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Stellar Resources: PhillipCapital Bullish On Heemskirk Tin

Stellar Resources (ASX: SRZ) has received a "Strong Buy" recommendation and an increased 12-month price target of more than seven times its last traded share price of $0.05 from Singapore-based broker PhillipCapital.

The key to the valuation is the company's Heemskirk tin project, which PhillipCapital says has the "best tin grade of any project and the volume of contained tin is enough to get serious industry interest".

The following is an extract from the report.

Stellar Resources (SRZ)

71,500t contained tin - a real and valuable project

Three Key Points

- On 19 February, SRZ announced an increase in its Resource estimate for its Heemskirk project, to 71.kt of contained tin from 6.28Mt at 1.14%. This is the BEST tin grade of any project and the volume of contained tin is enough to get serious industry interest.

- On a comparative basis, SRZ is the cheapest tin equity exposure anywhere, at an EV of $48 per tonne of contained tin, compared with around $150/t for its peers.

- We calculate that the Heemskirk project has a value of over $160m. We assume that SRZ sells a 30% stake which finances their equity needs. This gives a valuation of 52c/share for SRZ, which we risk adjust to 37c.

Revised Resource increase SRZ value

Revised Resource

- In March 2011, SRZ published its initial Resource estimate for its Heemskirk project of 47.5kt of contained tin, from 4.36Mt at 1.1% tin.

- In February 2013, SRZ upgraded its Resource estimate to 71.5kt of contained tin, from 6.28Mt at 1.14%.

- The volume of total contained tin is among the more significant projects, and its grade is the highest.

- This is now a project of sufficient size to attract serious industry interest where there is a lack of mined tin.

Pre-feasibility Study

- SRZ announced the results of their scoping study in July 2011. SRZ expect to announce the results of the PFS in June 2013.

- The scoping study estimated pre-production capital costs of $108m, including feasibility studies. We do not expect a significant revision to this estimate as a result of the PFS.

- We expect that the results of the PFS will be the basis of a decision by an industry partner to buy a share of the project.

Project Value raised

- Our previous valuation assumed a mining inventory of 10Mt at a diluted grade of 0.95% Sn. This gave a valuation for the Heemskirk project of $62m.

- We now use the Resource estimate as the basis for our valuation, and this gives a valuation of $160m, after tax but before gearing. Some of the increase in value is due to our revised commodity price assumptions.

Investment View

- We assume that SRZ is able to sell a 30% project stake for 90% of our valuation, which provides SRZ with the equity funding required to complete the project. However, we expect SRZ to raise some working capital soon.

- Our revised valuation is now 37c/share. We raise our recommendation to a Strong Buy.

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