An Over-Rated and Expensive Way to Invest in Tin
Welcome back to Analysts Notes. This report focuses on Alphamin Resources Corporation (“Alphamin”). Our research shows that Alphamin is trading at 5.4x the calculated NPV5 value, which is a stretch. Alphamin Resources has retained its value over the past two years and out-performed the two largest tin companies in the world, Yunnan Tin (000960.SZ) and Timah (TINS.JK). It is looking expensive.
The jurisdiction risk of the Kivu province within the DRC warrants a higher discount rate than 5%. The market valuation of Alphamin is pricing in much higher tin prices and exploration success that would extend mine life. There are many risks associated with the Company. Nevertheless, Crux Investor acknowledges that tin is a critical metal.
EXECUTIVE SUMMARY
Alphamin Resources¬ Corporation ("Alphamin") (TSX:AFM) is a Canadian mining company that first acquired an interest in the Bisie Tin Project in 2011. Company management obviously has a healthy appetite for risk as the DRC is a notoriously high risk jurisdiction. The government has a track record of finding fault with mining licence title and tenure after companies have already invested and identified a project with economic potential. The pattern is for the government to extract additional rents once the companies are committed, which is a virulent form of resource nationalisation. To this point, in 2018 a new Mining Code formalised resource nationalism by way of high taxation: royalties of 3.5%, export fees of 2.0%, 30% income taxes, super profit taxes of another 20%, a free carried interest of 10%, with an additional 10% for every licence extension, 10% tax on dividends. Fortunately for Alphamin, the mining licence was issued for 30 years, which makes the need of renewal and issuing of another 10% free carried interest highly unlikely.
In the personal experience of the author of this report, DRC authorities often will find fault with historical import duties and/or tax assessments, which results in enormous additional charges after imposition of penalties and interest rates to the short fall. There could be some unpleasant surprises for Alphamin in future.
The risks associated with the DRC did not deter Alphamin. The licences acquired in 2011 were in North Kivu, a province plagued by warlords and with almost no infrastructure. In 2012 Alphamin also acquired permits over Manono, which later proved to host one of the largest global lithium resources, but it dropped this licence without doing exploration after achieving success in North Kivu.
The Bisie tin project in North Kivu was already a well-known site when Alphamin started work, with artisanal workings on extremely rich tin deposits. Alphamin quickly proved up resources below artisanal workings; completed a positive bankable feasibility study in 2016; and secured the funding in 2017 to start mine construction on a deposit referred to as Mpama North. Commercial production was declared in September 2019 and the mine was soon highly profitable. Alphamin has been able to reduce debt and pay generous dividends from the 2022 financial year.
Exploration at Mpama South successfully identified additional mineral resources, albeit at much lower grade. The results of a preliminary economic assessment (“PEA”) were sufficiently compelling to drive the construction of another mining centre with its own processing plant. The two units are close enough to share certain infrastructure with two drives at Level 8 and Level 9 of Mpama North developed towards Mpama South for exploration and return air reticulation. Construction is ongoing with forecast first production early in 2024, which is a delay of 1-2 months from plan. The project is forecast to absorb US$116 million, before contingencies. This together with a very large tax bill in 2023, based on 2022 profits, has dramatically reduced the cash balance as of 30 September 2023 and will probably severely limit dividend payments in the short term.
After a number of revisions of the mining method to be used for Mpama North, the company settled on longhole open stoping (“LHOS”) and has successfully applied this since production started. Crux Investor records that the actual feed grade to the processing plant is on average 4% lower than planned, indicating an underestimation of dilution. Crux Investor has adjusted the remaining schedule accordingly resulting in an additional 0.11 million tonne (“Mt”) to be mined and a life of mine (“LOM”) grade dropping to 3.50% Sn from 3.97% in the feasibility study schedule.
This valuation has adjusted the PEA production schedule for Mpama South by accounting for the increase in resources announced in February 2023. This extends the LOM there to 2030 at an average grade of 2.19% Sn.
With the metallurgical performance well established there is little risk associated with processing and forecast concentrate production.
This valuation has mostly been based on a technical report dated 2022 which provides revised reserves for Mpama North and a PEA assessment for Mpama South. Alphamin relied on a waiver for producing companies to prove through an economic assessment the validity of reserves. Spoiler Alert: why would a company show through its own valuation that its share value is way over the top?
This valuation has used the suggested operating cost rates for Mpama North after verifying that historical actual costs are in line with these suggestions. Alphamin forecasts much lower costs for Mpama South suggesting that the operating unit will greatly benefit from shared services with Mpama North. Although Crux Investor thinks that the cost reduction is overly optimistic, it has adopted the rates. Crux Investor has also adopted the capital expenditure provisions of Alphamin. As the Mpama South project capital expenditure will be almost totally sunk by 1 January 2024, the start date of the cash flow model, the remaining US$17 million has been accounted for as a reduction in cash balance from the 30 September 2023 level.
The cash flow model has estimated cash flow for Mpama North and Mpama South separately to establish the tax liabilities for each separately considering the criteria for super profits. The findings of the cash flow model are that the off-mine charges are a great burden taking 25.6% of gross revenue. The gross profit margins expressed as a percentage of at-mine revenue is decent at the spot tin price of US$25,175 on 19 January 2024 (around 45% for both units) indicating that the forecast overall operating cost structure is relatively low. However, with all the tax burdens and leakages to other parties, the cash received in Mauritius is only US$402 million, less than 16% of gross revenue. After accounting for Mauritius differential taxes and corporate expenses, only US$192 million remains attributable to Alphamin shareholders. This has a value of US$162 million at a discount rate of 5%.
Given the high-risk nature of the DRC jurisdiction and in particular the Kivu province there is much to be said to apply a higher discount rate than 5%.
At the share price of C$0.83 on 19 January 2024, the market capitalisation of Alphamin is almost US$0.80 billion, and the diluted Enterprise value US$0.87 billion. This is 5.4x the calculated NPV5 value. It is clear that the market has a very inflated view about the prospects of the company, expecting much higher tin prices, combined with much exploration success that will substantially increase the LOM beyond 2032.
Given that each additional year of production would add approximately US$30 million, there is little chance for investors ever realising the current Enterprise Value.
INTRODUCTION
Alphamin Resources Corporation ("Alphamin") (TSX:AFM) is a Canadian company which purchased in August 2011 a 70% stake in a company registered in the Democratic Republic of Congo (“DRC”) called Mining and Processing Congo, SPRL (“MPC”) for a consideration of C$14.1 million in shares. Another 20% shareholding had to be purchased before 18 March 2014. With the acquisition, Alphamin took control of five exploration licences, one of which covered the Bisie tin deposit.
In June 2012 Alphamin announced the acquisition of two permits surrounding the historic Manono Mine in Katanga Province in the Democratic Republic of the Congo. In consideration for acquiring the permits, Alphamin paid US$2 million in cash and issued 6,100,000 shares.
The company was sufficiently encouraged by early exploration results at Bisie to purchase not only 20%, but the full remaining 30% from MPC, in July 2012 in exchange for 29.0 million shares.
Exploration drilling during 2012 intersected deposits with attractive tin grade which led the company to carry out resource drilling in 2013 with a Maiden mineral resource estimate (“MRE”) declared in November 2013 with 4.0 million tonnes (“Mt”) @ 3.5% Sn in the Inferred category. By March 2015 Alphamin could declare an updated MRE which did not increase the resource tonnage, but with 2.65 Mt @ 4.49% Sn in the Indicated category.
With all the success at Bisie, the company did not carry out any work at Manono and wrote off its investment in 2014. It must have regretted this decision later as another company AVZ Minerals Limited (“AVZ”) defined one of the largest lithium reserves in the world there (93 Mt) from total mineral resources of 400 Mt with 1.65 Li2O and 0.07% Sn. It propelled the share price of AVZ at some stage to a level where its market capitalisation was more than A$3 billion, before dropping back to its current A$2.75 billion with the shares suspended following a conflict with DRC authorities about the legality of its mineral tenure. This is a perpetual risk with successful mineral projects in the DRC.
Alphamin however did not have similar problems as AVZ as it received in February 2015 a mining license over the Bisie prospect, for which it had to issue 5% to the DRC government in terms of the mining law. A definitive feasibility study was in progress and the company expected the start of construction to commence early in 2016.
On 11 November 2015, it was announced that the Industrial Development Corporation of South Africa Limited (“IDC”) would acquire in stages a 14.25% stake in the project for US$10 million. On 23 February 2016, the results of a positive feasibility study were released and in November 2017 the financial arrangements were completed, allowing construction to start.
The process plant was completed in Q1 2019 with various stages of commissioning continuing until May of that year and commercial production declared in September 2019.
It is noticeable that the company was uncertain about the best mining methods. The feasibility study was based on Sub-level Caving (“SLC”). In the fourth quarter of 2018 rock conditions underground caused management to review the suitability of the SLC and it was decided to change the method to Cut and Fill (“C&F) mining. This was again revised in 2019 to transition to Longhole Open Stoping (“LHOS”) with hydraulic fill.
Figure 1_1 shows the production volumes and feed grade achieved since start of commercial production with the number for 2023 annualised Q1 production.
The graph shows a drop in grade with increasing plant throughput until 2021 after which the mine managed to turn around the grade decline.
Figure 1_2 shows the share price of Alphamin on the Toronto Stock Exchange since August 2011 when it acquired the first stake in the Bisie project.
The graph shows the typical high share price in the initial stages when exploration results were announced for it to drop until the announcement of the maiden MRE in November 2013.
Thereafter the price pattern is typical for the Orphan Period of the Lassonde Curve with the share price dropping until the feasibility study findings were released in February 2016. The price then rose again until just before the start of construction. As to be expected the price dropped then again with the balance sheet at its most stretched despite a relatively smooth construction phase and start of production. The shares dipped to the lowest point post-financing around April 2020 when it became clear the operation became cash-positive and would no longer require third-party investments. From then the mine became a strong cash flow generator (see next section), partially because the tin price almost doubled from 2020 to 2021, and the price skyrocketed. The drop in 2022 is probably because of concerns about a dropping tin price, but this has reversed to some extent.
HISTORICAL FINANCIAL PERFORMANCE
Table 2_1 gives the historical financial performance from January 2010, the year when Alphamin, started becoming increasingly active, until 30 June 2023. In 2014 the company elected to convert from reporting in Canadian Dollars to US Dollars. The totals in the table are only for the numbers reported in US Dollars.
Table 2_1 shows that:
- Operations were cash negative until 2019, absorbing US$37 million. However, since 1 January 2020, the mine generated US$347 million up to 31 December 2022. Cash generation remained strong during the first nine months of 2023 exceeding US$110 million, but the company had to pay US$90 million in taxes during this period, almost half of this in Q3 alone. The discussion on finances is silent on this major item, but a partial explanation can be found in the statement under note 8:
Under DRC tax law, provisional payments of 80% of the prior year’s tax bill are due each year. There is no allowance for estimated profits.
- Profit before tax of US$185 million was declared in 2022. The taxes levied in 2023 imply that superprofit taxation was imposed for a total rate of 50%.
- The tax drain together with substantial investments in working capital (US$27.5 million) resulted in negative cash generation from operations for the first 9 months of 2023 of US$3.1 million.
- Net investments required from 1 January 2014 until the end of 2019 were only US$230 million, after which the company became cash-positive to the extent that financiers could be rewarded by returning US$143 million.
- Financing was dominantly by means of equity placements raising US$171 million between 1 January 2014 and 31 December 2020. The company has already returned US$125 million more than cash raised in 2021-June 2023 from exercising share options. It is however unlikely this can be sustained. The cash balance has dropped to US$10 million as of 30 September 2023. Management has elected to keep dividends steady in 2023 (US$56 million) by essentially financing these through overdraft (US$51 million).
- With the delay in the completion of the Mpama South project the next few quarters may prove challenging.
- It is evident that the project is a great investment success, partially because the tin price moved favourably over time.
The following sections will investigate whether investors can continue to expect good returns at the current market valuation of Alphamin.
VALUATION OF THE BISIE MINE COMPLEX
Background
The title of this section uses “mine complex” because Alphamin is constructing another mine with a dedicated plant immediately south of current operations.
The technical information in his report has been dominantly drawn from a NI. 43-101 compliant technical report by Bara Consulting (Pty) Ltd (“Bara”), dated 22 April 2022, with an updated mineral reserves estimation for the Mpama North Deposit and a preliminary economic assessment (“PEA”) for the Mpama South Deposit. This report has also reviewed the feasibility study report dated 23 March 2017 and a technical report dated 11 February 2020 with mineral reserves effective 31 December 2019.
The Bisie tin mine complex is located approximately 180 km northwest of Goma, the capital of North Kivu Province in eastern DRC (see Figure 3.1_1).
The area is not easy to work in. It is practically devoid of infrastructure and it has been plagued by gangs and warlords in the recent past. The preferred road route for consumables and supplies is through Kisangani towards Uganda. A 32 km private access road from the N3 state road to the site was constructed by Alphamin. The mine site’s Kokoli airport is used to transport staff to the site, and for aeroplane and helicopter charters from Goma, the regional capital city of North Kivu Province.
The mineral rights are held by a local registered company Alphamin Bisie Mining SA (“ABM”) in which Alphamin has an 84.14% ownership, the government of the DRC 5% and the IDC of South Africa 10.86%.
At the publication date of the technical report on the latest reserve estimation ABM held three exploration permits (Permis de Recherches PR 10346 of 65.76 km2; PR 5266 of 36.30 km2; and PR 5267 of 158.84 km2) and one mining permit (Permis d’Exploitation PE 13155 covering 128.96 km2) on which the Mpama North Mine and Mpama South project are located. Figure 3.1.1_1 shows the outlines of the mineral rights.
No encumbrances to third parties are attached to the mineral rights, but, according to the annual financial statements for the year ending 31 December 2022, “royalties are payable to various branches of the DRC government in line with the DRC mining code and calculated on 3.5% of revenue, as determined by the DRC government agency’s assays results and tin price tables which are published on a weekly basis”. The statement reads as if the royalty applies to gross revenue, but Crux Investor verified in Section 3.7.1 from actual reported figures it applies to revenue net of off-mine charges.
