MZI Resources : Research Note - Argonaut - Early Shipment from Keysbrook

25d2def0-4f0b-413d-be1a-0e85bdd86784.pdf

BUY Current Price	$0.36
Target Price	$0.73

Ticker: MZI

Sector: Materials

Shares on Issue (m): 195.8

Market Cap ($m): 83.2

Net Cash ($m): -52.1

Enterprise Value ($m): 135.3

52 wk High/Low: $0.58 $0.23

Wednesday, 23 December 2015 MZI Resources Early shipment from Keysbrook

Analysts | Matthew Keane | Patrick Chang

Quick Read

MZI Resources (MZI) has delivered its first shipment from the Keysbrook mineral sands project a month ahead of schedule. ~1kt of zircon concentrate was sold last week to offtake partner Tricoastal/Wensheng marking the commencement of project cashflow. Both the Keysbrook Wet Concentrator Plant (WCP) and Picton Mineral Separation Plant (MSP) were successfully commissioned within seven days of first ore feed. This is

12m Av Daily Vol (m):

Key Ratios

0.07

FY15 FY16 FY17

testimony to the simplicity of the project and highlights the advantage of being one of

the few mineral projects under development in 2015. MZI is now focused on optimising the project and is exploring a number of low capital options to expand production.

PER (CPS) (4.6) 7.9 3.9

EV/EBITDA (12.1) 6.4 3.3

Event & Impact | Positive

EPS (CPS) (9.2) 5.4 11.0

First shipment: MZI delivered its first shipment from the Keysbrook mineral sands

Mineral Inventory (100% basis)

Mt THM % VHM %

Ore Reserves	25.8	2.6%	2.3%
Mineral Resource Directors	155.0	1.8%	0.9%

Mal Randall Non-Executive Chairman Trevor Matthews Managing Director

Nathan Wong Non-Executive Director

Stephen Ward Non-Executive Director

Maree Arnason Non-Executive Director

Rodney Baxter Non-Executive Director

Substantial Shareholders

Resource Capiatal Fund (RCF) - Pro forma 40.0%

All values in A$ unless stated otherwise

(including additional electrostatic separators and drying capacity). A 30% increase in
$0.60	1.0	production lifts our steady state EBITDA to $55mpa from $40mpa and increased our
$0.50	valuation to $0.84/sh.
$0.40	TiO2 price signalling: A number of TiO2 and pigment producers including Tronox Limited
$0.30	0.5	(NYSE: TROX) recently announced price increases up to 18% from Q1 2016. If this price

Share Price Graph

project one month ahead of schedule. Approximately 1kt of zircon concentrate was sold last week to Tricoastal/Wensheng under an established long term offtake agreement. First leucoxene sales are targeted for February 2016.

L88 recovery the final hurdle: EPC contractor GR Engineering has completed performance testing and handed the WCP to MZI. The Company is now focussing on optimising throughput and recoveries, with the last key hurdle being L88 recovery (to 71% or greater). As noted from Argonaut's site visit last week, site management and technical staff are confident of achieving this in the coming weeks.

Optimisation and expansion: Having achieved nameplate throughput, MZI is turning its focus to project optimisation. The Company has identified a number opportunities to improve recoveries (foremost L88) and increase production. Argonaut understands there is potential for a 30% production increase for just $2-3m additional capex. This would entail minor debottlenecking of the WCP and some additional componentry at the MSP

$0.20

$0.10

$0.00

0.0

increase transpires through the broader market, MZI should realise the benefits for its L88 product which is linked to rutile prices. (current Argonaut est. US$660/t L88). The demand for TiO2 products is currently polarised with a diminishing supply of high Titanium products, such as rutile and leucoxene, but an oversupply of low grade

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

ilmenite. MZI is well positioned with only high margin, non-ilmenite products.

Recommendation

Argonaut maintains a BUY recommendation and a $0.73 price target.

