Restructuring of a company often presents great scope for those investors who will do the sometimes complicated maths, and especially if combined with a phoenix-like resurrection of the business. Weatherly International (LON:WTI) – which is about to reopen two of its copper mines in Namibia and has other prospects - is such a case, and despite having risen 5-fold in four months and 3-fold in three, we think the shares have further to go. That may depend on the progress of the copper price – currently at a record $9,600/ton – but according to a recent report by Morgan Stanley - “copper has one of the most constructive outlooks among the major commodities - It is feasible that copper prices could spike well above the 2008 record high.”
Before the crash, Weatherly was developing a highly efficient copper mining and smelting business in Namibia, having acquired six mines or prospective mines, of which three were flooded (due to power shortages outside its control) and one was insolvent. Nevertheless, having invested heavily, in 2008 WTI had produced (and smelted on a toll basis) 22,000 tonnes of copper and was on course for 55,000 tonnes in 2009.
But a more than halved copper price forced it in late 2008 to place its mines under care and maintenance and in Nov the shares were suspended (for three months) while a period of retrenchment and sale of assets began. Throughout 2009 Weatherly concentrated on ensuring that its closed mines were kept in good order and on expanding and improving the toll refining operation, for which it was given financial support by key customers Dundee Precious Metals Inc and Swiss metals trader Louis Dreyfus Commodities. They recognised WTI’s excellent management and its experience in the industry and in Namibia and have supported it all through the crisis.
Having closed its mines and sold off enough assets to clear most of its liabilities, WTI by the end of 2009 had met all its commitments, and with a small amount of cash in the bank and the support of its customers, together with a copper price that had recovered to more than double its December 2008 low, began to plan to reopen at least two of its mines, while continuing to operate its smelters and to invest in them to ensure efficiency.
A collapsed share price had made it impossible to raise further equity throughout 2009 in order to finance the reopenings, but in October Weatherly’s key assets in Namibia attracted the East China Mineral Exploitation Bureau who proposed to inject $16m in return for a 50.1% stake. Following objections from shareholders however to the change of control, WTI decided instead to accept an offer from Dundee Precious Metals for its smelter business, in exchange for $18.8m cash and 4.4m shares in DPM worth $15m. 40% of the latter are being distributed to WTI shareholders, with the remaining payment of one DPM share per 500 WTI ord due this April.
This deal enabled Weatherly to clear all its outstanding debts and, together with another £5m proceeds due soon from other asset sales, and take-off agreements with Dreyfus, will provide all the working capital needed to reopen the first two mines. By selling assets WTI had managed to get through the crisis without diluting its shares too severely, and by November 2011 – having begun to publicise its prospects more widely – it was able to raise £4.45m to finance further exploration and development at its other mines through a placing of its shares at a much better price – 5p – in exchange for adding only 20% to those in issue, which now total 535.1 million compared with 405.3million at June 2008. In that respect WTI has done well by its shareholders, who still have a worthwhile asset unlike some others.
Dreyfus has agreed to take all of Weatherly’s mine production for the next seven years (at an agreed discount to prevailing prices) and to pay in advance of delivery, and the first two mines (Otjihase and Matchless) have already started stockpiling ore, with target to produce 20,000 tpy of copper initially. In addition Weatherly is now able to progress exploration to extend their resources, and to develop three other mines, at least one of which has prospects of producing in the near term.
Forecasting initial profits is complicated by fees payable to the contractors who will operate the mines, and by the various take-off deals and discounts. Nevertheless WTI’s broker, Ambrian “guesstimated” in November that Otjihase and Matchless will generate EBITDA of US$14.4m in the current calendar year, rising to US$26.0m in 2012 – on which basis they set a target for the share price of 6p. (ie a market cap, then, of £27m)
The shares are now 14p, partly because 6p looked cautious in relation to the projected cash flow, partly because the copper price is now considerably higher (gearing up profits substantially more) but particularly because it did not contain anything for the potential from the next mine – Tschudi - for which the funds are now available to complete a feasibility study in the current year with a view to reopening it in 2012. As an open pit operation, and with a production capability of 11,000-13,000 tpy over 10 years, it has a higher potential value than Ojithase and Matchless – which one estimate (on a NPV basis) puts at double their value - although that won’t be confirmed until the feasibility study, and financing has been arranged.
Tschudi is not all however, because there are two other potentially valuable assets. The sale to Dunbar meant that the deal with ECMEB, and the valuable strategic link this would have provided with Chinese metals interests, could not go through. Subsequently however, WTI has transferred its latent Berg Aukas zinc/lead mine into a new joint company with ECMEB - China Africa Resources (CAR)
CAR is to be listed on AIM in about April, and WTI will have a 25% stake after distributing 10% of the shares to WTI shareholders. Berg Aukas is estimated to contain zinc and lead ‘in the ground’ valued currently at almost $900bn, and it remains to be seen what CAR’s market cap will be on listing. Based on the £7.4m that ECMEB has paid for its 65% share, it will not be large to start with, but after allowing for the financing that will be required to develop Berg Aukas, and with other businesses that CAR is likely to add, Weatherly’s CEO Rod Webster is very excited by its growth potential. ECMEB is reported to have said that it will use CAR as one of its main vehicles for mineral investment in Africa. - "ECE has recently obtained 18 exploration rights in Namibia, including gold, copper, iron ore, zinc and other mineral assets that cover an area of approximately 7,146 square kilometres, which it is planned will be injected into China Africa Resources when the exploration is complete."
In addition is a tailings pond containing high quality copper residues that Weatherly intends to exploit. The costs of doing so are not known at present, but with a gross value of the contained copper amounting to over $1bn, it could add substantially to WTI’s earning over the next few years.
And, lastly, is another prospect that WTI is jointly working on, to develop a high grade manganese deposit at Tambao over the border in Burkino Faso, although currently it is subject to a few problems with the joint partner so cannot be counted yet as an asset.
But given these additional prospects, news on which can be expected in the current year, it seems to us that a current £72m market cap in relation to £16m of cash generation in 2012 from operations just starting, and perhaps three times £20m when Tschudi comes into operation possibly next year also, is not at all expensive. Those profits would be geared up by a higher copper price (very crudely, we estimate that a 10% higher copper price would add 20% to profits) so we believe the shares could at least double over the next 12 months. As ever, the cautious could wait for them to drift back in quiet phases, risking losing the opportunity altogether.
