Equatorial Resources Scoping Study Delivered

The scoping study suggests Mayoko-Moussondji has a high chance of success, underpinned by robust economics, access to infrastructure and the potential co-operation with Exxaro. With A$52m in cash and only A$114m needed to launch first production, the project’s overall capex of A$231m looks manageable. We estimate the project’s NPV at A$162m and view the Equatorial (EXX.V) stock as an attractive investment proposition.

Encouraging scoping study results
The study considers development of a 2Mtpa operation based on higher-grade hematite resource to produce a premium concentrate at 64.1% Fe, with combined silica and alumina at a reasonable 6.8% level. The ore is amenable to gravity separation, with an estimated metallurgical recovery of about 66%. This points to a relatively high, though typical for hematite, mass recovery of c 42%. While the overall capital cost is forecast at US$231m (US$115/t of capacity), only US$114m is needed to achieve first production of 0.5Mtpa at a relatively short lead time of 15 months as transport infrastructure is available. The project’s opex is estimated at US$41.4/t, with a low processing cost of US$6.4/t thanks to the soft nature of the ore and a slightly elevated US$16.1/t cost of contractor-operated mining.

Access to the existing infrastructure is key
Equatorial has been granted access to the existing state-owned port and railway infrastructure, which only requires a moderate refurbishment and upgrade to be able to rail and ship 2Mtpa of product from the deep water port at Pointe Noire. The company believes it will cooperate with Exxaro, which is advancing the neighbouring Mayoko-Lekoumou iron ore project (with first production expected in H213) and plans to upgrade the railway line, eventually bringing its capacity to 15Mtpa.

Valuation: A$162m in NPV, plus A$52m in cash
We estimate the project’s NPV at A$162m on an unrisked basis using a 10% discount rate. This does not take into account the company’s current cash position of A$52m. Our valuation is based on an iron ore price of US$90/t (CFR China), US$20/t freight, a US$2.5 premium for one Fe unit, a corporate tax rate of 34%, a 3% royalty and a five-year tax holiday. Both cash cost and capex assumptions are in line with the scoping study. We note that a 10% increase in opex gives a 32% reduction in the project’s NPV, while a 10% increase in the iron ore price boosts the NPV by 67%. The key share price catalysts are the upcoming resource upgrade, the ongoing strategic partnership search or other project funding, and granting of the mining licence, as well as the realisation of infrastructure synergies with Exxaro.

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