MZI Resources Equities Research

Analyst: Matthew Keane

Recommendation BUY Sector Metals & Mining

Current Price $0.36 Issued Capital Pro Forma (m) 195.8

Target Price $0.73 Market Cap (m) $70.5

Date

23-December-2015

Profit & Loss (A$m) 30 June	2015E	2016E	2017E	2018E	Financial Summary	2015E	2016E	2017E	2018E
Sales revenue	0.0	58.4	82.2	83.6	Reported earnings
Other income	4.4	0.0	0.0	0.0	Net profit (US$m)	(18.1)	10.5	21.5	23.7
Operating costs	0.7	26.6	35.9	35.0	EPS (A$cps)	(9.2)	5.4	11.0	12.1
Exploration and evaluation	0.0	0.1	0.1	0.1	PER (x)	(3.9)	6.7	3.3	3.0
Corporate & marketing	6.3	6.6	5.0	5.0	Normalised earnings
Other inc. Foreign exchange loss	8.6	4.0	0.0	0.0	Net profit (US$m)	(18.1)	10.5	21.5	23.7
EBITDA	-11.1	21.1	41.2	43.5	EPS (A$cps)	(9.2)	5.4	11.0	12.1
D&A	0.2	3.9	5.7	5.8	EPS growth (%)	0.0	(158.1)	104.6	10.2
EBIT	-11.4	17.2	35.5	37.6	PER (x)	(3.9)	6.7	3.3	3.0
Interest (Income -Expense)	-5.3	-6.7	-4.9	-3.8	Cashflow
Operating profit	-16.6	10.5	30.6	33.9	Operating cashflow ($m)	(15.2)	14.5	27.3	33.0
Impairments	0.0	0.0	0.0	0.0	GCFPS (A$cps)	(7.8)	7.4	13.9	16.9
Tax expense	0.0	0.0	9.1	10.2	PCF (x)	(4.6)	4.9	2.6	2.1
Other	-1.5	0.0	0.0	0.0	Dividend
Non-controlling interests	0.0	0.0	0.0	0.0	Dividend (A$cps)	0.0	0.0	0.0	0.0
NPAT	-18.1	10.5	21.5	23.7	Yield (%)	0.0	0.0	0.0	0.0
Normalised NPAT	-18.1	10.5	21.5	23.7

Cash Flow (A$m)	2015E	2016E	2017E	2018E	Financial Ratios	2015E	2016E	2017E	2018E
Operating Cashflow	-15.2	14.5	27.3	33.0	Balance Sheet Ratios
- Capex	52.2	14.4	2.5	1.0	Total Debt / Equity (%)	2603	82	62	37
- Exploration & evaluation	0.3	0.3	0.3	0.3	Interest cover (x)	-2.6	2.2	6.1	7.7
- Asset purchases (+ asset sales)	-4.2	0.0	0.0	0.0	Acid test ratio (x)	0.8	4.5	3.4	97.1
+ Other	2.1	-18.5	-5.0	0.0
Free Cashflow	-61.4	-18.7	19.5	31.8	Profitability Ratios
- Dividends	0.0	0.0	0.0	0.0	Net profit margin (%)	-	18.0	26.2	28.4
+ Equity raised	0.1	44.7	0.0	0.0	Return on assets (%)	-11.2	11.1	25.2	28.2
+ Debt drawdown (- repaid)	94.0	-43.5	-17.1	-17.1	Return on equity (%)	-392.8	10.6	20.7	18.4
Net Change in Cash	32.7	-17.5	2.4	14.6
Effects of exchange rate	0.0	0.0	0.0	0.0
Cash at end	33.8	16.3	18.7	33.4