Geology and Mineralisation
The geology at the project is characterised in the west by a highly intruded basement/pluton and in the east by younger metamorphosed sedimentary/volcano-sedimentary sediments. These in turn have been intruded by different generations of younger granites, the youngest of which is referred to as “tin granites”.
The area has been affected by multiple phases of deformation which have given the mine area a predominantly N-S tectonic grain with subtle inflections in a NW-SE orientation. At the mine area, there is a N-S trending shear zone with a number of splays on either side. The interpretation suggests a number of the splay structures fan out towards the north while others appear to be anastomosing.
A tectonic phase younger than the mineralisation has folded the tine-bearing veins about a westerly dipping fold axis. The veins are hosted within an amphibolite schist (a dark rock with little quartz and minerals rich in Fe, Mg, Ca) that has been moderate to intensely altered to chlorite (a mica mineral rich in Fe, Mg), talc (Mg rich mineral) and garnet (a dark mineral with a wide range of composition, but here probably Fe, Mg rich).
Tin mineralisation at Bisie is hosted within a north-south striking, eastward dipping shear zone hosting multiple cassiterite (SnO2) veins, stringers and disseminated cassiterite in a structurally controlled zone. Associated with the tin is copper, lead and zinc, but in quantities that make these relative to tin of little economic interest.
Within the vein zone, the tin is predominantly present in two high-grade parallel shoots that plunge approximately 35° to the north.
Two areas of economic interest have been defined: Mpama North on which the mine was initially developed and Mpama South which is now being developed for mining. Figure 3.2_1 shows the relative location of the deposits in the far north. The map also shows nicely the prospects for similar deposits further south along the boundary between the granites in the west (in orange colour) and sedimentary rocks in the east (in green).
Mineral Resources
Mpama North
The discussion on the methodology used for the resource estimation of the Mpama North deposit is less relevant after a number of years of production with no major surprises noticeable. As essentially the same methodology was used as for Mpama South, this section will discuss it in detail with the section on Mpama South referring to the discussion here.
The last resource estimation was completed in May 2016 in support of the feasibility study. A resource statement effective 30 June 2019 is based on the 2016 resources, accounting for depletion by mining and a reassessment of the extent of artisanal mining.
The MRE was based on tin, copper, lead, zinc and silver assays and density measurements obtained from the cores of 122 NQ size diamond drill holes and 21 closely spaced PQ size holes used for the purpose of obtaining a metallurgical test sample. The holes are between 25 m and 50 m apart along east-west fence lines spaced approximately 50 m apart over a strike length of approximately 600 m, with some infill drilling at 25 m line spacing.
A review of the raw data assay distribution indicated that above a grade of 0.35% Sn there was a grade distribution distinct from the distribution below this grade. The grade was then used as a threshold to define wireframes for resource estimation. Three zones of mineralisation were modelled: the Main Vein, the Hangingwall Vein and the Footwall Vein. The Main Vein is by far the most important body in terms of size, grade and consistency.
Figure 3.3.1_1 shows two isometric views of the deposits with the left view looking east and the right view looking west with in light blue the Main Vein, in red the Footwall Vein and in dark blue the Hangingwall Vein.
Although the mineralisation has been modelled as steeply dipping slabs, the mineralisation within the individual zones occurs in the form of irregular high-grade veins several tens of centimetres thick and lesser amounts in blebs and vein fragments irregularly disseminated in the schist.
The Main Vein is a tabular body striking north-south for 570 m and dipping 50° to 65° to the east and is developed over a true width of 5 m to 15 m with an average thickness of approximately 9 m. It plunges approximately 25° towards the north and extends 700 m down plunge to a depth of 550 m below the surface. The mineralisation is open in a northerly plunging direction and to a limited extent to the south. The strike of the payable zone ranges from 490 m in the shallow areas to 150 m in the deeper areas of the mine. The deposit remains open at depth.
The Hangingwall Vein (HW Vein) is between 1 m and 20 m above the Main Vein and is generally between 0.5 m and 4 m wide. It occurs in the northern area of the deposit and tapers out northwards.
The Footwall Vein is restricted to the southern area where it is between 1 m and 10 m below the Main Vein. It is very narrow (<50 cm) and high grade in its most northern occurrences, but towards the south it thickens to approximately 6 m.
The assays were composited to a standard 1 m length. Semivariograms were generated within the plane of mineralisation and the principal direction down plunge to the north, the secondary direction perpendicular to this and the minor direction across the strike. There was insufficient data to calculate robust semi-variograms for the Hangingwall and Footwall Vein zones, and so the semi-variograms for the Main Vein zone were applied to these zones.
Block models were rotated in the dip direction in order to best fit the orientation of the mineralised zones. Based on the estimated strike and dip direction in each block model cell the search parameter direction was modified.
A block size was chosen to measure 20 m x 10 m x 2 m for grade estimation with subblocks of 2 m x 2m x 0.2 m to fill the wireframe model accurately and create blocks where the mineralisation is narrow.
Using a particular indicator two data sets were distinguished with the high-grade set results given a limited range to influence the block grade. The topographic model and “mined-out” models were added to the mineralisation models, so that the block model cells were coded as either mined or un-mined, and the model cells above the topographic surface were removed.
Figure 3.3.1_2 shows two cross sections 255 m apart comparing the estimated block Sn grades with drill intersection grades to validate the correlation between the two.
Table 3.3.1_1 shows the estimated resources for the Mpama North Deposit of the Bisie deposits, effective 9 May 2016, using a cut-off grade of 0.5% Sn.
The table illustrates that the Hangingwall and Footwall veins are negligible contributors to the resources.
Whereas a cut-off grade of 0.5% Sn was chosen, the exact value does not materially affect resources as is shown in Figure 3.3.1_3 with the tin content only dropping by 1.4% for an increase in cut-off grade from 0.5% to 1.0% Sn.
Not shown in the table is that Inferred mineral resources amount to another 0.5 Mt grading 4.25% Sn for 22,800 tonnes contained tin.
Mpama South
The database for resource estimation includes 135 drill holes. The threshold value used for drawing up mineralisation wireframes is 0.40% Sn. Seven mineralised zones, denoted MZ1 to MZ7, were modelled, striking parallel to sub-parallel in a northerly direction with azimuths between 350° to 010° and dipping approximately 70° to the east. Some of these zones have very limited strike extent.
Figure 3.3.2_1 shows five of these zones in cross-section.
The total strike length of the mineralisation is 1,110 m, with MZ1 having a total strike length of 900 m and dip extension of 350 m, followed by MZ2 with a strike length of 650 m and dip extension of 350 m. These two zones represent up to 88 % of the Mineral Resource.
Figure 3.3.2_2 shows a cross-section through the Sn block model of Mpama South and an isometric view along the strike extent of the model comparing the estimated block Sn grades with drill intersection grades to validate the correlation between the two.
Upon reviewing the illustrations the extent by which some isolated high-grade intersections define large areas with high-grade blocks is of concern. Unpleasant surprises can be expected.
Table 3.3.2_1 shows the estimated resources for the Mpama South Deposit, effective 29 March 2022, using a cut-off grade of 1.0% Sn. This cut-off grade was selected based on an underground mine and concentrator with an operating cost of US$50/t and a tin price of US$ 20,000 per tonne.
Very few of the estimated resources are in the Indicated resource category confirming the impression above that there is much risk associated with the interpreted extent of the high-grade blocks around isolated high-grade drill hole intersections.
With almost all resources in the Inferred category, it made little sense for Alphamin to conduct a feasibility study for Mpama South as it could not use these to declare reserves. For this reason, it assessed the economics of this deposit at a level of PEA. The construction of a standalone mining operation at Mpama South is based on this PEA, which is a very risky approach by the company. It probably decided that the average grade is well above similar operations elsewhere in the world and should forgive any shortcomings in the input parameters. Crux Investor is however particularly concerned about the estimated average grade as this is very much determined by a few intersections.
Mineral Reserves and Mineable Inventory
Mpama North
Whereas the reserves estimated in the feasibility study assumed sublevel caving (SLC) as a mining method, this was subsequently revised to longhole open stoping (LHOS) for the 2019 reserve estimation. By that time 0.17 Mt had been mined by means of cut and fill (“C&F”) mining.
The reserves dropped considerably from the feasibility study numbers (i.e. 1.34 Mt ore), predominantly due to a large drop in dilution: for unplanned 5% versus 14.5% in the feasibility study and unplanned dilution of less than 16% versus 35% previously.
The 2022 technical report did not update the reserves from first principles and used the same mine schedule as the 2020 study. The latest report presents a mine schedule including 13.7% Inferred Mineral Resources. The total can therefore not be referred to as “mineral reserves”, but as a Mineable Inventory. Moreover, the report also informs that “the current mining method at Mpama North mine differs somewhat from the planned method associated with the LoM schedule and Reserves”. The reason given for the change is minimising dilution. In Section 3.7.2 it will be shown that this is not true as actual grades during 2020-2022 were lower than forecast, indicating higher dilution than forecast.
The conversion of mineral resources to mineable inventory assumed underground mining by longitudinal long hole open stoping with paste backfill and cut-off grades based on the input parameters in Table 3.4.1_1. The table includes Mpama South to allow for comparison to show the inconsistent manner in which the cut-off grades were derived.
The table illustrates that in particular for Mpama North a large number of very important parameters were ignored resulting in an optimistically low cut-off grade. However, this is very much compensated by a very low assumed tin price.
The calculation for Mpama South includes a much higher tin price, but also accounts for a number of important off-mine charges. The higher assumed tin price and much lower mine cost result in a calculated cut-off grade half of Mpama North. Whereas theoretically 0.8 % could have been used, the consultants were instructed by Alphamin to use 1.0% Sn. Given the optimistic tin price and omission of many important charges Crux Investor considers this cut-off grade too low.
Table 3.4.1_2 shows the modifying factors applied to Mpama North resources.
Table 3.4.1_3 gives the reserve statement and the amount of Inferred Resources included in the LOM production schedule for total Mineable Inventory as at 31 December 2019 and as at 31 December 2022 after accounting for planned production.
The table shows that over time the contribution of inferred resources increases. It should be noted that the table accounts for planned depletion, not actual. In Section 3.7.2 where the production from 1 January 2024 is derived, Crux Investor will account for actual production.
Mpama South
The technical report does not have a discussion on the derivation of the Mineable Inventory under a separate caption. Its derivation assumes LHOS mining, even though the deposits are in places relatively narrow. Here there is a risk of hang-ups should the blasting not result in sufficiently small size particles.
In Table 3.4.1_1 the cut-off grade of 1% Sn was derived. Table 3.4.2_1 gives the modifying factors applied to the Mpama South resources.
The factors are much more aggressive than assumed for Mpama North despite the deposits being generally much narrower.
The Mineable Inventory has been derived from the table in the technical report with a LOM production schedule and is summarised in Table 3.4.2_2.
The table shows that the deposit is very much inferior to Mpama North in terms of size and grade. Development is a very important component as source for plant feed, which is a reflection of the generally narrow nature of the veins.
On 10 February 2023, the company announced a revised MRE which is reproduced in Table 3.4.2_3 and from which Crux Investor generated a revised Mineable Inventory using the same conversion rates as derived in the table above.
Mining Operations
Figure 3.5.1_1 shows the lay-out of a typical production level at Mpama North.
Mine access to Mpama North is through a central decline (blue in the illustration) developed at minus 9. From the decline footwall drives (brown) are developed over the strike length of the deposit from where regular intervals stope crosscuts (light blue) are developed to the hangingwall contact of the orebody. Ore drives (purple) are then developed from the stope crosscuts, along the strike of the deposit.
All stoping takes place in a longitudinal formation and in a bottom-up sequence within an echelon. An echelon consists of four levels, three production levels and a top holing level at the top of the echelon, directly below the sill pillar. The stope height is 10 m. Sill pillars separate the echelons from each other. Figure 3.5.1_2 shows a longitudinal section of Mpama North with the Mine Layout with the sill pillars in orange.
Dip pillars, or rib pillars (white vertical bars in section), are located along the strike and will be spaced at distances ranging from 20 m to 50 m depending on geotechnical guidelines. The spacing of the rib pillars defines the stope length. The width of the rib pillars increases with depth and varies from 3.0 m to 6.5 m as specified in the geotechnical guidelines.
As already mentioned, the stopes are mined in a bottom-up sequence. Once a stope has been mined and backfilled with waste rock (without binder), the stopes adjacent to it and the one above can be mined. Mining of two adjacent stopes simultaneously is not allowed due to safety concerns should a rib pillar fail.
The stope slot raises are developed by bottom-up long-hole blasting methods. Once the slot raise is complete the slot is opened up to the full width of the orebody, creating a mining face, from where stope blasting can commence, advancing back towards the stope access cross-cut. The technique currently in use is for a stope to be pre-drilled, charged and then blasted in a single blast.
On average, a sill pillar thickness of 8 m every 59 m vertically, will generate a 13.6 % pillar loss on dip. The rib pillars (3 m with spacing depending on the geotechnical domain) will contribute from 6% to 13% to pillar loss. The mine plan includes the mining of the sill pillars once an echelon is completely mined out. For sill pillar mining a mining recovery of 61 % is applied.
Loading of the broken rock is by Load Haul Dump (“LHD”) equipment with 10 t capacity, which feeds 35 tonne articulated dump trucks (“ADT”), which haul the rock to the surface along the decline.
The Mpama South deposit is located slightly South and East of the current plant and surface infrastructure. The plant and offices are located at an elevation of approximately 635 m above mean sea level (“mamsl”). The Mpama South deposit extends from 780 mamsl to 470 mamsl.
It was decided to build a dedicated new plant south of the current plant and access Mpama South from here via strength length decline developed at minus 8°. The 345 m long ramp will intersect the orebody at an elevation of 629 mamsl. From this point, ramps will be developed up and down at an inclination of 9° to interconnect the production levels. Access to Mpama South will also be established from Mpama North from its 8 Level and 9 Level southwards. Figure 3.5.1_3 shows the relative location of Mpama North and South and the infrastructure connecting these.
The connecting drives will serve as second means of egress, conduits for return ventilation and platforms for exploration and possible future production from the area between Mpama North and South.
