Australian Mines Limited

AUZ Details

Mineralisation Discovery at the Broken Hill Project (BHP): Australian Mines Limited (ASX: AUZ) is engaged in the mining, exploration, and pre-development of its battery metals projects in Eastern Australia. As of 7 May 2021, the company’s market capitalisation stood at ~$83.19 million. On 5 May 2021, AUZ notified the positive results to date from the ongoing reverse circulation drilling at its Broken Hill Project in New South Wales. The results so far indicate the presence of multiple lead-zinc-silver targets at the project. The program is being undertaken to test the DHEM anomalies identified at Alpha 1 and Alpha 5 targets and completed in three weeks. Though Sconi Project in North Queensland is of prime focus to AUZ, it is engaging on Broken Hill and Flemington Projects to realise each project’s full potential.

A Sneak-Peak at the Q3FY21 Results: During Q3FY21, AUZ focused on developing its Sconi Nickel-Cobalt-Scandium Project (100%) in North Queensland. It engaged in negotiations with the potential partners (car and battery manufacturers) and financers for offtake of the output of the Sconi project. In Q3FY21, AUZ fast-tracked the R&D of the precursor cathode active material- P-CAM for NCM (nickel-cobalt manganese) battery chemistries. It also advanced on the P-CAM scoping study at the Sconi project.

AUZ continued the R&D program with Deakin University’s Institute for Frontier Materials to develop aluminium alloys, including scandium. In Q3FY21, it set up Advanced Materials Limited (AML), a subsidiary for undertaking R&D activities. AUZ started a ground-based geophysical survey over the Flemington Projects’ Target A during Q3FY21. In April 2021, AUZ announced the completion of the in-specie distribution of Norwest Minerals shares after its shareholder approval at the General Meeting. AUZ reported net cash outgoings of $821K from operating activities and held a cash and cash equivalents balance of $5.25 million as of 31 March 2021.

Q3FY21 Cash Flow from Operating Activities (Source: Company Reports)

Key Risks: The company faces the risk of signing purchase agreements for its flagship projects. It faces the threat of meeting the production requirements of P-CAM for the NCM batteries.

Outlook: AUZ engages with the potential partners to meet their due diligence requirements for entering formal contracts with them. It expects a purchase contract for its Sconi Project in CY2021. AUZ has scheduled additional production runs of P-CAM in FY21 and looks forward to concluding its offtake discussions with interested partners. At the Flemington project, AUZ is processing data and interpreting the survey results in May. It expects to receive results of the survey over Target A by the end of June quarter. At the Broken Hill Project, AUZ proposed to commence drill testing at Alpha 5 during the June 2021 quarter.

Stock Recommendation: The stock of AUZ gave a positive return of 53.28% in the past six months and a positive return of 138.43% in the past one year. The stock is currently trading lower than the 52-weeks’ average price level of $0.007-$0.040. The stock of AUZ has a support level of ~$0.013 and a resistance level of ~$0.029. On a TTM basis, the stock of AUZ is trading at an EV/Sales multiple of 2.1x lower than the industry median of 2.8x and thus seems undervalued. Considering the decent results of Q3FY21, ongoing off-take negotiations and agreements expected for Sconi project in CY21, drill testing of Alpha 5 at BHP, high current ratio signalling decent liquidity position, and associated risks of meeting production related client specifications and signing off-take agreements, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.021 on 7 May 2021.

AUZ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Essential Metals Limited

ESS Details

Project Update & Financials in the March 2021 Quarter (Q3FY21): Essential Metals Limited (ASX: ESS) is a gold and lithium exploration and mining firm. It is operating three gold and lithium projects (100%) in Western Australia (WA). As of 7 May 2021, the company’s market capitalisation stood at ~$19.27 million. On 27 April 2021, ESS announced a change in its principal place of business and registered office to West Perth in WA as per the Listing Rule 3.14. The company reported net cash outgoings of $290K from the operating activities for Q3FY21. It incurred an exploration and evaluation expenditure of $24K on the projects. At the Pioneer Dome Lithium Project (PDLP), ESS identified high-priority (32) and medium priority (16) lithium caesium targets. At its Juglah Dome Gold Project (JDGP), ESS received assay results from the drilling at prospects- Golden Shovel, Gards, Moonbaker and Dwyer. It reported gold intersections from the reverse circulation drilling of 11 holes of the Gards prospects.

During the quarter, ESS signed a JV with Crest Investment Group (“Crest”) for the Blair-Golden Ridge Nickel Project. As per the agreed terms, “Crest” will incur $4 million for four years to earn a 75% interest in the nickel rights. ESS will have a 25% free-carried interest until a decision to mine. During the quarter, ESS listed the options (issued in Q2FY21 via placement and SPP) on the ASX under ASX: ESSO code. It held a cash and cash equivalents balance of $6.23 million as of 31 March 2021.    

March Quarter (Q3FY21) Highlights (Source: Company Reports)

Key Risks: The company faces the risks associated with the mining and exploration of gold and lithium and compliance with the environmental regulations for mining. It faces the risk of the pandemic environment and operating business within the COVID-19 protocols. 

Outlook: At the PDLP, ESS is continuing work to identify drill-ready targets by June. It has scheduled a field reconnaissance programme to map and sample the targets. It has Phase-I in progress already. At JDGP, ESS started follow-up drilling at the end of Q3FY21 to assess the southern extent at the Gards prospect.

Stock Recommendation: The stock of ESS gave a negative return of 36.55% in the past three months and a negative return of 3.15% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $0.076-$0.180. The stock of ESS has a support level of ~$0.067 and a resistance level of ~$0.148. On a TTM basis, the stock of ESS is trading at a price to book value multiple of 0.9x lower than the industry (Metals & Mining) median of 2.7x, thus seems undervalued. Considering the current trading levels, high gross margins, debt-free balance sheet, drilling targets identified on PDLP and JDGP, valuation on a TTM basis, and associated risks of exploration and operating joint venture projects, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.092, down by 4.167% on 7 May 2021.

ESS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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