Goldman Sachs Investor Research - Discovery Metals Limited

7 October 2010 Discovery Metals Limited
Valuation
• As stated previously, we have included the commencement of open pit mining in FY12
and underground mining in FY15. Our base case assumes combined production from
these two sources at a rate of 3mtpa increasing to 3.5mtpa for 15 years out to the
conclusion of FY26. This base case also includes $65m in exploration assets, which is
included to approximate the likelihood of further resource upgrades.
• For our upside case, we have included a 10-year extension to Boseto, which, given the
size of the current resource is feasible, as well as some benefit from a project
development at Dikoloti. This project is clearly early-stage and not the primary focus of
DML at present.
• We have included a summary of our valuation below:
Discovery Metals
DISCOUNTED CASH FLOW VALUATION
Discount Rate Used % 11.7%
Issued Shares millions 313.9
Mines
A$m
$ per share
Boseto (15 Year Mine Life) 385 $1.23
- $0.00
Sub Total Mines 385 $1.23
Exploration Assets 65 $0.21
NPV of Tax (188) ($0.60)
NPV of Hedge Book – $0.00
Net Cash 39 $0.13
Corporate (36) ($0.11)
Franking Credits 7 $0.02
Option Dilution 15 $0.05
Other – $0.00
Sub Total Corporate/Other (98) ($0.31)
NET PRESENT VALUE 287 $0.91
Upside Options
Boseto Extension of Life (10 Years) - post tax 41 $0.13
Dikoloti Ni Project - attributable and post tax 48 $0.15
UPSIDE VALUATION 377 $1.20
Source: GS&PA Research estimates
Financing
DML is yet to complete the funding arrangements for the development of Boseto. However,
the company has articulated the desire to use a maximum amount of debt (as high as 60%).
We see some risk to this high level of debt given the experience of a number of junior
development companies that have not only been forced into excessive hedge positions but
have also been precluded from accessing the project cash flow to fund any exploration or
other developments until the debt has been reduced following the commissioning and
financial closure of the project.
We further note that, on our estimates, DML is currently trading above our base NPV and
thus any equity raising (above NPV) is accretive for shareholders.
Based on the current share price and assuming an equity raising of $121m (gross) 40%
debt: 60% equity (a 7.5% discount to the current share price $1.28/share) our base case
valuation increases to $1.01/share.
Goldman Sachs & Partners Australia
Investment Research
All figures in A$ unless otherwise advised 16