The main difference between Mpama South and Mpama North is that the Mpama North orebody consists of a single mineralised zone of 5 to 15 m wide. At Mpama South the orebody has been modelled as a number of roughly parallel vein-type lodes with widths between 2 m and 15 m and with varying middling thickness between the veins. The method is the same as for Mpama North, but with stope height of 15 m and a 20 m span. The sill pillar widths are designed at 8 m and the rib pillars at 3 m.
The level plans have the same design as for Mpama North and mining will use the same mining equipment types. Mineralised material from the stopes above 629 m elevation will be tipped by the LHD into the level orepass. This material will report to 6 Level where a truck loading chute will be established and trucks will be loaded and haul the material the short distance to the surface. The haul distance from the loading chute to the run of mine (“ROM”) pad will be approximately 550 m. Below Level 6 loading and hauling arrangements are the same as for Mpama North.
Processing Operations
The Bisie mine can now demonstrate years of processing performance which has shown recoveries improving from 71% in 2020 to 76% during the first half of 2023. According to the technical report metallurgical test work for Mpama South showed it to be the same type of mineralisation as Mpama North, except for being lower grade, the cassiterite being finer and the deposit containing more sulphides. For this reason, the Mpama South processing flowsheet will be identical to the existing plant except for some minor changes.
The Mpama North plant process flow is shown in Figure 3.6_1.
The plant comprises three stages of crushing to reduce the particle size to -8 mm which is sent to a bin. The material is then subjected to two stages of jigging with the –1 mm material proceeding directly to the low grade (“LG”) concentration circuit with hydro cyclones, gravity spirals and shaking tables. The +1-8 mm concentrate is first sent to a ball mill for comminution to 80% passing (“P80”) -425 micron and then further concentrated in the high grade (“HG”) circuit also using cyclones, gravity spirals and shaking tables. The Mpama South processing flowsheet differs here with screening of the crusher product before, not after, jigging.
Both concentrates are milled further to P80 -106 microns and sulphides are removed by flotation. Jig tailings are discarded to a tailings stockpile, part of the Tailings Storage Facility (“TSF”); The remaining -1 mm tails are thickened and discarded on the TSF. Combined final concentrates are treated through a magnetic separator to remove iron, and are then filtered, dried and bagged for sale.
According to Alphamin, the addition of the multi-gravity separation (”MGS”) fine tin circuit will improve the process recovery to approximately 77.5% with a grade of >60% tin concentrate for Mpama North process plant. The PEA for the Mpama South project assumes a LOM recovery of “at least” 70% with a grade of >60% tin concentrate. These recoveries have been adopted for this valuation.
Economic Valuation – Bisie Mine
Metal Prices and Off-mine Charges
For the Base Case of this valuation, the tin spot price on 19 January 2024 of US$25,175/t Sn was used to determine the value of the discounted cash flow.
The technical report does not give specific terms for off-mine charges and some of these had to be derived in a roundabout way. Table 3.7.1_1 shows numbers provided in Table 21.4 of the technical report for off-mine charges assuming a tin price of US$40,000/t and how Crux Investor converted these to rates in more relevant units for cash flow modelling.
The table shows the considerable impact of off-mine costs on the total cost structure. At a tin price of US$40,000/t this is almost 19% of gross revenue. For lower prices, the proportion increases.
For a reality check that the above terms are long-term applicable Crux Investor referred to an expert tin trader to obtain typical marketing terms for tin concentrate. The advice was:
- Payability terms: a minimum deduction of 1.7 units at 70% Sn grade and an additional deduction of 0.1 units for every percentage below 70% Sn. At a concentrate grade of 61% this converts to a deduction of 4.26% of the price. At a tin price of US$40,000 this would result in a reduction of US$1,705/t, only US$169/t more than modelled.
- Treatment charge of US$550/t at 70% plus US$5/t for every percentage point below. This converts to US$595/t concentrate, much lower than the US$1,295/t concentrate modelled.
Without impurity grades, the provided information on penalties could not be compared to the modelled overall penalty of US$133/t concentrate.
The overall conclusion is that there is no obvious optimistic bias in the modelled marketing terms.
Production Schedule
Crux Investor has adjusted the forecast throughput in the 2020 LOM plan for Mpama North for actual production numbers during the 2020-2023 period. These show that the actual annual feed grades differ by respectively -3%, -13% and -4% and -4% from the forecast. It seems that actual dilution has been larger than accounted for in the plan. For this reason, Crux Investor has included an additional 109,000 tonnes to the Mpama North LOM production as of 1 January 2023 to reduce the suggested feed grades by 4%.
The Q3 2023 MDA reveals that the company now expects the Mpama South plant commissioning to start one month later in January 2023. As a simplification, this valuation has modelled commercial production from 1 January 2024 with initially the same throughput rates as per PEA but extending the LOM with the additional Mining Inventory derived from additional resources.
The production schedule is best presented by a number of graphs. Figure 3.7.2_1 shows the amount of material treated in the Mpama North and Mpama South plants together with the forecast feed grade.
Figure 3.7.2_2 shows the forecast tin production over the LOM from Mpama North and Mpama South.
According the Alphamin, at full production from Mpama South the mine would supply more than 6% of the global tin production.
Operating Expenditure
Before adopting any operating expenditure rates suggested by Alphamin, Crux Investor carried out a review of reported actual costs to get numbers against which such expenditure could be compared. Unfortunately, the company gives very little detail on costs in its reports and Crux Investor could only get overall cost numbers.
Table 3.7.3_1 derives the earnings before interest, taxes, depreciation and amortisation (“EBITDA”) from numbers reported by Alphamin and the EBITDA quoted by the company. The two are the same and prove the validity of overall on-mine cost, which translates to unit cost between US$157/t ROM and US$172/t ROM over the last three years. The royalty amount calculated is based on 3.5% applied to at-mine revenue.
Alphamin is inconsistent in its cost breakdown and provides in the technical report the cost in 2022 as per Table 3.7.3_2, expressing these for Mpama North in US$ per tonne of tin sold from which Crux Investor could convert these in US$/t ROM. The total of US$190/t ROM compared high to the unit cost derived in the table above.
For Mpama South the technical report gives cost rates per conventional breakdown: mining, processing and G&A. The report maintains that there will be substantial savings as a large number of costs will not apply with the unit benefiting from existing services. Whereas there will be considerable savings in overheads, Crux Investor is of the opinion that the much lower mining costs is far too optimistic. Crux Investor has used for Mpama North a mining cost rate of US$110/t ROM, processing of US$37/t and G&A of US$43/t treated (total US$190/t) and for Mpama South the rates suggested in Table 3.7.3_2, but with the G&A rate converted to an annual rate of US$8.7 million).
Corporate Expenses of US$22.5 million per annum have been included, based on current actual cash cost.
Capital Expenditure
The PEA for Mpama South forecasts an investment of US$127 million after contingencies to complete the project. Table 3.7.4_1 gives the breakdown under the “Initial” column.
The contingencies under “Mining” amount to 12.5% of expenditure excluding Mining Equipment. Given the level of confidence of estimates in a PEA study, this is very low. Similarly, the contingency for Plant and Infrastructure is very low at 14.3%. An EPCM rate of 7% is also optimistically low. Whereas the contingencies appear low, the statement in the Q3 2023 MDA report on capital expenditure implies that the project will be completed without needing any contingency:
By quarter-end, the Company had spent US$99 million of cash resources on the Mpama South project of which US$24.5 million was spent in Q3 2023. The project is forecasted to be substantially completed within the budget of US$116 million.
For this reason, this valuation has accounted for the remaining capital expenditure by reducing the 30 September 2023 cash balance by US$17 million at 31 December 2023.
The latest technical report gives very little information about sustaining capital expenditure for Mpama North apart from mentioning that after 2022 it expects to spend US$10 million annually. Crux Investor had used this rate until 2 years before mine closure with half this rate in the year before mine closure and nil for the last year of construction. As the footprint of Mpama South is at least as large as for Mpama North, the same rates and tail off have been used.
Working Capital
Being located in a very isolated area with little infrastructure and producing a concentrate with a long pipeline to get to off-takers implies considerable investment in working capital. This valuation has referred to actual net current asset and liability balances at 30 September 2023 and converted these into units that are suitable for the cash flow model. Table 3.7.5_1 shows the conversion.
Royalties and Taxes
There is very little information provided by Alphamin about applicable royalties and taxes. Crux Investor had to indirectly establish that the 3.5% royalty is applied to revenue net of off-mine charges. Similarly, Crux Investor had to establish from Table 3.7.1_1 that the Export Taxes are levied at 2.0% of revenue net of off-mine charges.
The income tax rate for mines is 30%, but with a possibility of a “super profit tax” of another 20 percentage points when the metal price exceeds the feasibility study price by 25%. The feasibility study for Mpama North used a price of US$21,400/t, whereas the PEA used a price of US$40,000/t for Mpama South. This means that the thresholds for super profit is US$26,750 for Mpama North and US$50,000 for Mpama South.
Page 34 of the annual financial statements for the year ending 31 December 2022 gives more detail about when superprofit tax applies. It states:
“In the case of superprofit tax applying a calculation using ABM’s “Excédent Brut d’Exploitation (EBT)”, an OHADA or Francophone Africa accounting term that is loosely equivalent to EBITDA for the year. Where the EBT is greater than 25% higher than that stipulated in the feasibility study then a superprofit tax of an additional 20% applies, taking the effective tax rate on that incremental portion of the profit from 30% to 50%.”
The implication of the above is that the two operations are ringfenced and the cash flow and taxes are established individually.
One of the important determinants of effective tax payable is the rate at which capital expenditure may be amortised and depreciated. No information is provided, but Crux Investor referred to an IMF Country Report No 22/82, which states in Table 8 that exploration and development expenses can be depreciated over two years on a straight-line basis. A 2019 fiscal guide by KPMG gives depreciation rates of up to 5% for buildings, 15% for plant and equipment, 20% for vehicles and 33% for IT equipment. This valuation has assumed the accelerated depreciation to apply to all capital expenditures introducing an optimistic bias.
Dividends to foreign beneficiaries are taxed at 10%.
Results
Table 3.7.7_1 gives the forecast financial performance at Base Case metal prices from 1 January 2024 onwards.
There are many striking aspects to the financial performance of the operations:
- The off-mine charges and taxes on revenue take a huge chunk out of gross revenue (25.7%)
- Whereas the operating costs at Mpama North are low enough to give a decent gross profit cash margin on at-mine revenue (i.e. 43.1%), the EBITDA is only 27% of gross revenue because of high off-mine charges.
- Fortunately for Mpama North, the feasibility study only had EBITDA estimates for 2021 and 2022 at which superprofit tax would be applicable. It is not clear what applies when there is production at the end of LOM not accounted for in the feasibility study. Crux Investor has assumed that super profit tax may apply for 2032 should the tin price and profitability thresholds be exceeded.
- The after-tax cash flow for Mpama North is only 20.5% of gross revenue.
- The gross profit cash margin at Mpama South is also very good at 47.6%, but EBITDA is only 30% of gross revenue.
- The after-tax cash flow from Mpama South is only 20.4% of gross revenue.
- The taxation regulations of the DRC are so onerous the total government take amounts to US$281 million (not accounting for the 5% free-carried interest benefit), which is 70% of the cash received by Alphamin in Mauritius (US$402 million).
- After deducting the corporate expenses and taxes due in Mauritius only US$192 million remains attributable to Alphamin shareholders with an NPV5 value of US$162 million.
Figure 3.7.7_1 shows the modelled cash flow attributable to shareholders.
Table 3.7.7_2 expresses the sensitivity of the value of Alphamin as the change in Net Present Values per percentage point change in the economic main parameters.
The table shows that, for every percentage point increase in tin price (i.e. US$252/t) the NPV5 increases by 5.8% (i.e. US$9.3 million) and for every percentage point increase in the cash operating cost (i.e. US$1.47/t treated) the NPV5 drops by 2.3% (i.e. US$3.7 million. Sensitivity to changes in capex is negligible given the small base.
It should be noted that at a tin price exceeding the super profit threshold of US$50,000/t the above relationship does not apply as super profit taxes would kick in at Mpama South.
Given the high-risk nature of the DRC jurisdiction and in particular the Kivu province there is much to be said to apply a higher discount rate than 5%.
THE ENTERPRISE VALUE OF ALPHAMIN AT 20 NOVEMBER 2023
At the share price of C$0.83 on 19 January 2024 and with 1,275.3 million shares issued, according to the TMX money website, the market capitalisation of Alphamin is C$1,058 million, or US$784 million. At 30 September 2023, the company had no share warrants outstanding and 9.1 million share options, all of which were in the money with an average exercise price of C$0.72.
At 30 September 2023 total debt and lease liabilities, including the current portion, amounted to US$65.2 million to which Crux Investor has added US$17 million to cover the remaining capital expenditure.
As the model accounts for the realisation of working capital at the end of the LOM Table 4_1 has ignored this in the estimation of diluted Enterprise Value.
The diluted Enterprise Value is 5.4x the NPV5 value. It is clear that the market has an inflated view about the prospects of the company - expecting much higher tin prices as well as exploration success that will substantially increase the LOM beyond 2032.
Given that each additional year of production would add approximately US$30 million, there is little chance for investors ever realising the current Enterprise Value.
An Over-Rated and Expensive Way to Invest in Tin
Welcome back to Analysts Notes. This report focuses on Alphamin Resources Corporation (“Alphamin”). Our research shows that Alphamin is trading at 5.4x the calculated NPV5 value, which is a stretch. Alphamin Resources has retained its value over the past two years and out-performed the two largest tin companies in the world, Yunnan Tin (000960.SZ) and Timah (TINS.JK). It is looking expensive.
The jurisdiction risk of the Kivu province within the DRC warrants a higher discount rate than 5%. The market valuation of Alphamin is pricing in much higher tin prices and exploration success that would extend mine life. There are many risks associated with the Company. Nevertheless, Crux Investor acknowledges that tin is a critical metal.