Valuation Summary	A$m	A$/sh
Balance Sheet (A$m)	2015E	2016E	2017E	2018E	Keysbrook	239	0.91
Total assets	134.8	171.0	159.6	167.0	Corporate Overheads	-41	-0.16
Current debt	18.6	17.1	17.1	8.3	Tiwi Island Project	0	0.00
Non-current debt	101.4	64.7	47.6	39.2	Unmined Resources	45	0.17
Total liabilities	130.2	71.8	55.6	38.2
Shareholders funds	4.6	99.2	104.0	128.8	Cash est.	15	0.06
Debt est.	-67	-0.26

Production Summary 2015E 2016E 2017E 2018E

Keysbrook Leucoxene 88 kt N.A 31.3 43.2 38.9 Total @ 10% discount rate 190 0.73

Leucoxene 70 kt N.A 19.8 28.3 28.2 * Valuation incorporates dilution from US$21m CB of 58.2M shares

Zircon Concentrate kt N.A 19.5 26.8 29.5 ** Based on max shares on issue of 263m

Total Products kt N.A 70.6 98.4 96.6

Unit Cash Cost (A$/t) N.A 377 365 362 Directors All-in Sustaining Cost (A$/t) N.A 474 444 427 Mal Randall Non-Executive Chairman Mineral Sand Price Assumptions Trevor Matthews Managing Director

Leucoxene 88 (US$/t) N.A 900 950 950 Nathan Wong Non-Executive Director

Leucoxene 70 (US$/t) N.A 350 350 350 Stephen Ward Non-Executive Director

Zircon (US$/t) N.A 1,100 1,100 1,100 Maree Arnason Non-Executive Director

2016E

Leucoxene 88

2017E

Leucoxene 70

2018E

Zircon Concentrate

REALISED PRICE AND COST PROFILE

1000

900

800

700

600

500

400

300

200

100

0

2016E 2017E 2018E

All-in Sustaining Cost (A$/t) Basket Price Received (A$/t)

A$/t

Exchange Rate Assumptions (AUD/USD) N.A 0.73 0.73 0.73 Rodney Baxter Non-Executive Director Basket Price Received (A$/t) N.A 828 835 865

Attributable Reserves & Resources	Substantial Shareholders	%
Reserves Mt THM k(t) L70% L88% Zr % Keysbrook 25.8 698 27.8% 46.6% 14.6%	Resource Capiatal Fund (RCF) - Pro forma	40.0%

Resources	Mt THM k(t)	L70%	L88%	Zr %
Keysbrook	155 3,105	16.9%	31.5%	8.9%

ANNUAL PRODUCTION

120

100

80

60

40

20

0

First zircon shipment one month ahead of schedule…

…first leucoxene shipment due in February 2016

Optimisation studies are underway…

…with opportunities for low capex, significant production increases

Consumers and producers are signalling H1 CY16 TiO2 price rise

The TiO2 market currently favours high TiO2 products

Recent equity raising will repay bridging debt…

… and further optimisation studies

First shipment

MZI delivered its shipment from the Keysbrook mineral sands project one month ahead of schedule. Approximately 1kt of zircon concentrate was sold last week to Tricoastal/Wensheng under an established long term offtake agreement. First leucoxene sales are targeted for February 2016. Over 85% of planned production is contracted under off-take agreements and the Company is deploying several bulk samples to prospective customers for the remaining 15%. Most recently, MZI signed a Letter of Intent with Jinzhou Titanium Industry Co. Ltd, one of China's largest chloride titanium dioxide producers, for supply of L88 (leucoxene 88% TiO2). Amongst the mix of prospective off-takers are welding rod manufacturers, who, despite modest requirements, commonly pay a high premium to market TiO2 prices. MZI ships product out of Bunbury Port, but it is understood some local parties are also interested in off- take.

Optimising and investigating expansion

Having achieved nameplate throughput, MZI is turning its focus to project optimisation. The Company has identified a number opportunities to improve recoveries (foremost L88) and increase production. Argonaut understands there is potential for a 30% production increased for just $2-3m additional capex. This would entail minor debottlenecking of the WCP and some additional componentry at the MSP (including additional electrostatic separators and drying capacity). A 30% increase in production lifts our steady state EBITDA to $55mpa from $40mpa and increased our valuation to

$0.84/sh. Recent test work has demonstrated potential to improving L88 recoveries (from 71% to 90%). Combine recovery improvements and throughput increases have potential to double EBITDA.

