Tuesday, 18 February 2020
Jindalee Resources Limited (ASX:JRL) is an exploration company with exposure to lithium, gold and nickel, all of which have strong demand fundamentals. The company’s 100% owned McDermitt Project in the US has been receiving the most attention, and in 18 months from acquisition as a greenfield exploration site, has reported a maiden resource of 1.55 million tonnes of lithium carbonate equivalent. Independent Investment Research (IIR) has initiated coverage on Jindalee and expects its share price to re-rate based on anticipated catalysts such as a scoping study, a pre-feasibility study or a maiden reserve. Following is an extract from IRR’s research report: KEY POINTS Jindalee is a geology driven project generator – The management has a track record of acquiring projects early and cheaply, adding significant value during the early lower cost phase of project generation, and partnering when assets entered more capital intensive development phases. The company has been listed since 2002 and still has only 38.5M shares on issue. McDermitt is one of a new class of lithium deposit – Current global lithium supply comes from hard rock spodumene producers, typically in Australia, or brine based producers in Chile and Argentina. McDermitt is a dried out lake deposit at surface, basically an open pit clay mine, with the potential to have cash operating costs close to the bottom end of the brine producer cost curve, while also having half the time to ramp up to full capacity of brine projects. Being a new class of supply is a source of risk at present, translating to a higher discount at present, but the discount is likely to wind back if similar projects are successfully developed. Share price drivers – We expect the McDermitt project to deliver news flow relating to additional drilling, and particularly additional metallurgical test work, which we expect will form the basis of a scoping study, or possibly a PFS and Reserve announcement. The PFS/Reserve would be the major share price driver, but we would expect interim announcements along the way to create a positive share price trend. Lithium price oversold – From our assessment of the cost curve, and more importantly by the actions of some existing producers who are winding back production, it is clear that the current lithium price will rebound, although that will probably have to wait for US/China trade wars, Corona virus impacts, and the effects of the Chinese subsidy changes to ease. Australian gold and nickel exploration – The newly applied for North Gruyere tenement is certainly a focus, and if Jindalee is allowed to drill in the Dorothy Hills shear zone along strike from the 6Moz Gruyere operation, we would expect that to spark some market interest. VALUATION As an exploration story, we find it difficult to place a specific value on the company’s assets. Any valuation is contingent on the outcome of value adding activity. From a review of comparable ASX listed lithium project developers, the median market capitalization per tonne of lithium carbonate equivalent resource is around A$80/t LCE, and if Jindalee can convert all its current 1.6 Mt LCE resource into a competitive project, with similar capex and opex metrics to comparable companies, then it should trade at over A$3/sh. The risk is that in the process of building an economic project, the resource typically shrinks, hence the market’s caution. The nickel and gold exploration ground in WA provides diversification and additional upside.