MZI Resources : Research Note - Argonaut - Maiden L88 Shipment

9eb84c65-7c33-42b3-aefc-de2488037df2.pdf

BUY Current Price	$0.26
Target Price	$0.68

Current Price:

$0.26

Thursday, 30 June 2016 MZI Resources Maiden L88 shipment

Analyst | Matthew Keane

Valuation: $0.68

Ticker: MZI

Sector: Materials

Shares on Issue (m): 203.8

Market Cap ($m): 53.0

Net Cash ($m): -61.5

Enterprise Value ($m): 114.5

52 wk High/Low: $0.58 $0.22

Quick Read

MZI Resources' (MZI) first bulk shipment of L88 (88% TiO2 leucoxene) was shipped from the Port of Bunbury yesterday. The shipment, which consisted 8.3kt L88 and 7.0kt L70 (70% TiO2 leucoxene), will generate ~$9.8m revenue. Earlier in the week the Company also announced the restructure of its US$37.5m Senior Debt Facility with RMB. Repayments have been extended over an additional 27 months with lower upfront principle repayments and lower cash sweeping. These two events release pressure on MZI's cash balance caused by lower contract sales with off-take partner Chemours (See Argonaut report: Sales contract reduced). Argonaut maintains a BUY recommendation

12m Av Daily Vol (m):

Key Ratios

0.10

FY15A FY16E FY17E

with a revised target price of $0.68 (from $0.70).

Event & Impact | Positive

Ships ahoy: MZI made its first bulk shipment of L88 yesterday in a cargo containing 8.3kt

PER (CPS) (2.9) (6.6) 4.3

EV/EBITDA NA NA 4.3

EPS (CPS) (8.9) (3.9) 6.0

Mineral Inventory (100% basis)

Mt THM % VHM %

Ore Reserves 72.1 2.6% 2.3%

Mineral Resource 155.0 1.8% 1.0%

Directors

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

Ronald Beevor Non-Executive Director

Substantial Shareholders

Resource Capiatal Fund (RCF) 41.9%

Merryl Lynch Nominees 10..0%

All values in A$ unless stated otherwise

Share Price Graph

L88 and 7.0kt of L70 to key off-take partner Chemours. The estimated revenue from the shipment is $9.8m, with cash to be realised in Q3 CY16. Total product sales of 31.4kt, incorporating L88, L70 and zircon concentrate, have been completed since operations commenced in October 2015.

Further contracts required for H2: Following a decision by major leucoxene offtake partner Chemours to reduce CY16 volumes, MZI has been left with surplus product to sell in H2. Zircon concentrate remains 100% contracted to Tricoastal/Wensheng, however Argonaut estimates ~10kt of L88 production and minor L70 remains uncommitted over the period. MZI is in discussions and has despatched trial shipments to potential new offtake parties and a Letter of Intent has been signed with Jinzhou Titanium Industry Co, a leading Chinese pigment producer. There is also potential for small (~1.0kt) batch sales to welding rod producers at a premium price to pigment market TiO2 prices.

Debt restructure: MZI also announced a restructure of its US$37.5m Senior Debt Facility with RMB. The facility has been extended for an additional 27 months and first repayments have been deferred six months to March 2017. Principle repayments will now be US$1.0m for the first five quarters, US$2.0m for the next 10 quarters then US$2.5m thereafter (previously US$2.9m per quarter). The restructure also reduces cash sweeping to 50% of surplus cashflow (from 70%) and decreases the amount held in the Debt Service

$0.60

$0.50

$0.40

$0.30

$0.20

$0.10

$0.00

2.0

1.5

1.0

0.5

0.0

Reserve Account to US$3.0m (from US$4.5m). The interest rate margin above LIBOR has increased by 1.1% to 5.85%pa then 5.35%pa post project completion. This alleviates balance sheet pressure in FY17 where ramp-up and cancelled sales to Chemours previously reduced Argonaut's modelled cash to ~$4.0m (now $8.1m).

Recommendation

Argonaut maintains a BUY recommendation with a revised target price of $0.68

Jul-15 Oct-15 Jan-16 Apr-16 Jul-16

(previously $0.70). We have deferred all L88 shipments from H2 CY16 to H1 CY17 in our

model to reflect reduced H2 sales to Chemours impacting near term cash flows.

MZI Resources Equities Research

Analyst: Matthew Keane

Recommendation BUY Sector Metals & Mining

Current Price $0.26 Issued Capital (m) 203.8

Target Price $0.68 Market Cap (m) $53.0

2016E

Leucoxene 88

2017E

Leucoxene 70

2018E

Zircon Concentrate

2016E 2017E

All-in Sustaining Cost (A$/t)

2018E

Basket Price Received (A$/t)

