ASX’s next zinc producer about to fly

Sixteen months ago, Heron Resources (ASX:HRR) secured A$240min funding – via a $140m equity issue and a US$76m debt package - to developthe Woodlawn Zinc-Copper Project (50km NE of Canberra). As at end-August 2018,the processing plant (1Mtpa capacity underground ore – 1.5Mtpa reclaimedtailings) and associated infrastructure was nearly 75% complete withcommissioning scheduled to commence by the end of 2018. In late September 2018,mining contractor Pybar commenced underground activities, while contracts forall key activities - tails mining, concentrate offtake (3 years), port andhaulage logistics, power and water treatment etc, are in place. In 1Q 2019,we forecast that HRR will be one of only four zinc-focused producers listed onthe ASX. Although prices for zinc - primarily used to galvanise steel -have softened in recent months, Zn has comfortably outperformed its base metalpeer group over the past five years. We expect that continued robust demandfrom China and developing economies in SE Asia, in conjunction withhistorically low stockpiles and a lag in new supplies, will help to supportprices at current spot price levels as HRR enters first production.

Valuation: A$1.40ps withupside potential

Our base-case scenario assumes amining inventory of 12.3Mt – equivalent to the 2016 estimated Mineral Reserves- and a 10-year LOM, with 77% of ore sourced from Reclaimed Tailings (6% ZnEq)and 23% of ore sourced from Underground (14% ZnEq). Predicated on our miningschedule we forecast average post ramp-up output of 32ktpa Zn, 5ktpa Cu, 10ktpaPb, and 10kozpa AuEq (Au+AuEq from silver), with metal output split almost50/50 between the two ore sources. Note: LOM metal output between the two oresources is equal with relatively higher ZnEq grade underground ore offsettinglower u/g tonnage.

Predicated on a flat (real) spot metalprice environment, we forecast Woodlawn generating average post ramp-uprevenues of A$220m per annum and average post-ramp up EBITDA of A$113m perannum (EBITDA margin of 51%). Our estimated NPV10 for the Woodlawn Project isA$508m. Attaching a 33% project-risk discount for timing and operatingforecasts (commissioning slippage, ramp-up profile, grade, recovery, unit costsetc.) and adjusting for investments, Resource value outside of mininginventory, exploration upside and FY19E net debt, we calculate HRR’s equityvalue at A$352m or A$1.40 per diluted share.