EQUITY RESEARCH - Australian Securities ?· EQUITY RESEARCH Materials 4th December 2017 DISCLAIMER:…

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  • EQUITY RESEARCH

    Materials

    4th December 2017

    DISCLAIMER: Foster Stockbroking Pty Ltd does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Refer full disclosures at the end of this report.

    Kidman Resources Ltd (KDR.ASX)

    Developing a world class asset

    Event:

    We initiate research coverage on Kidman Resources Ltd (KDR).

    Investment Highlights:

    World class asset. KDR owns the Mt Holland lithium project in south Western Australia, which comprises the Earl Grey lithium deposit containing 128Mt at 1.44% Li2O. Additionally there is an exploration target of 75-100Mt at 1.3-1.5% which extends north of Earl Grey. The deposit is relatively flat lying and comes to near surface, making for low mining cost and strip (1.9x post overburden removal).

    NPV10 $793M just for base case. We estimate an NPV1o $793M for Earl Grey based on a 25 year mine life at 2Mtpa. We assume all-in-sustaining costs of US$269/t, CFR basis. We assume 60% lithium recovery as per scoping but believe this to be conservative.

    JV with SQM minimises funding and operating risk. KDR entered into a JV agreement with Chilean lithium giant SQM over Mt Holland whereby KDR will dilute to 50% ownership in return for US$30M of upfront cash payments and US$80M of capital contributions from SQM. We believe this will likely fund KDR to mine commissioning. We forecast first mine production beginning FY20e.

    Refinery to be examined in parallel. SQM is proposing a downstream lithium carbonate/hydroxide refinery of 37ktpa LCE capacity, with KDR offered an option to participate up to a 50% interest. While a scoping study has yet to be released, we estimate capex of $500M (100%) and incremental NPV of $390M (100%). KDR intends to take up its option and we factor the refinery in our valuation and forecasts. We forecast first carbonate production beginning FY21e.

    Compelling case for expansion. While KDR has not formally announced any expansion of mine at this stage, we believe that the large size of Earl Grey, as well as Exploration Target, means that the case for bringing forward cashflows and significantly increasing NPV is compelling. We have factored in an expansion of mine (to 5Mpa) and refinery (92kt LCE) in our valuation but have aggressively discounted these cases given that it is still early days.

    Earnings and Valuation:

    We forecast KDR to report NPAT of $29M both in FY18e and FY19e, as a result of upfront cash payments and capital contributions from SQM being booked as profit on selldown of its interest in Mt Holland. However we forecast underlying losses chiefly due to corporate costs. We forecast first earnings from sales of spodumene in FY20e.

    We derive a risked valuation of $1.99/share for KDR, and unrisked of $3.85/share. The major component of our risked valuation is the base case 2Mtpa Earl Grey mine, followed by potential plant expansion to 5Mtpa, the proposed 37ktpa LCE refinery, and refinery expansion.

    Recommendation:

    We initiate with a Buy recommendation and price target of $1.99/share, based on our risked valuation. Catalysts include execution of JV; Refinery study; Resource upgrade; and Decision to mine.

    Recommendation Buy

    Previous n/a

    Risk High

    Price Target $1.99

    Previous n/a

    Share Price (A$) 1.65$

    ASX Code KDR

    52 week low - high (A$)

    Valuation (A$/share) - risked $1.99

    Methodology DCF

    Capital structure

    Shares on Issue (M) 350

    Market Cap (A$M) 578

    Net Cash/(Debt) (A$M) -2

    EV (A$M) 579

    Options (M) 50

    Fully diluted EV ($M) 661

    12mth Ave Daily Volume ('000) 8,936

    Y/e Jun (A$M) 2017a 2018e 2019e 2020e

    Sales 0.0 0.0 0.0 68.4

    Adj EBITDA -6.7 -13.5 -10.0 37.4

    Adj NPAT underlying -7.2 -14.1 -9.5 19.5

    Reported NPAT -31.3 29.4 29.1 19.5

    Adj EPS diluted $ -0.02 -0.04 -0.02 0.04

    PER x diluted nm nm nm 43.3

    EV/EBITDA x nm nm nm 16.5

    *Adj = underlying FSB estimate

    Board

    Martin Donohue Managing Director

    David Southam Non-Executive Director

    Brad Evans Non-Executive Chairman

    Substantial shareholders

    EDM Nominees Pty Ltd 9.3%

    Share Price Graph

    Analyst: Mark Fichera

    mark.fichera@fostock.com.au

    The analyst owns no securities in KDR.

    Foster Stockbroking and associated entities (excluding

    Carnport Pty Ltd) hold 185,000 KDR shares.

    Cranport Pty Ltd does not own secutities in KDR.

    0.335-1.68

    +612 9993 8162

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  • 4th December 2017 Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au 2

    Kidman Resources Ltd (KDR.ASX)

    Kidman Resources (KDR)Ful l Year Ended 30 June

    Profit and Loss A$M 2017a 2018e 2019e 2020e Financial Metrics 2017a 2018e 2019e 2020eSales 0.8 0.0 0.0 68.4 Sales growth % nm nm nm nmOther revenue 0.0 40.0 0.0 0.0 EPS growth % nm nm nm nm

    Operating Costs 7.5 13.5 10.0 37.4 EBITDA margin nm nm nm 45%

    Underlying EBITDA -6.7 -13.5 -10.0 31.0 EBIT margin nm nm nm 41%

    D&A 0.0 0.2 0.2 3.2 Gearing (ND/ND+E) 27% -685% -4% 19%

    Underlying EBIT -6.7 -13.7 -10.2 27.8 Interest Cover (EBIT/net int) nm nm 14x -521x

