Delayed Until mid-2015.
- Likely Reduction to Colluli Project CapEx.
- Relative Undervaluation to Allana Potash.
South Boulder Mines
Featured In: *July 2012*
Partnership Average Cost per Share: *$0.50*
Current Market Price (July 15, 2014): *$0.17*
In April 2014, I received mixed news from CEO Paul Donaldson regarding
South Boulder Mine's (OTCPK:SBMSF <
http://seekingalpha.com/symbol/sbmsf>)
Definitive Feasibility Study. The negative aspect is that the DFS (the
final necessary report before construction can commence) will not be
completed until 1H 2015, while I was expecting the release to be mid-2014.
This substantial delay is due to management's decision to completely
rewrite the mine plan that was devised by previous management. The silver
lining to this delay is that the project's already robust economics will
undoubtedly be improved upon when the DFS is released (more below). The
Partnership will continue to hold STB until the DFS is released due to (1)
the highly likely improvement of the project's economics and (2) STB's
undervaluation compared to development rival Allana Potash (OTCPK:ALLRF
<
http://seekingalpha.com/symbol/allrf>).
While current STB management did a fantastic job of discovering the
impressive Colluli Deposit, they made some tactical errors in the later
stages of the mines development. The most glaring of these was their
decision to include only sylvinite rock (16% of the total resource) in
their previous studies, including the PFS. While this may have saved time
in advancing the mine through development, it ignored a large quantity of
economic Carnallitite and Kainatite rock. This stunted the project's
economics to a large extent. As explained in a recent STB new release: "By
processing the carnallitite and kainitite mineralisation in addition to the
sylvinite, the project has the potential to significantly reduce operating
costs. This is because the carnallitite and the kainitite material would be
considered as ore rather than waste, meaning the stripping ratio will be
cut substantially. This approach would also significantly extend the mine
life due to the expanded resource base." Additionally, Donaldson indicated
to me that an initial CapEx of ~$400M is a distinct possibility. This is
huge news considering that the company's previous CapEx estimate of ~$700M
is in itself tiny relative to typical potash mines. This improvement in
both initial CapEx and OpEx makes me believe that this already economic
project will look a lot prettier when the comprehensive DFS is unveiled to
the market.
Over the past six months, Allana Potash (another Partnership holding and
STB's potash rival from neighboring Ethiopia) made great strides on their
development project by securing strategic financing from Israel Chemicals.
In fact, after receiving $25M in early 2014, ICL's controlling shareholder
said in May that a fertilizer production plant will be fully constructed
"within a year" and that potash from the Dallol Mine will be used as an
input in 2015. This is a positive indicator for potash mining in the region
and also a good benchmark to judge STB's relative value. Allana currently
has a $100M IPV for their Dallol Project (market capitalization minus
cash), while South Boulder's IPV is roughly $10-12M. While STB is a year
behind AAA and has yet to find a strategic partner, this 10x deviation does
not seem justified. At the very least, STB is relatively undervalued
compared to AAA and seems to have justifiable upside if they are successful
in releasing their DFS and securing strategic financing over the next 12
-18 months.
The combination of the Colluli Project's additional upside and the market's
current valuation of STB justify waiting for the company's Definitive
Feasibility Study. However, there will be a strict deadline of July 1, 2014
and, if the DFS hasn't been released in the timeframe Donaldson indicated,
the Partnership will liquidate its STB holding. Over the next six months,
there will be minimal news flow from the company - as the multiple
consultancies hired for the DFS diligently push through their work. There
is a slight risk that the company will have to raise up to $3M in order to
finish the DFS (likely in Q1 2015). This should result in minimal dilution,
given that the company's current market capitalization doesn't erode
significantly between now and then.
Editor's Note: This article covers a stock trading at less than $1 per
share and/or with less than a $100 million market cap. Please be aware of
the risks associated with these stocks.
Received on Thu Jul 24 2014 - 10:00:09 EDT