EXECUTIVE SUMMARY
Alphamin Resources¬ Corporation ("Alphamin") (TSX:AFM) is a Canadian mining company that first acquired an interest in the Bisie Tin Project in 2011. Company management obviously has a healthy appetite for risk as the DRC is a notoriously high risk jurisdiction. The government has a track record of finding fault with mining licence title and tenure after companies have already invested and identified a project with economic potential. The pattern is for the government to extract additional rents once the companies are committed, which is a virulent form of resource nationalisation. To this point, in 2018 a new Mining Code formalised resource nationalism by way of high taxation: royalties of 3.5%, export fees of 2.0%, 30% income taxes, super profit taxes of another 20%, a free carried interest of 10%, with an additional 10% for every licence extension, 10% tax on dividends. Fortunately for Alphamin, the mining licence was issued for 30 years, which makes the need of renewal and issuing of another 10% free carried interest highly unlikely.
In the personal experience of the author of this report, DRC authorities often will find fault with historical import duties and/or tax assessments, which results in enormous additional charges after imposition of penalties and interest rates to the short fall. There could be some unpleasant surprises for Alphamin in future.
The risks associated with the DRC did not deter Alphamin. The licences acquired in 2011 were in North Kivu, a province plagued by warlords and with almost no infrastructure. In 2012 Alphamin also acquired permits over Manono, which later proved to host one of the largest global lithium resources, but it dropped this licence without doing exploration after achieving success in North Kivu.
The Bisie tin project in North Kivu was already a well-known site when Alphamin started work, with artisanal workings on extremely rich tin deposits. Alphamin quickly proved up resources below artisanal workings; completed a positive bankable feasibility study in 2016; and secured the funding in 2017 to start mine construction on a deposit referred to as Mpama North. Commercial production was declared in September 2019 and the mine was soon highly profitable. Alphamin has been able to reduce debt and pay generous dividends from the 2022 financial year.
Exploration at Mpama South successfully identified additional mineral resources, albeit at much lower grade. The results of a preliminary economic assessment (“PEA”) were sufficiently compelling to drive the construction of another mining centre with its own processing plant. The two units are close enough to share certain infrastructure with two drives at Level 8 and Level 9 of Mpama North developed towards Mpama South for exploration and return air reticulation. Construction is ongoing with forecast first production early in 2024, which is a delay of 1-2 months from plan. The project is forecast to absorb US$116 million, before contingencies. This together with a very large tax bill in 2023, based on 2022 profits, has dramatically reduced the cash balance as of 30 September 2023 and will probably severely limit dividend payments in the short term.
After a number of revisions of the mining method to be used for Mpama North, the company settled on longhole open stoping (“LHOS”) and has successfully applied this since production started. Crux Investor records that the actual feed grade to the processing plant is on average 4% lower than planned, indicating an underestimation of dilution. Crux Investor has adjusted the remaining schedule accordingly resulting in an additional 0.11 million tonne (“Mt”) to be mined and a life of mine (“LOM”) grade dropping to 3.50% Sn from 3.97% in the feasibility study schedule.
This valuation has adjusted the PEA production schedule for Mpama South by accounting for the increase in resources announced in February 2023. This extends the LOM there to 2030 at an average grade of 2.19% Sn.
With the metallurgical performance well established there is little risk associated with processing and forecast concentrate production.
This valuation has mostly been based on a technical report dated 2022 which provides revised reserves for Mpama North and a PEA assessment for Mpama South. Alphamin relied on a waiver for producing companies to prove through an economic assessment the validity of reserves. Spoiler Alert: why would a company show through its own valuation that its share value is way over the top?
This valuation has used the suggested operating cost rates for Mpama North after verifying that historical actual costs are in line with these suggestions. Alphamin forecasts much lower costs for Mpama South suggesting that the operating unit will greatly benefit from shared services with Mpama North. Although Crux Investor thinks that the cost reduction is overly optimistic, it has adopted the rates. Crux Investor has also adopted the capital expenditure provisions of Alphamin. As the Mpama South project capital expenditure will be almost totally sunk by 1 January 2024, the start date of the cash flow model, the remaining US$17 million has been accounted for as a reduction in cash balance from the 30 September 2023 level.
The cash flow model has estimated cash flow for Mpama North and Mpama South separately to establish the tax liabilities for each separately considering the criteria for super profits. The findings of the cash flow model are that the off-mine charges are a great burden taking 25.6% of gross revenue. The gross profit margins expressed as a percentage of at-mine revenue is decent at the spot tin price of US$25,175 on 19 January 2024 (around 45% for both units) indicating that the forecast overall operating cost structure is relatively low. However, with all the tax burdens and leakages to other parties, the cash received in Mauritius is only US$402 million, less than 16% of gross revenue. After accounting for Mauritius differential taxes and corporate expenses, only US$192 million remains attributable to Alphamin shareholders. This has a value of US$162 million at a discount rate of 5%.
Given the high-risk nature of the DRC jurisdiction and in particular the Kivu province there is much to be said to apply a higher discount rate than 5%.
At the share price of C$0.83 on 19 January 2024, the market capitalisation of Alphamin is almost US$0.80 billion, and the diluted Enterprise value US$0.87 billion. This is 5.4x the calculated NPV5 value. It is clear that the market has a very inflated view about the prospects of the company, expecting much higher tin prices, combined with much exploration success that will substantially increase the LOM beyond 2032.
Given that each additional year of production would add approximately US$30 million, there is little chance for investors ever realising the current Enterprise Value.
INTRODUCTION
Alphamin Resources Corporation ("Alphamin") (TSX:AFM) is a Canadian company which purchased in August 2011 a 70% stake in a company registered in the Democratic Republic of Congo (“DRC”) called Mining and Processing Congo, SPRL (“MPC”) for a consideration of C$14.1 million in shares. Another 20% shareholding had to be purchased before 18 March 2014. With the acquisition, Alphamin took control of five exploration licences, one of which covered the Bisie tin deposit.
In June 2012 Alphamin announced the acquisition of two permits surrounding the historic Manono Mine in Katanga Province in the Democratic Republic of the Congo. In consideration for acquiring the permits, Alphamin paid US$2 million in cash and issued 6,100,000 shares.
The company was sufficiently encouraged by early exploration results at Bisie to purchase not only 20%, but the full remaining 30% from MPC, in July 2012 in exchange for 29.0 million shares.
Exploration drilling during 2012 intersected deposits with attractive tin grade which led the company to carry out resource drilling in 2013 with a Maiden mineral resource estimate (“MRE”) declared in November 2013 with 4.0 million tonnes (“Mt”) @ 3.5% Sn in the Inferred category. By March 2015 Alphamin could declare an updated MRE which did not increase the resource tonnage, but with 2.65 Mt @ 4.49% Sn in the Indicated category.
With all the success at Bisie, the company did not carry out any work at Manono and wrote off its investment in 2014. It must have regretted this decision later as another company AVZ Minerals Limited (“AVZ”) defined one of the largest lithium reserves in the world there (93 Mt) from total mineral resources of 400 Mt with 1.65 Li2O and 0.07% Sn. It propelled the share price of AVZ at some stage to a level where its market capitalisation was more than A$3 billion, before dropping back to its current A$2.75 billion with the shares suspended following a conflict with DRC authorities about the legality of its mineral tenure. This is a perpetual risk with successful mineral projects in the DRC.
Alphamin however did not have similar problems as AVZ as it received in February 2015 a mining license over the Bisie prospect, for which it had to issue 5% to the DRC government in terms of the mining law. A definitive feasibility study was in progress and the company expected the start of construction to commence early in 2016.
On 11 November 2015, it was announced that the Industrial Development Corporation of South Africa Limited (“IDC”) would acquire in stages a 14.25% stake in the project for US$10 million. On 23 February 2016, the results of a positive feasibility study were released and in November 2017 the financial arrangements were completed, allowing construction to start.
The process plant was completed in Q1 2019 with various stages of commissioning continuing until May of that year and commercial production declared in September 2019.
It is noticeable that the company was uncertain about the best mining methods. The feasibility study was based on Sub-level Caving (“SLC”). In the fourth quarter of 2018 rock conditions underground caused management to review the suitability of the SLC and it was decided to change the method to Cut and Fill (“C&F) mining. This was again revised in 2019 to transition to Longhole Open Stoping (“LHOS”) with hydraulic fill.
Figure 1_1 shows the production volumes and feed grade achieved since start of commercial production with the number for 2023 annualised Q1 production.
The graph shows a drop in grade with increasing plant throughput until 2021 after which the mine managed to turn around the grade decline.
Figure 1_2 shows the share price of Alphamin on the Toronto Stock Exchange since August 2011 when it acquired the first stake in the Bisie project.
The graph shows the typical high share price in the initial stages when exploration results were announced for it to drop until the announcement of the maiden MRE in November 2013.
Thereafter the price pattern is typical for the Orphan Period of the Lassonde Curve with the share price dropping until the feasibility study findings were released in February 2016. The price then rose again until just before the start of construction. As to be expected the price dropped then again with the balance sheet at its most stretched despite a relatively smooth construction phase and start of production. The shares dipped to the lowest point post-financing around April 2020 when it became clear the operation became cash-positive and would no longer require third-party investments. From then the mine became a strong cash flow generator (see next section), partially because the tin price almost doubled from 2020 to 2021, and the price skyrocketed. The drop in 2022 is probably because of concerns about a dropping tin price, but this has reversed to some extent.
HISTORICAL FINANCIAL PERFORMANCE
Table 2_1 gives the historical financial performance from January 2010, the year when Alphamin, started becoming increasingly active, until 30 June 2023. In 2014 the company elected to convert from reporting in Canadian Dollars to US Dollars. The totals in the table are only for the numbers reported in US Dollars.
Table 2_1 shows that:
- Operations were cash negative until 2019, absorbing US$37 million. However, since 1 January 2020, the mine generated US$347 million up to 31 December 2022. Cash generation remained strong during the first nine months of 2023 exceeding US$110 million, but the company had to pay US$90 million in taxes during this period, almost half of this in Q3 alone. The discussion on finances is silent on this major item, but a partial explanation can be found in the statement under note 8:
Under DRC tax law, provisional payments of 80% of the prior year’s tax bill are due each year. There is no allowance for estimated profits.
- Profit before tax of US$185 million was declared in 2022. The taxes levied in 2023 imply that superprofit taxation was imposed for a total rate of 50%.
- The tax drain together with substantial investments in working capital (US$27.5 million) resulted in negative cash generation from operations for the first 9 months of 2023 of US$3.1 million.
- Net investments required from 1 January 2014 until the end of 2019 were only US$230 million, after which the company became cash-positive to the extent that financiers could be rewarded by returning US$143 million.
- Financing was dominantly by means of equity placements raising US$171 million between 1 January 2014 and 31 December 2020. The company has already returned US$125 million more than cash raised in 2021-June 2023 from exercising share options. It is however unlikely this can be sustained. The cash balance has dropped to US$10 million as of 30 September 2023. Management has elected to keep dividends steady in 2023 (US$56 million) by essentially financing these through overdraft (US$51 million).
- With the delay in the completion of the Mpama South project the next few quarters may prove challenging.
- It is evident that the project is a great investment success, partially because the tin price moved favourably over time.
The following sections will investigate whether investors can continue to expect good returns at the current market valuation of Alphamin.
VALUATION OF THE BISIE MINE COMPLEX
Background
The title of this section uses “mine complex” because Alphamin is constructing another mine with a dedicated plant immediately south of current operations.
The technical information in his report has been dominantly drawn from a NI. 43-101 compliant technical report by Bara Consulting (Pty) Ltd (“Bara”), dated 22 April 2022, with an updated mineral reserves estimation for the Mpama North Deposit and a preliminary economic assessment (“PEA”) for the Mpama South Deposit. This report has also reviewed the feasibility study report dated 23 March 2017 and a technical report dated 11 February 2020 with mineral reserves effective 31 December 2019.
The Bisie tin mine complex is located approximately 180 km northwest of Goma, the capital of North Kivu Province in eastern DRC (see Figure 3.1_1).
The area is not easy to work in. It is practically devoid of infrastructure and it has been plagued by gangs and warlords in the recent past. The preferred road route for consumables and supplies is through Kisangani towards Uganda. A 32 km private access road from the N3 state road to the site was constructed by Alphamin. The mine site’s Kokoli airport is used to transport staff to the site, and for aeroplane and helicopter charters from Goma, the regional capital city of North Kivu Province.
The mineral rights are held by a local registered company Alphamin Bisie Mining SA (“ABM”) in which Alphamin has an 84.14% ownership, the government of the DRC 5% and the IDC of South Africa 10.86%.
At the publication date of the technical report on the latest reserve estimation ABM held three exploration permits (Permis de Recherches PR 10346 of 65.76 km2; PR 5266 of 36.30 km2; and PR 5267 of 158.84 km2) and one mining permit (Permis d’Exploitation PE 13155 covering 128.96 km2) on which the Mpama North Mine and Mpama South project are located. Figure 3.1.1_1 shows the outlines of the mineral rights.
No encumbrances to third parties are attached to the mineral rights, but, according to the annual financial statements for the year ending 31 December 2022, “royalties are payable to various branches of the DRC government in line with the DRC mining code and calculated on 3.5% of revenue, as determined by the DRC government agency’s assays results and tin price tables which are published on a weekly basis”. The statement reads as if the royalty applies to gross revenue, but Crux Investor verified in Section 3.7.1 from actual reported figures it applies to revenue net of off-mine charges.
Geology and Mineralisation
The geology at the project is characterised in the west by a highly intruded basement/pluton and in the east by younger metamorphosed sedimentary/volcano-sedimentary sediments. These in turn have been intruded by different generations of younger granites, the youngest of which is referred to as “tin granites”.
The area has been affected by multiple phases of deformation which have given the mine area a predominantly N-S tectonic grain with subtle inflections in a NW-SE orientation. At the mine area, there is a N-S trending shear zone with a number of splays on either side. The interpretation suggests a number of the splay structures fan out towards the north while others appear to be anastomosing.
A tectonic phase younger than the mineralisation has folded the tine-bearing veins about a westerly dipping fold axis. The veins are hosted within an amphibolite schist (a dark rock with little quartz and minerals rich in Fe, Mg, Ca) that has been moderate to intensely altered to chlorite (a mica mineral rich in Fe, Mg), talc (Mg rich mineral) and garnet (a dark mineral with a wide range of composition, but here probably Fe, Mg rich).
Tin mineralisation at Bisie is hosted within a north-south striking, eastward dipping shear zone hosting multiple cassiterite (SnO2) veins, stringers and disseminated cassiterite in a structurally controlled zone. Associated with the tin is copper, lead and zinc, but in quantities that make these relative to tin of little economic interest.