TiO2 Price signalling

A number of TiO2 and pigment producers including Tronox, Chemours (CC:NYSE) and Huntsman Corporation (NYSE: HUN) have signalled recently announced price increases up to 18% from Q1 2016. If this increase transpires through the broader market, MZI should realise the benefits for its L88 product which is linked to rutile prices MZI's L88 achieves a ~15% discount to the market rutile price (current Argonaut est. US$660/t L88). The L70 product is on a fixed price contract for ~US$350/t.

The demand for TiO2 products is currently polarised with a diminishing supply of high Titanium products, such as rutile and leucoxene, but an oversupply of low grade ilmenite. Most ilmenite products required intermediate processing (conversion to a chlorite slag) prior to pigment manufacturing. Higher TiO2 products provide direct feed to pigment plants. MZI's L70 (70% TiO2 leucoxene) contains a common blended TiO2 grade for pigment producers, making it an attractive product. MZI is well positioned with only high margin, non-ilmenite products.

Recent equity raising

MZI Resources (MZI) has raised $43m via a three tranche placement and a $2m share purchase plan (SPP) at $0.40/sh. Proceeds from the raising will be used to repay US$25.5m Resource Capital Fund (RCF) bridging loans, to further expansion and improved recovery projects and for general working capital. Tranche 2 has been approved in a recent General Meeting and Tranche 3 is due at the earliest mid-February.

RESEARCH:

Ian Christie | Director, Industrial Research

[phone] [e-mail]

Philipp M-O Kin | Analyst, Oil & Gas Research

[phone] [e-mail]

Patrick Chang | Analyst, Metals & Mining Research

[phone] [e-mail]

Matthew Keane | Analyst, Metals & Mining Research

[phone] [e-mail]

Helen Lau | Analyst, Metals & Mining Research

[phone] [e-mail]

INSTITUTIONAL SALES - PERTH:

Chris Wippl | Executive Director, Head of Sales & Research

[phone] [e-mail]

John Santul | Consultant, Sales & Research

[phone] [e-mail]

Damian Rooney | Senior Institutional Dealer

[phone] [e-mail]

Ben Willoughby | Institutional Dealer

[phone] [e-mail]

INSTITUTIONAL SALES - HONG KONG:

Travis Smithson | Managing Director - Asia

[phone] [e-mail]

Glen Gordon | Institutional Research Sales

[phone] [e-mail]

CORPORATE AND PRIVATE CLIENT SALES:

Glen Colgan | Executive Director, Desk Manager

[phone] [e-mail]

Kevin Johnson | Executive Director, Corporate Stockbroking

[phone] [e-mail]

James McGlew | Executive Director, Corporate Stockbroking

[phone] [e-mail]

Ian Dorrington | Director, Corporate Stockbroking

[phone] [e-mail]

Geoff Barnesby-Johnson | Senior Dealer, Corporate Stockbroking

[phone] [e-mail]

Rob Healy | Dealer, Private Clients

[phone], [e-mail]

Tony Locantro | Dealer, Private Clients

[phone], [e-mail]

Cameron Prunster |Dealer, Private Clients

[phone] [e-mail]

James Massey |Dealer, Private Clients

[phone] [e-mail]

Chris Hill | Dealer, Private Clients

[phone], [e-mail]

Important disclosure

Argonaut acts as Corporate Adviser to MZI and will receive fees commensurate with these services. Argonaut acted as Joint Lead Manager to the Placement to raise up to $43M in October 2015 and will receive fees commensurate with this service. Argonaut holds or controls 1,660,612 MZI shares and 1.25M MZI Options exercisable at $0.64 on or before 5 December 2016.

The analyst owns shares in MZI.

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