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New Century Resources - Flash note: $27m banked as ramp up continues

Oct 2018

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Summary - Flash note: $27m banked as ramp up continues

New Century Resources (ASX:NCZ) has announced a monthly (September) update for the Century zinc operation in Queensland. Highlights of the announcement include the following

  • Revenue of $27.2 million from zinc concentrate sales was generated in September; viz:
  • A$9.8 million from production of 7,000 tonnes of zinc concentrate to date;
  • A$17.4 million from the forward sale of 13,000 tonnes of October production.
  • The first shipment of concentrate direct to China is scheduled for the end of October 2018.
  • The hydraulic mining and processing plant performance ramp-up is on schedule.
  • The operational restart of the slurry pipeline and port facility has also been successful.
  • Arrival of the MV Wunma in Karumba in readiness for first shipment is imminent.
  • An A$40 million debt facility with National Australia Bank is nearing completion.
 Analyst comment:  typically during ramp-up, new mining operations – and particularly re-commissioned ones – experience an extended period of ‘teething issues’. New Century has emerged from the experience relatively unscathed and has, in fact, somewhat exceeded expectations.

At this stage of an operation the most telling indicator for investors is revenue generation; it provides an insight into whether additional funds (capital raising) may be required to complete the ramp-up. 

During September (the first month of production), around A$10 million of revenue was generated, with more than A$17 million received in forward sales for October. By our calculations, this means New Century was around break-even during September, and assuming the company achieves its forward sales target (13,000 tonnes), it should be cashflow positive during October. This, coupled with the impending debt facility (A$40 million), indicates that New Century will have more than sufficient funds, so a future capital-raising seems highly unlikely.   

 December quarterly: given New Century’s provision of regular updates during the past few months, we do not anticipate the release of any major new information during the September quarterly.

The December quarterly, however, will be a different story. As it will probably be the first full quarter of production, we expect New Century to release meaningful information regarding its production statistics (mining, throughput and recoveries) and, if those numbers show continued improvement on a month-to-month basis, this should be viewed as a positive outcome.   

We believe investors should continue to focus on revenue generation. That said, forward sales for October were A$17 million, so New Century seems on track to realise quarterly proceeds of between A$60 million and A$70 million; this would see the company trading at just over 2x annualised revenue.

The information in this email should not be the only trigger for your investment decision. We strongly recommend you seek professional financial advice whenever making financial investment decisions. 

Valuation: we maintain our previous long term valuation for NCZ at $3.32/share (share price $1.00).  However, in light of high volatility in the zinc price over the past six months (it has traded between US$1.12 and US$1.62/lb and is currently $1.17/lb), we should note that at the current zinc price (LOM), our valuation reduces to $2.85 / share.  During the coming quarter we will review our key assumptions, including the zinc price, and provide an updated valuation in due course.