A$/t

Date

30-June-2016

Profit & Loss (A$m) 30 June	2015E	2016E	2017E	2018E	Financial Summary	2015E	2016E	2017E	2018E
Sales revenue	0.0	18.3	66.5	81.9	Reported earnings
Other income	4.4	0.0	0.0	0.0	Net profit (US$m)	(18.1)	(8.0)	12.3	23.8
Operating costs	0.7	11.9	34.8	34.3	EPS (A$cps)	(8.9)	(3.9)	6.0	11.7
Exploration and evaluation	0.0	0.5	0.3	0.3	PER (x)	(2.9)	(6.6)	4.3	2.2
Corporate & marketing	6.3	5.7	5.0	5.0	Normalised earnings
Other inc. Foreign exchange loss	8.6	0.0	0.0	0.0	Net profit (US$m)	(18.1)	(8.0)	12.3	23.8
EBITDA	-11.1	0.1	26.5	42.3	EPS (A$cps)	(8.9)	(3.9)	6.0	11.7
D&A	0.2	2.6	5.7	5.8	EPS growth (%)	0.0	(55.8)	(253.7)	94.0
EBIT	-11.4	-2.4	20.8	36.5	PER (x)	(2.9)	(6.6)	4.3	2.2
Interest (Income -Expense)	-5.3	-5.6	-8.5	-6.5	Cashflow
Operating profit	-16.6	-8.0	12.3	30.0	Operating cashflow ($m)	(15.2)	(4.9)	18.3	29.9
Impairments	0.0	0.0	0.0	0.0	GCFPS (A$cps)	(7.5)	(2.4)	9.0	14.7
Tax expense	0.0	0.0	0.0	6.2	PCF (x)	(3.5)	(10.7)	2.9	1.8
Other	-1.5	0.0	0.0	0.0	Dividend
Non-controlling interests	0.0	0.0	0.0	0.0	Dividend (A$cps)	0.0	0.0	0.0	0.0
NPAT	-18.1	-8.0	12.3	23.8	Yield (%)	0.0	0.0	0.0	0.0
Normalised NPAT	-18.1	-8.0	12.3	23.8

Cash Flow (A$m)	2015E	2016E	2017E	2018E	Financial Ratios	2015E	2016E	2017E	2018E
Operating Cashflow	-15.2	-4.9	18.3	29.9	Balance Sheet Ratios
- Capex	52.2	45.4	2.5	1.0	Total Debt / Equity (%)	2603	207	114	84
- Exploration & evaluation	0.3	0.5	0.3	0.3	Interest cover (x)	-2.0	-0.4	2.3	5.2
- Asset purchases (+ asset sales)	-4.2	0.0	0.0	0.0	Acid test ratio (x)	1.8	0.4	12.6	6.3
+ Other	2.1	-2.7	0.0	0.0
Free Cashflow	-61.4	-53.6	15.5	28.7	Profitability Ratios
- Dividends	0.0	0.0	0.0	0.0	Net profit margin (%)	-	-43.8	18.5	29.1
+ Equity raised	0.1	22.0	0.0	0.0	Return on assets (%)	-11.2	-1.7	13.0	24.3
+ Debt drawdown (- repaid)	94.0	12.1	-21.4	-7.1	Return on equity (%)	-392.8	-15.2	15.5	24.1
Net Change in Cash	32.7	-19.5	-5.9	21.5
Effects of exchange rate	0.0	0.0	0.0	0.0
Cash at end	33.8	14.2	8.3	29.9

Valuation Summary	A$m	A$/sh
Balance Sheet (A$m)	2015E	2016E	2017E	2018E	Keysbrook	251	0.93
Total assets	134.8	159.2	168.2	180.1	Corporate Overheads	-40	-0.15
Current debt	18.6	21.4	7.1	11.1	Tiwi Island Project	0	0.00
Non-current debt	101.4	87.5	83.3	72.2	Unmined Resources	35	0.13
Total liabilities	130.2	106.4	88.7	81.3
Shareholders funds	4.6	52.7	79.5	98.8	Cash est.	14	0.05
Debt est.	-76	-0.28
Production Summary	2015E	2016E	2017E	2018E	Total @ 11% discount rate	185	0.68
Keysbrook	Leucoxene 88	kt	N.A	16.3	39.4	36.4
Leucoxene 70	kt	N.A	13.1	28.3	28.2
Zircon Concentrate	kt	N.A	12.9	26.8	29.5
Total Products kt N.A 42.3 94.6 94.0
Unit Cash Cost (A$/t)		N.A	410	367	365	Directors
All-in Sustaining Cost (A$/t)		N.A	558	449	431	Mal Randall Non-Executive Chairman
Mineral Sand Price Assumptions		Trevor Matthews Managing Director
Leucoxene 88 (US$/t)		N.A	669	621	829	Nathan Wong Non-Executive Director
Leucoxene 70 (US$/t)		N.A	350	350	350	Stephen Ward Non-Executive Director
Zircon (US$/t)		N.A	1013	1000	1200	Maree Arnason Non-Executive Director
Exchange Rate Assumptions (AUD/USD)		N.A	0.72	0.73	0.70	Rodney Baxter Non-Executive Director
Basket Price Received (A$/t)		N.A	577	703	871	Ronald Beevor Non-Executive Director

Attributable Reserves & Resources	Substantial Shareholders	%
Reserves Mt THM k(t) L70% L88% Zr %	Resource Capiatal Fund (RCF) - Pro forma	41.9%
Keysbrook 72 1,586 26.3% 49.3% 13.6%	Merryl Lynch Nominees Nominees	10.0%

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

ANNUAL PRODUCTION

REALISED PRICE AND COST PROFILE

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RESEARCH:

Ian Christie | Director, Industrial 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]

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 has acted as Corporate Adviser to MZI in the previous 12 months. Argonaut acted as Joint Lead Manager to the Placement to raise up to $43M in October 2015 and received fees commensurate with this service. Argonaut holds or controls 1,660,612 MZI shares, 1.25M MZI Options exercisable at $0.64 on or before 5 December 2016 and 1M MZI Options exercisable at $0.50 on or before 30 May 2018

The analyst owns shares in MZI

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© 2016. All rights reserved. No part of this document may be reproduced or distributed in any manner without the written permission of Argonaut Securities Pty Limited and / or Argonaut Securities (Asia) Limited. Argonaut Securities Pty Limited and Argonaut Securities (Asia) Limited specifically prohibits the re-distribution of this document, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.