Within the vein zone, the tin is predominantly present in two high-grade parallel shoots that plunge approximately 35° to the north.
Two areas of economic interest have been defined: Mpama North on which the mine was initially developed and Mpama South which is now being developed for mining. Figure 3.2_1 shows the relative location of the deposits in the far north. The map also shows nicely the prospects for similar deposits further south along the boundary between the granites in the west (in orange colour) and sedimentary rocks in the east (in green).
Mineral Resources
Mpama North
The discussion on the methodology used for the resource estimation of the Mpama North deposit is less relevant after a number of years of production with no major surprises noticeable. As essentially the same methodology was used as for Mpama South, this section will discuss it in detail with the section on Mpama South referring to the discussion here.
The last resource estimation was completed in May 2016 in support of the feasibility study. A resource statement effective 30 June 2019 is based on the 2016 resources, accounting for depletion by mining and a reassessment of the extent of artisanal mining.
The MRE was based on tin, copper, lead, zinc and silver assays and density measurements obtained from the cores of 122 NQ size diamond drill holes and 21 closely spaced PQ size holes used for the purpose of obtaining a metallurgical test sample. The holes are between 25 m and 50 m apart along east-west fence lines spaced approximately 50 m apart over a strike length of approximately 600 m, with some infill drilling at 25 m line spacing.
A review of the raw data assay distribution indicated that above a grade of 0.35% Sn there was a grade distribution distinct from the distribution below this grade. The grade was then used as a threshold to define wireframes for resource estimation. Three zones of mineralisation were modelled: the Main Vein, the Hangingwall Vein and the Footwall Vein. The Main Vein is by far the most important body in terms of size, grade and consistency.
Figure 3.3.1_1 shows two isometric views of the deposits with the left view looking east and the right view looking west with in light blue the Main Vein, in red the Footwall Vein and in dark blue the Hangingwall Vein.
Although the mineralisation has been modelled as steeply dipping slabs, the mineralisation within the individual zones occurs in the form of irregular high-grade veins several tens of centimetres thick and lesser amounts in blebs and vein fragments irregularly disseminated in the schist.
The Main Vein is a tabular body striking north-south for 570 m and dipping 50° to 65° to the east and is developed over a true width of 5 m to 15 m with an average thickness of approximately 9 m. It plunges approximately 25° towards the north and extends 700 m down plunge to a depth of 550 m below the surface. The mineralisation is open in a northerly plunging direction and to a limited extent to the south. The strike of the payable zone ranges from 490 m in the shallow areas to 150 m in the deeper areas of the mine. The deposit remains open at depth.
The Hangingwall Vein (HW Vein) is between 1 m and 20 m above the Main Vein and is generally between 0.5 m and 4 m wide. It occurs in the northern area of the deposit and tapers out northwards.
The Footwall Vein is restricted to the southern area where it is between 1 m and 10 m below the Main Vein. It is very narrow (<50 cm) and high grade in its most northern occurrences, but towards the south it thickens to approximately 6 m.
The assays were composited to a standard 1 m length. Semivariograms were generated within the plane of mineralisation and the principal direction down plunge to the north, the secondary direction perpendicular to this and the minor direction across the strike. There was insufficient data to calculate robust semi-variograms for the Hangingwall and Footwall Vein zones, and so the semi-variograms for the Main Vein zone were applied to these zones.
Block models were rotated in the dip direction in order to best fit the orientation of the mineralised zones. Based on the estimated strike and dip direction in each block model cell the search parameter direction was modified.
A block size was chosen to measure 20 m x 10 m x 2 m for grade estimation with subblocks of 2 m x 2m x 0.2 m to fill the wireframe model accurately and create blocks where the mineralisation is narrow.
Using a particular indicator two data sets were distinguished with the high-grade set results given a limited range to influence the block grade. The topographic model and “mined-out” models were added to the mineralisation models, so that the block model cells were coded as either mined or un-mined, and the model cells above the topographic surface were removed.
Figure 3.3.1_2 shows two cross sections 255 m apart comparing the estimated block Sn grades with drill intersection grades to validate the correlation between the two.
Table 3.3.1_1 shows the estimated resources for the Mpama North Deposit of the Bisie deposits, effective 9 May 2016, using a cut-off grade of 0.5% Sn.
The table illustrates that the Hangingwall and Footwall veins are negligible contributors to the resources.
Whereas a cut-off grade of 0.5% Sn was chosen, the exact value does not materially affect resources as is shown in Figure 3.3.1_3 with the tin content only dropping by 1.4% for an increase in cut-off grade from 0.5% to 1.0% Sn.
Not shown in the table is that Inferred mineral resources amount to another 0.5 Mt grading 4.25% Sn for 22,800 tonnes contained tin.
Mpama South
The database for resource estimation includes 135 drill holes. The threshold value used for drawing up mineralisation wireframes is 0.40% Sn. Seven mineralised zones, denoted MZ1 to MZ7, were modelled, striking parallel to sub-parallel in a northerly direction with azimuths between 350° to 010° and dipping approximately 70° to the east. Some of these zones have very limited strike extent.
Figure 3.3.2_1 shows five of these zones in cross-section.
The total strike length of the mineralisation is 1,110 m, with MZ1 having a total strike length of 900 m and dip extension of 350 m, followed by MZ2 with a strike length of 650 m and dip extension of 350 m. These two zones represent up to 88 % of the Mineral Resource.
Figure 3.3.2_2 shows a cross-section through the Sn block model of Mpama South and an isometric view along the strike extent of the model comparing the estimated block Sn grades with drill intersection grades to validate the correlation between the two.
Upon reviewing the illustrations the extent by which some isolated high-grade intersections define large areas with high-grade blocks is of concern. Unpleasant surprises can be expected.
Table 3.3.2_1 shows the estimated resources for the Mpama South Deposit, effective 29 March 2022, using a cut-off grade of 1.0% Sn. This cut-off grade was selected based on an underground mine and concentrator with an operating cost of US$50/t and a tin price of US$ 20,000 per tonne.
Very few of the estimated resources are in the Indicated resource category confirming the impression above that there is much risk associated with the interpreted extent of the high-grade blocks around isolated high-grade drill hole intersections.
With almost all resources in the Inferred category, it made little sense for Alphamin to conduct a feasibility study for Mpama South as it could not use these to declare reserves. For this reason, it assessed the economics of this deposit at a level of PEA. The construction of a standalone mining operation at Mpama South is based on this PEA, which is a very risky approach by the company. It probably decided that the average grade is well above similar operations elsewhere in the world and should forgive any shortcomings in the input parameters. Crux Investor is however particularly concerned about the estimated average grade as this is very much determined by a few intersections.
Mineral Reserves and Mineable Inventory
Mpama North
Whereas the reserves estimated in the feasibility study assumed sublevel caving (SLC) as a mining method, this was subsequently revised to longhole open stoping (LHOS) for the 2019 reserve estimation. By that time 0.17 Mt had been mined by means of cut and fill (“C&F”) mining.
The reserves dropped considerably from the feasibility study numbers (i.e. 1.34 Mt ore), predominantly due to a large drop in dilution: for unplanned 5% versus 14.5% in the feasibility study and unplanned dilution of less than 16% versus 35% previously.
The 2022 technical report did not update the reserves from first principles and used the same mine schedule as the 2020 study. The latest report presents a mine schedule including 13.7% Inferred Mineral Resources. The total can therefore not be referred to as “mineral reserves”, but as a Mineable Inventory. Moreover, the report also informs that “the current mining method at Mpama North mine differs somewhat from the planned method associated with the LoM schedule and Reserves”. The reason given for the change is minimising dilution. In Section 3.7.2 it will be shown that this is not true as actual grades during 2020-2022 were lower than forecast, indicating higher dilution than forecast.
The conversion of mineral resources to mineable inventory assumed underground mining by longitudinal long hole open stoping with paste backfill and cut-off grades based on the input parameters in Table 3.4.1_1. The table includes Mpama South to allow for comparison to show the inconsistent manner in which the cut-off grades were derived.
The table illustrates that in particular for Mpama North a large number of very important parameters were ignored resulting in an optimistically low cut-off grade. However, this is very much compensated by a very low assumed tin price.
The calculation for Mpama South includes a much higher tin price, but also accounts for a number of important off-mine charges. The higher assumed tin price and much lower mine cost result in a calculated cut-off grade half of Mpama North. Whereas theoretically 0.8 % could have been used, the consultants were instructed by Alphamin to use 1.0% Sn. Given the optimistic tin price and omission of many important charges Crux Investor considers this cut-off grade too low.
Table 3.4.1_2 shows the modifying factors applied to Mpama North resources.
Table 3.4.1_3 gives the reserve statement and the amount of Inferred Resources included in the LOM production schedule for total Mineable Inventory as at 31 December 2019 and as at 31 December 2022 after accounting for planned production.
The table shows that over time the contribution of inferred resources increases. It should be noted that the table accounts for planned depletion, not actual. In Section 3.7.2 where the production from 1 January 2024 is derived, Crux Investor will account for actual production.
Mpama South
The technical report does not have a discussion on the derivation of the Mineable Inventory under a separate caption. Its derivation assumes LHOS mining, even though the deposits are in places relatively narrow. Here there is a risk of hang-ups should the blasting not result in sufficiently small size particles.
In Table 3.4.1_1 the cut-off grade of 1% Sn was derived. Table 3.4.2_1 gives the modifying factors applied to the Mpama South resources.
The factors are much more aggressive than assumed for Mpama North despite the deposits being generally much narrower.
The Mineable Inventory has been derived from the table in the technical report with a LOM production schedule and is summarised in Table 3.4.2_2.
The table shows that the deposit is very much inferior to Mpama North in terms of size and grade. Development is a very important component as source for plant feed, which is a reflection of the generally narrow nature of the veins.
On 10 February 2023, the company announced a revised MRE which is reproduced in Table 3.4.2_3 and from which Crux Investor generated a revised Mineable Inventory using the same conversion rates as derived in the table above.
Mining Operations
Figure 3.5.1_1 shows the lay-out of a typical production level at Mpama North.
Mine access to Mpama North is through a central decline (blue in the illustration) developed at minus 9. From the decline footwall drives (brown) are developed over the strike length of the deposit from where regular intervals stope crosscuts (light blue) are developed to the hangingwall contact of the orebody. Ore drives (purple) are then developed from the stope crosscuts, along the strike of the deposit.
All stoping takes place in a longitudinal formation and in a bottom-up sequence within an echelon. An echelon consists of four levels, three production levels and a top holing level at the top of the echelon, directly below the sill pillar. The stope height is 10 m. Sill pillars separate the echelons from each other. Figure 3.5.1_2 shows a longitudinal section of Mpama North with the Mine Layout with the sill pillars in orange.
Dip pillars, or rib pillars (white vertical bars in section), are located along the strike and will be spaced at distances ranging from 20 m to 50 m depending on geotechnical guidelines. The spacing of the rib pillars defines the stope length. The width of the rib pillars increases with depth and varies from 3.0 m to 6.5 m as specified in the geotechnical guidelines.
As already mentioned, the stopes are mined in a bottom-up sequence. Once a stope has been mined and backfilled with waste rock (without binder), the stopes adjacent to it and the one above can be mined. Mining of two adjacent stopes simultaneously is not allowed due to safety concerns should a rib pillar fail.
The stope slot raises are developed by bottom-up long-hole blasting methods. Once the slot raise is complete the slot is opened up to the full width of the orebody, creating a mining face, from where stope blasting can commence, advancing back towards the stope access cross-cut. The technique currently in use is for a stope to be pre-drilled, charged and then blasted in a single blast.
On average, a sill pillar thickness of 8 m every 59 m vertically, will generate a 13.6 % pillar loss on dip. The rib pillars (3 m with spacing depending on the geotechnical domain) will contribute from 6% to 13% to pillar loss. The mine plan includes the mining of the sill pillars once an echelon is completely mined out. For sill pillar mining a mining recovery of 61 % is applied.
Loading of the broken rock is by Load Haul Dump (“LHD”) equipment with 10 t capacity, which feeds 35 tonne articulated dump trucks (“ADT”), which haul the rock to the surface along the decline.
The Mpama South deposit is located slightly South and East of the current plant and surface infrastructure. The plant and offices are located at an elevation of approximately 635 m above mean sea level (“mamsl”). The Mpama South deposit extends from 780 mamsl to 470 mamsl.
It was decided to build a dedicated new plant south of the current plant and access Mpama South from here via strength length decline developed at minus 8°. The 345 m long ramp will intersect the orebody at an elevation of 629 mamsl. From this point, ramps will be developed up and down at an inclination of 9° to interconnect the production levels. Access to Mpama South will also be established from Mpama North from its 8 Level and 9 Level southwards. Figure 3.5.1_3 shows the relative location of Mpama North and South and the infrastructure connecting these.
The connecting drives will serve as second means of egress, conduits for return ventilation and platforms for exploration and possible future production from the area between Mpama North and South.
The main difference between Mpama South and Mpama North is that the Mpama North orebody consists of a single mineralised zone of 5 to 15 m wide. At Mpama South the orebody has been modelled as a number of roughly parallel vein-type lodes with widths between 2 m and 15 m and with varying middling thickness between the veins. The method is the same as for Mpama North, but with stope height of 15 m and a 20 m span. The sill pillar widths are designed at 8 m and the rib pillars at 3 m.
The level plans have the same design as for Mpama North and mining will use the same mining equipment types. Mineralised material from the stopes above 629 m elevation will be tipped by the LHD into the level orepass. This material will report to 6 Level where a truck loading chute will be established and trucks will be loaded and haul the material the short distance to the surface. The haul distance from the loading chute to the run of mine (“ROM”) pad will be approximately 550 m. Below Level 6 loading and hauling arrangements are the same as for Mpama North.
Processing Operations
The Bisie mine can now demonstrate years of processing performance which has shown recoveries improving from 71% in 2020 to 76% during the first half of 2023. According to the technical report metallurgical test work for Mpama South showed it to be the same type of mineralisation as Mpama North, except for being lower grade, the cassiterite being finer and the deposit containing more sulphides. For this reason, the Mpama South processing flowsheet will be identical to the existing plant except for some minor changes.
