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Base Resources: Buy Recommendation From UK Broker As The Kwale Minerals Sand Project Develops

Base Resources (ASX: BSE) has received a buy recommendation from UK broker Ambrian Partners, with a price target of $1.40 - which is more than two-and-a-half times the last traded price of $0.57.

The following is an extract from the report.


We initiate coverage of Base Resources with a BUY recommendation and a target price of A$1.40.

To determine an appropriate target price we valued Base Resources on a sum-of-the-parts basis using a number of different valuation techniques. A summary of the valuation is shown in the table below.


Since 2010 Mineral Sands prices have risen significantly and are expected to stay high for the foreseeable future. This price
increase was due to increased demand from developing nations and a lag of new supply due to the limited investment in new projects and exploration.

Base is well positioned to take advantage of this as its Kwale Project has extremely robust economics and is due to commence
production in 2H13.

We recently returned from a site trip to Base's Kwale Mineral Sands Project in Kenya. What struck us most about the project was:
how simple the operation is going to be once in production; how supportive the government and community are of the project; and how much positive cashflow it is set to generate over its life.

Base completed project financing for the development of Kwale through a debt facility and equity placement in 2H11. Base also recently commenced construction of the project and its supporting infrastructure requirements.

Base has commenced exploration at Kilifi and Mambrui, which are located to the north of Kwale in Kenya. A decision will be made later in 2012 as to which project will be advanced to PFS.

Catalysts for 2012 include:

- Project development updates at Kwale - Ongoing;
- Exploration update - 2Q12;
- Finalisation of sales contracts - 1H12; and
- First drawdown of the debt facility - 1H12.


In the decade leading up to 2010, it seems that at one time or another each commodity had its 'moment in the sun'. However, Mineral Sand commodities, namely Ilmenite, Leucoxene, Rutile (also known as Titanium Dioxide minerals) and Zircon were relatively flat during that period.

Since 2010, this sector has seen significant appreciation in pricing and there doesn't appear to be any let up in the near future.

The reason why Mineral Sand commodities were slower than the majority of other commodities to see prices appreciate was, in our opinion, related to their end use. Mineral Sands are predominantly used in luxury goods items, such as ceramics, paints, tiles, plastics and inks.

As developing countries continue to transform and the wealth of the individuals in those countries has increased, so has their demand for luxury goods; we see no reason why this trend will not continue in the future.

A strong indication of the potential for further demand in the Mineral Sand commodity sector is shown in the graph in the side bar, which shows the GDP per capita of a number of developed and developing countries vs. per kg consumption of Titanium Dioxide minerals.

In the short term we believe Mineral Sand commodities will continue to stay at record prices, and even go higher. The main reasons for this are:

- Under-investment in the exploration for and the development of new Mineral Sands projects due to a history of poor returns;
- Limited near-term supply; and
- The lack of viable substitutes for Zircon and Titanium Dioxide in most key end-user applications.


The Kwale Project has advanced significantly since Base acquired it for only US$3m less than two years ago. Since then it has completed a comprehensive EDFS, fully financed the project construction (through US$170m debt and A$162m equity), established a cornerstone off-take agreement with DuPoint Titanium Technologies (the world's largest manufacturer of Titanium Dioxide) and commenced construction at Kwale.

To achieve all this in such a short space of time is impressive, and shows the strength of the management team. This has been evident by the number of awards that the team has won since securing the funding package.

To achieve all this in such a short amount of time you need a special asset, and we believe that Kwale is this. In our view, the reason Kwale is so appealing is that the project is straightforward (in mining and existing infrastructure terms) and has extremely compelling economics.

We thoroughly examine the economics of the project in the Scenario Analysis section and found that under all scenarios (including the downside where we increased the costs and capex by 30% and decreased revenue by 30%) there was still significant upside in the current share price.

This view is supported in the graph in the side bar that shows Kwale as the number one project in the world as ranked by industry leaders TZMI on the Revenue to Cash Costs (NYSE:CC) ratio, the key industry performance indicator.

While Mineral Sands projects are generally relatively simple, with an average strip ratio of just 0.1:1 and very low cash costs, Kwale is simpler than most. Kwale also has the advantage of being in close proximity to existing infrastructure, which has substantially decreased the upfront capital requirement.

With the major highway from Tanzania to Mombasa (East Africa's largest port) only 8km from the project and access to Kenya's national power grid, a substantial amount of capital has been saved on the development of Kwale. Also, Mineral Sands projects require access to a large amount of water, and Kwale is able to source water from the nearby river, which will be dammed, as well as from a borefield on a local aquifer.