    Net Interest exp / (income) 0.5 0.4 -0.8 -0.1 Average ROE % nm nm -16% 12%

    Profit before tax adj -7.2 -14.1 -9.5 27.9 Average ROA % nm nm -14% 12%

    Tax exp / (benefit) 0.0 0.0 0.0 8.4 Wtd ave shares (M) 307 333 350 462

    Underlying NPAT -7.2 -14.1 -9.5 19.5 Wtd ave share diluted (M) 307 385 400 512

    Non-recurring gain/(loss) -24.1 43.5 38.6 0.0

    Reported NPAT -31.3 29.4 29.1 19.5 Sales and earnings multiples 2017a 2018e 2019e 2020eP/E x nm nm nm 43.3

    Underlying EPS diluted ($) -0.02 -0.04 -0.02 0.04 EV/EBITDA x nm nm nm 16.5EV/EBIT x nm nm nm 18.4

    Cashflow A$M 2017a 2018e 2019e 2020eUnderlying EBITDA -6.7 -5.4 -5.0 31.0 Company Valuation A$M A$/sh A$M A$/shChange in WC -3.2 0.0 -3.4 -3.0 Unrisked Unrisked Risked Risked

    Tax paid 0.0 0.0 0.0 -8.4 Segment A$M A$/sh A$M A$/sh

    Other 0.2 0.0 0.0 0.0 Mine & concentrator:

    Net interest 0.1 -0.4 0.8 0.1 Earl Grey - base case 25 yr l ife 396 $0.77 317 $0.67

    Share based payments 0.7 0.0 0.0 0.0 Earl Grey - ex-scoping Resources and expl target 58 $0.11 23 $0.05

    Operating Cashflow -8.9 -5.8 -7.6 19.7 Potential 5Mtpa plant expansion - incremental value 510 $0.99 153 $0.32 Potential higher Li recovery - incremental value 389 $0.75 78 $0.16

    Purchase of PP&E -0.2 0.0 -27.5 -251.2 Refinery:

    Acquisitions -2.4 0.0 0.0 0.0 Refinery 37kt LCE - incremental value 195 $0.38 136 $0.29

    Exploration -8.4 0.0 0.0 0.0 Potential refinery expansion - incremental value 219 $0.42 66 $0.14

    Development -3.1 0.0 0.0 0.0 Corporate -26 -$0.05 -21 -$0.04

    Investments 0.1 0.0 0.0 0.0 Cash:

    Other 0.0 39.5 0.0 0.0 Balance of SQM earn-in payments 88 $0.17 70 $0.15

    Investing Cashflow -14.0 39.5 -27.5 -251.2 Cash from options exercise 8 $0.02 7 $0.02 Cash from future equity raise 167 $0.32 133 $0.28

    Equity issue 21.0 0.9 0.0 166.8 Net cash (debt) at end Sep 17 -19 -$0.04 -19 -$0.04

    Debt proceeds 2.1 5.7 0.0 83.3 Company Valuation 1,984 $3.85 944 $1.99

    Debt repayments -1.0 -5.1 0.0 0.0Other -1.4 0.0 0.0 0.0 Ordinary shares now 350 350

    Financing Cashflow 20.7 1.5 0.0 250.0 In-money-options 49 45 Shares from future equity raise 116 81

    Net Cashflow -2.2 35.2 -35.2 18.5 Pro-forma diluted shares M 515 476

    Balance Sheet A$M 2017a 2018e 2019e 2020e Commodity Assumptions 2017a 2018e 2019e 2020eCash 2.6 37.8 2.7 21.2 PricesReceivables 1.8 0.0 0.0 5.6 Spodumene 6% Li2O CFR, US$/t 695 791 768 712

    PPE 0.1 -0.1 73.0 321.0 Lithium carbonate min 99.5% , US$/t 10,000 15,531 17,501 15,117

    Capitalised exploration 22.1 16.2 16.2 16.2 A$:US$ 0.75 0.76 0.76 0.75

    Other 0.1 0.1 0.0 0.0Total Assets 26.8 54.1 91.9 364.1 Production

    Spodumene 6.0% - external sales, kt 0 0 0 144.1

    Accounts payable 2.0 0.3 0.5 2.2 Lithium carbonate 99.5%, kt 0 0 0 0.0

    Provisions 0.2 0.2 0.8 3.1

    Debt 8.4 0.0 0.0 83.3 Costs Other 0.0 10.3 18.1 16.7 Costs - AISC, US$/t 0 0 0 297

    Total Liabilities 10.7 10.8 19.4 105.3

    JORC Resources - LithiumReserves and capital 62.9 60.8 60.8 227.6 Earl Grey Ore Mt Li2O % Li2O kt LCE Mt

    Retained earnings -46.8 -17.5 11.7 31.2 Measured 0 0.00% 0 0

    Total Equity 16.1 43.4 72.5 258.8 Indicated 78.5 1.44% 1,130 2.8Inferred 49.5 1.43% 709 1.8

    Capital structure Total Resources 128 1.44% 1,839 4.5

    Ordinary shares 350.1 Options 49.5

    Fully diluted equity 399.6 Source: Foster Stockbroking estimates.

    http://www.fostock.com.au/

  • 4th December 2017 Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au 3

    Kidman Resources Ltd (KDR.ASX)

    KIDMAN RESOURCES OWNER OF WORLD CLASS MT HOLLAND LITHIUM PROJECT

    Kidman Resources Ltd (KDR) is an ASX listed company headquartered in Melbourne. Its main

    asset is the Mt Holland lithium project in Western Australia, which it acquired for on