The Mpama North plant process flow is shown in Figure 3.6_1.
The plant comprises three stages of crushing to reduce the particle size to -8 mm which is sent to a bin. The material is then subjected to two stages of jigging with the –1 mm material proceeding directly to the low grade (“LG”) concentration circuit with hydro cyclones, gravity spirals and shaking tables. The +1-8 mm concentrate is first sent to a ball mill for comminution to 80% passing (“P80”) -425 micron and then further concentrated in the high grade (“HG”) circuit also using cyclones, gravity spirals and shaking tables. The Mpama South processing flowsheet differs here with screening of the crusher product before, not after, jigging.
Both concentrates are milled further to P80 -106 microns and sulphides are removed by flotation. Jig tailings are discarded to a tailings stockpile, part of the Tailings Storage Facility (“TSF”); The remaining -1 mm tails are thickened and discarded on the TSF. Combined final concentrates are treated through a magnetic separator to remove iron, and are then filtered, dried and bagged for sale.
According to Alphamin, the addition of the multi-gravity separation (”MGS”) fine tin circuit will improve the process recovery to approximately 77.5% with a grade of >60% tin concentrate for Mpama North process plant. The PEA for the Mpama South project assumes a LOM recovery of “at least” 70% with a grade of >60% tin concentrate. These recoveries have been adopted for this valuation.
Economic Valuation – Bisie Mine
Metal Prices and Off-mine Charges
For the Base Case of this valuation, the tin spot price on 19 January 2024 of US$25,175/t Sn was used to determine the value of the discounted cash flow.
The technical report does not give specific terms for off-mine charges and some of these had to be derived in a roundabout way. Table 3.7.1_1 shows numbers provided in Table 21.4 of the technical report for off-mine charges assuming a tin price of US$40,000/t and how Crux Investor converted these to rates in more relevant units for cash flow modelling.
The table shows the considerable impact of off-mine costs on the total cost structure. At a tin price of US$40,000/t this is almost 19% of gross revenue. For lower prices, the proportion increases.
For a reality check that the above terms are long-term applicable Crux Investor referred to an expert tin trader to obtain typical marketing terms for tin concentrate. The advice was:
- Payability terms: a minimum deduction of 1.7 units at 70% Sn grade and an additional deduction of 0.1 units for every percentage below 70% Sn. At a concentrate grade of 61% this converts to a deduction of 4.26% of the price. At a tin price of US$40,000 this would result in a reduction of US$1,705/t, only US$169/t more than modelled.
- Treatment charge of US$550/t at 70% plus US$5/t for every percentage point below. This converts to US$595/t concentrate, much lower than the US$1,295/t concentrate modelled.
Without impurity grades, the provided information on penalties could not be compared to the modelled overall penalty of US$133/t concentrate.
The overall conclusion is that there is no obvious optimistic bias in the modelled marketing terms.
Production Schedule
Crux Investor has adjusted the forecast throughput in the 2020 LOM plan for Mpama North for actual production numbers during the 2020-2023 period. These show that the actual annual feed grades differ by respectively -3%, -13% and -4% and -4% from the forecast. It seems that actual dilution has been larger than accounted for in the plan. For this reason, Crux Investor has included an additional 109,000 tonnes to the Mpama North LOM production as of 1 January 2023 to reduce the suggested feed grades by 4%.
The Q3 2023 MDA reveals that the company now expects the Mpama South plant commissioning to start one month later in January 2023. As a simplification, this valuation has modelled commercial production from 1 January 2024 with initially the same throughput rates as per PEA but extending the LOM with the additional Mining Inventory derived from additional resources.
The production schedule is best presented by a number of graphs. Figure 3.7.2_1 shows the amount of material treated in the Mpama North and Mpama South plants together with the forecast feed grade.
Figure 3.7.2_2 shows the forecast tin production over the LOM from Mpama North and Mpama South.
According the Alphamin, at full production from Mpama South the mine would supply more than 6% of the global tin production.
Operating Expenditure
Before adopting any operating expenditure rates suggested by Alphamin, Crux Investor carried out a review of reported actual costs to get numbers against which such expenditure could be compared. Unfortunately, the company gives very little detail on costs in its reports and Crux Investor could only get overall cost numbers.
Table 3.7.3_1 derives the earnings before interest, taxes, depreciation and amortisation (“EBITDA”) from numbers reported by Alphamin and the EBITDA quoted by the company. The two are the same and prove the validity of overall on-mine cost, which translates to unit cost between US$157/t ROM and US$172/t ROM over the last three years. The royalty amount calculated is based on 3.5% applied to at-mine revenue.
Alphamin is inconsistent in its cost breakdown and provides in the technical report the cost in 2022 as per Table 3.7.3_2, expressing these for Mpama North in US$ per tonne of tin sold from which Crux Investor could convert these in US$/t ROM. The total of US$190/t ROM compared high to the unit cost derived in the table above.
For Mpama South the technical report gives cost rates per conventional breakdown: mining, processing and G&A. The report maintains that there will be substantial savings as a large number of costs will not apply with the unit benefiting from existing services. Whereas there will be considerable savings in overheads, Crux Investor is of the opinion that the much lower mining costs is far too optimistic. Crux Investor has used for Mpama North a mining cost rate of US$110/t ROM, processing of US$37/t and G&A of US$43/t treated (total US$190/t) and for Mpama South the rates suggested in Table 3.7.3_2, but with the G&A rate converted to an annual rate of US$8.7 million).
Corporate Expenses of US$22.5 million per annum have been included, based on current actual cash cost.
Capital Expenditure
The PEA for Mpama South forecasts an investment of US$127 million after contingencies to complete the project. Table 3.7.4_1 gives the breakdown under the “Initial” column.
The contingencies under “Mining” amount to 12.5% of expenditure excluding Mining Equipment. Given the level of confidence of estimates in a PEA study, this is very low. Similarly, the contingency for Plant and Infrastructure is very low at 14.3%. An EPCM rate of 7% is also optimistically low. Whereas the contingencies appear low, the statement in the Q3 2023 MDA report on capital expenditure implies that the project will be completed without needing any contingency:
By quarter-end, the Company had spent US$99 million of cash resources on the Mpama South project of which US$24.5 million was spent in Q3 2023. The project is forecasted to be substantially completed within the budget of US$116 million.
For this reason, this valuation has accounted for the remaining capital expenditure by reducing the 30 September 2023 cash balance by US$17 million at 31 December 2023.
The latest technical report gives very little information about sustaining capital expenditure for Mpama North apart from mentioning that after 2022 it expects to spend US$10 million annually. Crux Investor had used this rate until 2 years before mine closure with half this rate in the year before mine closure and nil for the last year of construction. As the footprint of Mpama South is at least as large as for Mpama North, the same rates and tail off have been used.
Working Capital
Being located in a very isolated area with little infrastructure and producing a concentrate with a long pipeline to get to off-takers implies considerable investment in working capital. This valuation has referred to actual net current asset and liability balances at 30 September 2023 and converted these into units that are suitable for the cash flow model. Table 3.7.5_1 shows the conversion.
Royalties and Taxes
There is very little information provided by Alphamin about applicable royalties and taxes. Crux Investor had to indirectly establish that the 3.5% royalty is applied to revenue net of off-mine charges. Similarly, Crux Investor had to establish from Table 3.7.1_1 that the Export Taxes are levied at 2.0% of revenue net of off-mine charges.
The income tax rate for mines is 30%, but with a possibility of a “super profit tax” of another 20 percentage points when the metal price exceeds the feasibility study price by 25%. The feasibility study for Mpama North used a price of US$21,400/t, whereas the PEA used a price of US$40,000/t for Mpama South. This means that the thresholds for super profit is US$26,750 for Mpama North and US$50,000 for Mpama South.
Page 34 of the annual financial statements for the year ending 31 December 2022 gives more detail about when superprofit tax applies. It states:
“In the case of superprofit tax applying a calculation using ABM’s “Excédent Brut d’Exploitation (EBT)”, an OHADA or Francophone Africa accounting term that is loosely equivalent to EBITDA for the year. Where the EBT is greater than 25% higher than that stipulated in the feasibility study then a superprofit tax of an additional 20% applies, taking the effective tax rate on that incremental portion of the profit from 30% to 50%.”
The implication of the above is that the two operations are ringfenced and the cash flow and taxes are established individually.
One of the important determinants of effective tax payable is the rate at which capital expenditure may be amortised and depreciated. No information is provided, but Crux Investor referred to an IMF Country Report No 22/82, which states in Table 8 that exploration and development expenses can be depreciated over two years on a straight-line basis. A 2019 fiscal guide by KPMG gives depreciation rates of up to 5% for buildings, 15% for plant and equipment, 20% for vehicles and 33% for IT equipment. This valuation has assumed the accelerated depreciation to apply to all capital expenditures introducing an optimistic bias.
Dividends to foreign beneficiaries are taxed at 10%.
Results
Table 3.7.7_1 gives the forecast financial performance at Base Case metal prices from 1 January 2024 onwards.
There are many striking aspects to the financial performance of the operations:
- The off-mine charges and taxes on revenue take a huge chunk out of gross revenue (25.7%)
- Whereas the operating costs at Mpama North are low enough to give a decent gross profit cash margin on at-mine revenue (i.e. 43.1%), the EBITDA is only 27% of gross revenue because of high off-mine charges.
- Fortunately for Mpama North, the feasibility study only had EBITDA estimates for 2021 and 2022 at which superprofit tax would be applicable. It is not clear what applies when there is production at the end of LOM not accounted for in the feasibility study. Crux Investor has assumed that super profit tax may apply for 2032 should the tin price and profitability thresholds be exceeded.
- The after-tax cash flow for Mpama North is only 20.5% of gross revenue.
- The gross profit cash margin at Mpama South is also very good at 47.6%, but EBITDA is only 30% of gross revenue.
- The after-tax cash flow from Mpama South is only 20.4% of gross revenue.
- The taxation regulations of the DRC are so onerous the total government take amounts to US$281 million (not accounting for the 5% free-carried interest benefit), which is 70% of the cash received by Alphamin in Mauritius (US$402 million).
- After deducting the corporate expenses and taxes due in Mauritius only US$192 million remains attributable to Alphamin shareholders with an NPV5 value of US$162 million.
Figure 3.7.7_1 shows the modelled cash flow attributable to shareholders.
Table 3.7.7_2 expresses the sensitivity of the value of Alphamin as the change in Net Present Values per percentage point change in the economic main parameters.
The table shows that, for every percentage point increase in tin price (i.e. US$252/t) the NPV5 increases by 5.8% (i.e. US$9.3 million) and for every percentage point increase in the cash operating cost (i.e. US$1.47/t treated) the NPV5 drops by 2.3% (i.e. US$3.7 million. Sensitivity to changes in capex is negligible given the small base.
It should be noted that at a tin price exceeding the super profit threshold of US$50,000/t the above relationship does not apply as super profit taxes would kick in at Mpama South.
Given the high-risk nature of the DRC jurisdiction and in particular the Kivu province there is much to be said to apply a higher discount rate than 5%.
THE ENTERPRISE VALUE OF ALPHAMIN AT 20 NOVEMBER 2023
At the share price of C$0.83 on 19 January 2024 and with 1,275.3 million shares issued, according to the TMX money website, the market capitalisation of Alphamin is C$1,058 million, or US$784 million. At 30 September 2023, the company had no share warrants outstanding and 9.1 million share options, all of which were in the money with an average exercise price of C$0.72.
At 30 September 2023 total debt and lease liabilities, including the current portion, amounted to US$65.2 million to which Crux Investor has added US$17 million to cover the remaining capital expenditure.
As the model accounts for the realisation of working capital at the end of the LOM Table 4_1 has ignored this in the estimation of diluted Enterprise Value.
The diluted Enterprise Value is 5.4x the NPV5 value. It is clear that the market has an inflated view about the prospects of the company - expecting much higher tin prices as well as exploration success that will substantially increase the LOM beyond 2032.
Given that each additional year of production would add approximately US$30 million, there is little chance for investors ever realising the current Enterprise Value.
An Over-Rated and Expensive Way to Invest in Tin
Welcome back to Analysts Notes. This report focuses on Alphamin Resources Corporation (“Alphamin”). Our research shows that Alphamin is trading at 5.4x the calculated NPV5 value, which is a stretch. Alphamin Resources has retained its value over the past two years and out-performed the two largest tin companies in the world, Yunnan Tin (000960.SZ) and Timah (TINS.JK). It is looking expensive.
The jurisdiction risk of the Kivu province within the DRC warrants a higher discount rate than 5%. The market valuation of Alphamin is pricing in much higher tin prices and exploration success that would extend mine life. There are many risks associated with the Company. Nevertheless, Crux Investor acknowledges that tin is a critical metal.
EXECUTIVE SUMMARY
Alphamin Resources¬ Corporation ("Alphamin") (TSX:AFM) is a Canadian mining company that first acquired an interest in the Bisie Tin Project in 2011. Company management obviously has a healthy appetite for risk as the DRC is a notoriously high risk jurisdiction. The government has a track record of finding fault with mining licence title and tenure after companies have already invested and identified a project with economic potential. The pattern is for the government to extract additional rents once the companies are committed, which is a virulent form of resource nationalisation. To this point, in 2018 a new Mining Code formalised resource nationalism by way of high taxation: royalties of 3.5%, export fees of 2.0%, 30% income taxes, super profit taxes of another 20%, a free carried interest of 10%, with an additional 10% for every licence extension, 10% tax on dividends. Fortunately for Alphamin, the mining licence was issued for 30 years, which makes the need of renewal and issuing of another 10% free carried interest highly unlikely.
In the personal experience of the author of this report, DRC authorities often will find fault with historical import duties and/or tax assessments, which results in enormous additional charges after imposition of penalties and interest rates to the short fall. There could be some unpleasant surprises for Alphamin in future.
The risks associated with the DRC did not deter Alphamin. The licences acquired in 2011 were in North Kivu, a province plagued by warlords and with almost no infrastructure. In 2012 Alphamin also acquired permits over Manono, which later proved to host one of the largest global lithium resources, but it dropped this licence without doing exploration after achieving success in North Kivu.
The Bisie tin project in North Kivu was already a well-known site when Alphamin started work, with artisanal workings on extremely rich tin deposits. Alphamin quickly proved up resources below artisanal workings; completed a positive bankable feasibility study in 2016; and secured the funding in 2017 to start mine construction on a deposit referred to as Mpama North. Commercial production was declared in September 2019 and the mine was soon highly profitable. Alphamin has been able to reduce debt and pay generous dividends from the 2022 financial year.
Exploration at Mpama South successfully identified additional mineral resources, albeit at much lower grade. The results of a preliminary economic assessment (“PEA”) were sufficiently compelling to drive the construction of another mining centre with its own processing plant. The two units are close enough to share certain infrastructure with two drives at Level 8 and Level 9 of Mpama North developed towards Mpama South for exploration and return air reticulation. Construction is ongoing with forecast first production early in 2024, which is a delay of 1-2 months from plan. The project is forecast to absorb US$116 million, before contingencies. This together with a very large tax bill in 2023, based on 2022 profits, has dramatically reduced the cash balance as of 30 September 2023 and will probably severely limit dividend payments in the short term.
After a number of revisions of the mining method to be used for Mpama North, the company settled on longhole open stoping (“LHOS”) and has successfully applied this since production started. Crux Investor records that the actual feed grade to the processing plant is on average 4% lower than planned, indicating an underestimation of dilution. Crux Investor has adjusted the remaining schedule accordingly resulting in an additional 0.11 million tonne (“Mt”) to be mined and a life of mine (“LOM”) grade dropping to 3.50% Sn from 3.97% in the feasibility study schedule.
This valuation has adjusted the PEA production schedule for Mpama South by accounting for the increase in resources announced in February 2023. This extends the LOM there to 2030 at an average grade of 2.19% Sn.
With the metallurgical performance well established there is little risk associated with processing and forecast concentrate production.
This valuation has mostly been based on a technical report dated 2022 which provides revised reserves for Mpama North and a PEA assessment for Mpama South. Alphamin relied on a waiver for producing companies to prove through an economic assessment the validity of reserves. Spoiler Alert: why would a company show through its own valuation that its share value is way over the top?
This valuation has used the suggested operating cost rates for Mpama North after verifying that historical actual costs are in line with these suggestions. Alphamin forecasts much lower costs for Mpama South suggesting that the operating unit will greatly benefit from shared services with Mpama North. Although Crux Investor thinks that the cost reduction is overly optimistic, it has adopted the rates. Crux Investor has also adopted the capital expenditure provisions of Alphamin. As the Mpama South project capital expenditure will be almost totally sunk by 1 January 2024, the start date of the cash flow model, the remaining US$17 million has been accounted for as a reduction in cash balance from the 30 September 2023 level.
The cash flow model has estimated cash flow for Mpama North and Mpama South separately to establish the tax liabilities for each separately considering the criteria for super profits. The findings of the cash flow model are that the off-mine charges are a great burden taking 25.6% of gross revenue. The gross profit margins expressed as a percentage of at-mine revenue is decent at the spot tin price of US$25,175 on 19 January 2024 (around 45% for both units) indicating that the forecast overall operating cost structure is relatively low. However, with all the tax burdens and leakages to other parties, the cash received in Mauritius is only US$402 million, less than 16% of gross revenue. After accounting for Mauritius differential taxes and corporate expenses, only US$192 million remains attributable to Alphamin shareholders. This has a value of US$162 million at a discount rate of 5%.
Given the high-risk nature of the DRC jurisdiction and in particular the Kivu province there is much to be said to apply a higher discount rate than 5%.
At the share price of C$0.83 on 19 January 2024, the market capitalisation of Alphamin is almost US$0.80 billion, and the diluted Enterprise value US$0.87 billion. This is 5.4x the calculated NPV5 value. It is clear that the market has a very inflated view about the prospects of the company, expecting much higher tin prices, combined with much exploration success that will substantially increase the LOM beyond 2032.
Given that each additional year of production would add approximately US$30 million, there is little chance for investors ever realising the current Enterprise Value.
INTRODUCTION
Alphamin Resources Corporation ("Alphamin") (TSX:AFM) is a Canadian company which purchased in August 2011 a 70% stake in a company registered in the Democratic Republic of Congo (“DRC”) called Mining and Processing Congo, SPRL (“MPC”) for a consideration of C$14.1 million in shares. Another 20% shareholding had to be purchased before 18 March 2014. With the acquisition, Alphamin took control of five exploration licences, one of which covered the Bisie tin deposit.
In June 2012 Alphamin announced the acquisition of two permits surrounding the historic Manono Mine in Katanga Province in the Democratic Republic of the Congo. In consideration for acquiring the permits, Alphamin paid US$2 million in cash and issued 6,100,000 shares.
The company was sufficiently encouraged by early exploration results at Bisie to purchase not only 20%, but the full remaining 30% from MPC, in July 2012 in exchange for 29.0 million shares.
Exploration drilling during 2012 intersected deposits with attractive tin grade which led the company to carry out resource drilling in 2013 with a Maiden mineral resource estimate (“MRE”) declared in November 2013 with 4.0 million tonnes (“Mt”) @ 3.5% Sn in the Inferred category. By March 2015 Alphamin could declare an updated MRE which did not increase the resource tonnage, but with 2.65 Mt @ 4.49% Sn in the Indicated category.
With all the success at Bisie, the company did not carry out any work at Manono and wrote off its investment in 2014. It must have regretted this decision later as another company AVZ Minerals Limited (“AVZ”) defined one of the largest lithium reserves in the world there (93 Mt) from total mineral resources of 400 Mt with 1.65 Li2O and 0.07% Sn. It propelled the share price of AVZ at some stage to a level where its market capitalisation was more than A$3 billion, before dropping back to its current A$2.75 billion with the shares suspended following a conflict with DRC authorities about the legality of its mineral tenure. This is a perpetual risk with successful mineral projects in the DRC.
Alphamin however did not have similar problems as AVZ as it received in February 2015 a mining license over the Bisie prospect, for which it had to issue 5% to the DRC government in terms of the mining law. A definitive feasibility study was in progress and the company expected the start of construction to commence early in 2016.
On 11 November 2015, it was announced that the Industrial Development Corporation of South Africa Limited (“IDC”) would acquire in stages a 14.25% stake in the project for US$10 million. On 23 February 2016, the results of a positive feasibility study were released and in November 2017 the financial arrangements were completed, allowing construction to start.
The process plant was completed in Q1 2019 with various stages of commissioning continuing until May of that year and commercial production declared in September 2019.
It is noticeable that the company was uncertain about the best mining methods. The feasibility study was based on Sub-level Caving (“SLC”). In the fourth quarter of 2018 rock conditions underground caused management to review the suitability of the SLC and it was decided to change the method to Cut and Fill (“C&F) mining. This was again revised in 2019 to transition to Longhole Open Stoping (“LHOS”) with hydraulic fill.
Figure 1_1 shows the production volumes and feed grade achieved since start of commercial production with the number for 2023 annualised Q1 production.
The graph shows a drop in grade with increasing plant throughput until 2021 after which the mine managed to turn around the grade decline.
Figure 1_2 shows the share price of Alphamin on the Toronto Stock Exchange since August 2011 when it acquired the first stake in the Bisie project.
The graph shows the typical high share price in the initial stages when exploration results were announced for it to drop until the announcement of the maiden MRE in November 2013.
Thereafter the price pattern is typical for the Orphan Period of the Lassonde Curve with the share price dropping until the feasibility study findings were released in February 2016. The price then rose again until just before the start of construction. As to be expected the price dropped then again with the balance sheet at its most stretched despite a relatively smooth construction phase and start of production. The shares dipped to the lowest point post-financing around April 2020 when it became clear the operation became cash-positive and would no longer require third-party investments. From then the mine became a strong cash flow generator (see next section), partially because the tin price almost doubled from 2020 to 2021, and the price skyrocketed. The drop in 2022 is probably because of concerns about a dropping tin price, but this has reversed to some extent.
HISTORICAL FINANCIAL PERFORMANCE
Table 2_1 gives the historical financial performance from January 2010, the year when Alphamin, started becoming increasingly active, until 30 June 2023. In 2014 the company elected to convert from reporting in Canadian Dollars to US Dollars. The totals in the table are only for the numbers reported in US Dollars.
Table 2_1 shows that:
- Operations were cash negative until 2019, absorbing US$37 million. However, since 1 January 2020, the mine generated US$347 million up to 31 December 2022. Cash generation remained strong during the first nine months of 2023 exceeding US$110 million, but the company had to pay US$90 million in taxes during this period, almost half of this in Q3 alone. The discussion on finances is silent on this major item, but a partial explanation can be found in the statement under note 8:
Under DRC tax law, provisional payments of 80% of the prior year’s tax bill are due each year. There is no allowance for estimated profits.
- Profit before tax of US$185 million was declared in 2022. The taxes levied in 2023 imply that superprofit taxation was imposed for a total rate of 50%.
- The tax drain together with substantial investments in working capital (US$27.5 million) resulted in negative cash generation from operations for the first 9 months of 2023 of US$3.1 million.
- Net investments required from 1 January 2014 until the end of 2019 were only US$230 million, after which the company became cash-positive to the extent that financiers could be rewarded by returning US$143 million.
- Financing was dominantly by means of equity placements raising US$171 million between 1 January 2014 and 31 December 2020. The company has already returned US$125 million more than cash raised in 2021-June 2023 from exercising share options. It is however unlikely this can be sustained. The cash balance has dropped to US$10 million as of 30 September 2023. Management has elected to keep dividends steady in 2023 (US$56 million) by essentially financing these through overdraft (US$51 million).
- With the delay in the completion of the Mpama South project the next few quarters may prove challenging.
- It is evident that the project is a great investment success, partially because the tin price moved favourably over time.
The following sections will investigate whether investors can continue to expect good returns at the current market valuation of Alphamin.
VALUATION OF THE BISIE MINE COMPLEX
Background
The title of this section uses “mine complex” because Alphamin is constructing another mine with a dedicated plant immediately south of current operations.
The technical information in his report has been dominantly drawn from a NI. 43-101 compliant technical report by Bara Consulting (Pty) Ltd (“Bara”), dated 22 April 2022, with an updated mineral reserves estimation for the Mpama North Deposit and a preliminary economic assessment (“PEA”) for the Mpama South Deposit. This report has also reviewed the feasibility study report dated 23 March 2017 and a technical report dated 11 February 2020 with mineral reserves effective 31 December 2019.
The Bisie tin mine complex is located approximately 180 km northwest of Goma, the capital of North Kivu Province in eastern DRC (see Figure 3.1_1).
The area is not easy to work in. It is practically devoid of infrastructure and it has been plagued by gangs and warlords in the recent past. The preferred road route for consumables and supplies is through Kisangani towards Uganda. A 32 km private access road from the N3 state road to the site was constructed by Alphamin. The mine site’s Kokoli airport is used to transport staff to the site, and for aeroplane and helicopter charters from Goma, the regional capital city of North Kivu Province.
The mineral rights are held by a local registered company Alphamin Bisie Mining SA (“ABM”) in which Alphamin has an 84.14% ownership, the government of the DRC 5% and the IDC of South Africa 10.86%.
At the publication date of the technical report on the latest reserve estimation ABM held three exploration permits (Permis de Recherches PR 10346 of 65.76 km2; PR 5266 of 36.30 km2; and PR 5267 of 158.84 km2) and one mining permit (Permis d’Exploitation PE 13155 covering 128.96 km2) on which the Mpama North Mine and Mpama South project are located. Figure 3.1.1_1 shows the outlines of the mineral rights.
No encumbrances to third parties are attached to the mineral rights, but, according to the annual financial statements for the year ending 31 December 2022, “royalties are payable to various branches of the DRC government in line with the DRC mining code and calculated on 3.5% of revenue, as determined by the DRC government agency’s assays results and tin price tables which are published on a weekly basis”. The statement reads as if the royalty applies to gross revenue, but Crux Investor verified in Section 3.7.1 from actual reported figures it applies to revenue net of off-mine charges.
Geology and Mineralisation
The geology at the project is characterised in the west by a highly intruded basement/pluton and in the east by younger metamorphosed sedimentary/volcano-sedimentary sediments. These in turn have been intruded by different generations of younger granites, the youngest of which is referred to as “tin granites”.
The area has been affected by multiple phases of deformation which have given the mine area a predominantly N-S tectonic grain with subtle inflections in a NW-SE orientation. At the mine area, there is a N-S trending shear zone with a number of splays on either side. The interpretation suggests a number of the splay structures fan out towards the north while others appear to be anastomosing.
A tectonic phase younger than the mineralisation has folded the tine-bearing veins about a westerly dipping fold axis. The veins are hosted within an amphibolite schist (a dark rock with little quartz and minerals rich in Fe, Mg, Ca) that has been moderate to intensely altered to chlorite (a mica mineral rich in Fe, Mg), talc (Mg rich mineral) and garnet (a dark mineral with a wide range of composition, but here probably Fe, Mg rich).
Tin mineralisation at Bisie is hosted within a north-south striking, eastward dipping shear zone hosting multiple cassiterite (SnO2) veins, stringers and disseminated cassiterite in a structurally controlled zone. Associated with the tin is copper, lead and zinc, but in quantities that make these relative to tin of little economic interest.
Within the vein zone, the tin is predominantly present in two high-grade parallel shoots that plunge approximately 35° to the north.
Two areas of economic interest have been defined: Mpama North on which the mine was initially developed and Mpama South which is now being developed for mining. Figure 3.2_1 shows the relative location of the deposits in the far north. The map also shows nicely the prospects for similar deposits further south along the boundary between the granites in the west (in orange colour) and sedimentary rocks in the east (in green).
Mineral Resources
Mpama North
The discussion on the methodology used for the resource estimation of the Mpama North deposit is less relevant after a number of years of production with no major surprises noticeable. As essentially the same methodology was used as for Mpama South, this section will discuss it in detail with the section on Mpama South referring to the discussion here.
The last resource estimation was completed in May 2016 in support of the feasibility study. A resource statement effective 30 June 2019 is based on the 2016 resources, accounting for depletion by mining and a reassessment of the extent of artisanal mining.
The MRE was based on tin, copper, lead, zinc and silver assays and density measurements obtained from the cores of 122 NQ size diamond drill holes and 21 closely spaced PQ size holes used for the purpose of obtaining a metallurgical test sample. The holes are between 25 m and 50 m apart along east-west fence lines spaced approximately 50 m apart over a strike length of approximately 600 m, with some infill drilling at 25 m line spacing.
A review of the raw data assay distribution indicated that above a grade of 0.35% Sn there was a grade distribution distinct from the distribution below this grade. The grade was then used as a threshold to define wireframes for resource estimation. Three zones of mineralisation were modelled: the Main Vein, the Hangingwall Vein and the Footwall Vein. The Main Vein is by far the most important body in terms of size, grade and consistency.
Figure 3.3.1_1 shows two isometric views of the deposits with the left view looking east and the right view looking west with in light blue the Main Vein, in red the Footwall Vein and in dark blue the Hangingwall Vein.
Although the mineralisation has been modelled as steeply dipping slabs, the mineralisation within the individual zones occurs in the form of irregular high-grade veins several tens of centimetres thick and lesser amounts in blebs and vein fragments irregularly disseminated in the schist.
The Main Vein is a tabular body striking north-south for 570 m and dipping 50° to 65° to the east and is developed over a true width of 5 m to 15 m with an average thickness of approximately 9 m. It plunges approximately 25° towards the north and extends 700 m down plunge to a depth of 550 m below the surface. The mineralisation is open in a northerly plunging direction and to a limited extent to the south. The strike of the payable zone ranges from 490 m in the shallow areas to 150 m in the deeper areas of the mine. The deposit remains open at depth.
The Hangingwall Vein (HW Vein) is between 1 m and 20 m above the Main Vein and is generally between 0.5 m and 4 m wide. It occurs in the northern area of the deposit and tapers out northwards.
The Footwall Vein is restricted to the southern area where it is between 1 m and 10 m below the Main Vein. It is very narrow (<50 cm) and high grade in its most northern occurrences, but towards the south it thickens to approximately 6 m.
The assays were composited to a standard 1 m length. Semivariograms were generated within the plane of mineralisation and the principal direction down plunge to the north, the secondary direction perpendicular to this and the minor direction across the strike. There was insufficient data to calculate robust semi-variograms for the Hangingwall and Footwall Vein zones, and so the semi-variograms for the Main Vein zone were applied to these zones.
Block models were rotated in the dip direction in order to best fit the orientation of the mineralised zones. Based on the estimated strike and dip direction in each block model cell the search parameter direction was modified.
A block size was chosen to measure 20 m x 10 m x 2 m for grade estimation with subblocks of 2 m x 2m x 0.2 m to fill the wireframe model accurately and create blocks where the mineralisation is narrow.
Using a particular indicator two data sets were distinguished with the high-grade set results given a limited range to influence the block grade. The topographic model and “mined-out” models were added to the mineralisation models, so that the block model cells were coded as either mined or un-mined, and the model cells above the topographic surface were removed.
Figure 3.3.1_2 shows two cross sections 255 m apart comparing the estimated block Sn grades with drill intersection grades to validate the correlation between the two.
Table 3.3.1_1 shows the estimated resources for the Mpama North Deposit of the Bisie deposits, effective 9 May 2016, using a cut-off grade of 0.5% Sn.
The table illustrates that the Hangingwall and Footwall veins are negligible contributors to the resources.
Whereas a cut-off grade of 0.5% Sn was chosen, the exact value does not materially affect resources as is shown in Figure 3.3.1_3 with the tin content only dropping by 1.4% for an increase in cut-off grade from 0.5% to 1.0% Sn.
Not shown in the table is that Inferred mineral resources amount to another 0.5 Mt grading 4.25% Sn for 22,800 tonnes contained tin.
Mpama South
The database for resource estimation includes 135 drill holes. The threshold value used for drawing up mineralisation wireframes is 0.40% Sn. Seven mineralised zones, denoted MZ1 to MZ7, were modelled, striking parallel to sub-parallel in a northerly direction with azimuths between 350° to 010° and dipping approximately 70° to the east. Some of these zones have very limited strike extent.
Figure 3.3.2_1 shows five of these zones in cross-section.
The total strike length of the mineralisation is 1,110 m, with MZ1 having a total strike length of 900 m and dip extension of 350 m, followed by MZ2 with a strike length of 650 m and dip extension of 350 m. These two zones represent up to 88 % of the Mineral Resource.
Figure 3.3.2_2 shows a cross-section through the Sn block model of Mpama South and an isometric view along the strike extent of the model comparing the estimated block Sn grades with drill intersection grades to validate the correlation between the two.
Upon reviewing the illustrations the extent by which some isolated high-grade intersections define large areas with high-grade blocks is of concern. Unpleasant surprises can be expected.
Table 3.3.2_1 shows the estimated resources for the Mpama South Deposit, effective 29 March 2022, using a cut-off grade of 1.0% Sn. This cut-off grade was selected based on an underground mine and concentrator with an operating cost of US$50/t and a tin price of US$ 20,000 per tonne.
Very few of the estimated resources are in the Indicated resource category confirming the impression above that there is much risk associated with the interpreted extent of the high-grade blocks around isolated high-grade drill hole intersections.
With almost all resources in the Inferred category, it made little sense for Alphamin to conduct a feasibility study for Mpama South as it could not use these to declare reserves. For this reason, it assessed the economics of this deposit at a level of PEA. The construction of a standalone mining operation at Mpama South is based on this PEA, which is a very risky approach by the company. It probably decided that the average grade is well above similar operations elsewhere in the world and should forgive any shortcomings in the input parameters. Crux Investor is however particularly concerned about the estimated average grade as this is very much determined by a few intersections.
Mineral Reserves and Mineable Inventory
Mpama North
Whereas the reserves estimated in the feasibility study assumed sublevel caving (SLC) as a mining method, this was subsequently revised to longhole open stoping (LHOS) for the 2019 reserve estimation. By that time 0.17 Mt had been mined by means of cut and fill (“C&F”) mining.
The reserves dropped considerably from the feasibility study numbers (i.e. 1.34 Mt ore), predominantly due to a large drop in dilution: for unplanned 5% versus 14.5% in the feasibility study and unplanned dilution of less than 16% versus 35% previously.
The 2022 technical report did not update the reserves from first principles and used the same mine schedule as the 2020 study. The latest report presents a mine schedule including 13.7% Inferred Mineral Resources. The total can therefore not be referred to as “mineral reserves”, but as a Mineable Inventory. Moreover, the report also informs that “the current mining method at Mpama North mine differs somewhat from the planned method associated with the LoM schedule and Reserves”. The reason given for the change is minimising dilution. In Section 3.7.2 it will be shown that this is not true as actual grades during 2020-2022 were lower than forecast, indicating higher dilution than forecast.
The conversion of mineral resources to mineable inventory assumed underground mining by longitudinal long hole open stoping with paste backfill and cut-off grades based on the input parameters in Table 3.4.1_1. The table includes Mpama South to allow for comparison to show the inconsistent manner in which the cut-off grades were derived.
The table illustrates that in particular for Mpama North a large number of very important parameters were ignored resulting in an optimistically low cut-off grade. However, this is very much compensated by a very low assumed tin price.
The calculation for Mpama South includes a much higher tin price, but also accounts for a number of important off-mine charges. The higher assumed tin price and much lower mine cost result in a calculated cut-off grade half of Mpama North. Whereas theoretically 0.8 % could have been used, the consultants were instructed by Alphamin to use 1.0% Sn. Given the optimistic tin price and omission of many important charges Crux Investor considers this cut-off grade too low.
Table 3.4.1_2 shows the modifying factors applied to Mpama North resources.
Table 3.4.1_3 gives the reserve statement and the amount of Inferred Resources included in the LOM production schedule for total Mineable Inventory as at 31 December 2019 and as at 31 December 2022 after accounting for planned production.
The table shows that over time the contribution of inferred resources increases. It should be noted that the table accounts for planned depletion, not actual. In Section 3.7.2 where the production from 1 January 2024 is derived, Crux Investor will account for actual production.
Mpama South
The technical report does not have a discussion on the derivation of the Mineable Inventory under a separate caption. Its derivation assumes LHOS mining, even though the deposits are in places relatively narrow. Here there is a risk of hang-ups should the blasting not result in sufficiently small size particles.
In Table 3.4.1_1 the cut-off grade of 1% Sn was derived. Table 3.4.2_1 gives the modifying factors applied to the Mpama South resources.
The factors are much more aggressive than assumed for Mpama North despite the deposits being generally much narrower.
The Mineable Inventory has been derived from the table in the technical report with a LOM production schedule and is summarised in Table 3.4.2_2.
The table shows that the deposit is very much inferior to Mpama North in terms of size and grade. Development is a very important component as source for plant feed, which is a reflection of the generally narrow nature of the veins.
On 10 February 2023, the company announced a revised MRE which is reproduced in Table 3.4.2_3 and from which Crux Investor generated a revised Mineable Inventory using the same conversion rates as derived in the table above.
Mining Operations
Figure 3.5.1_1 shows the lay-out of a typical production level at Mpama North.
Mine access to Mpama North is through a central decline (blue in the illustration) developed at minus 9. From the decline footwall drives (brown) are developed over the strike length of the deposit from where regular intervals stope crosscuts (light blue) are developed to the hangingwall contact of the orebody. Ore drives (purple) are then developed from the stope crosscuts, along the strike of the deposit.
All stoping takes place in a longitudinal formation and in a bottom-up sequence within an echelon. An echelon consists of four levels, three production levels and a top holing level at the top of the echelon, directly below the sill pillar. The stope height is 10 m. Sill pillars separate the echelons from each other. Figure 3.5.1_2 shows a longitudinal section of Mpama North with the Mine Layout with the sill pillars in orange.
Dip pillars, or rib pillars (white vertical bars in section), are located along the strike and will be spaced at distances ranging from 20 m to 50 m depending on geotechnical guidelines. The spacing of the rib pillars defines the stope length. The width of the rib pillars increases with depth and varies from 3.0 m to 6.5 m as specified in the geotechnical guidelines.
As already mentioned, the stopes are mined in a bottom-up sequence. Once a stope has been mined and backfilled with waste rock (without binder), the stopes adjacent to it and the one above can be mined. Mining of two adjacent stopes simultaneously is not allowed due to safety concerns should a rib pillar fail.
The stope slot raises are developed by bottom-up long-hole blasting methods. Once the slot raise is complete the slot is opened up to the full width of the orebody, creating a mining face, from where stope blasting can commence, advancing back towards the stope access cross-cut. The technique currently in use is for a stope to be pre-drilled, charged and then blasted in a single blast.
On average, a sill pillar thickness of 8 m every 59 m vertically, will generate a 13.6 % pillar loss on dip. The rib pillars (3 m with spacing depending on the geotechnical domain) will contribute from 6% to 13% to pillar loss. The mine plan includes the mining of the sill pillars once an echelon is completely mined out. For sill pillar mining a mining recovery of 61 % is applied.
Loading of the broken rock is by Load Haul Dump (“LHD”) equipment with 10 t capacity, which feeds 35 tonne articulated dump trucks (“ADT”), which haul the rock to the surface along the decline.
The Mpama South deposit is located slightly South and East of the current plant and surface infrastructure. The plant and offices are located at an elevation of approximately 635 m above mean sea level (“mamsl”). The Mpama South deposit extends from 780 mamsl to 470 mamsl.
It was decided to build a dedicated new plant south of the current plant and access Mpama South from here via strength length decline developed at minus 8°. The 345 m long ramp will intersect the orebody at an elevation of 629 mamsl. From this point, ramps will be developed up and down at an inclination of 9° to interconnect the production levels. Access to Mpama South will also be established from Mpama North from its 8 Level and 9 Level southwards. Figure 3.5.1_3 shows the relative location of Mpama North and South and the infrastructure connecting these.
The connecting drives will serve as second means of egress, conduits for return ventilation and platforms for exploration and possible future production from the area between Mpama North and South.
The main difference between Mpama South and Mpama North is that the Mpama North orebody consists of a single mineralised zone of 5 to 15 m wide. At Mpama South the orebody has been modelled as a number of roughly parallel vein-type lodes with widths between 2 m and 15 m and with varying middling thickness between the veins. The method is the same as for Mpama North, but with stope height of 15 m and a 20 m span. The sill pillar widths are designed at 8 m and the rib pillars at 3 m.
The level plans have the same design as for Mpama North and mining will use the same mining equipment types. Mineralised material from the stopes above 629 m elevation will be tipped by the LHD into the level orepass. This material will report to 6 Level where a truck loading chute will be established and trucks will be loaded and haul the material the short distance to the surface. The haul distance from the loading chute to the run of mine (“ROM”) pad will be approximately 550 m. Below Level 6 loading and hauling arrangements are the same as for Mpama North.
Processing Operations
The Bisie mine can now demonstrate years of processing performance which has shown recoveries improving from 71% in 2020 to 76% during the first half of 2023. According to the technical report metallurgical test work for Mpama South showed it to be the same type of mineralisation as Mpama North, except for being lower grade, the cassiterite being finer and the deposit containing more sulphides. For this reason, the Mpama South processing flowsheet will be identical to the existing plant except for some minor changes.
The Mpama North plant process flow is shown in Figure 3.6_1.
The plant comprises three stages of crushing to reduce the particle size to -8 mm which is sent to a bin. The material is then subjected to two stages of jigging with the –1 mm material proceeding directly to the low grade (“LG”) concentration circuit with hydro cyclones, gravity spirals and shaking tables. The +1-8 mm concentrate is first sent to a ball mill for comminution to 80% passing (“P80”) -425 micron and then further concentrated in the high grade (“HG”) circuit also using cyclones, gravity spirals and shaking tables. The Mpama South processing flowsheet differs here with screening of the crusher product before, not after, jigging.
Both concentrates are milled further to P80 -106 microns and sulphides are removed by flotation. Jig tailings are discarded to a tailings stockpile, part of the Tailings Storage Facility (“TSF”); The remaining -1 mm tails are thickened and discarded on the TSF. Combined final concentrates are treated through a magnetic separator to remove iron, and are then filtered, dried and bagged for sale.
According to Alphamin, the addition of the multi-gravity separation (”MGS”) fine tin circuit will improve the process recovery to approximately 77.5% with a grade of >60% tin concentrate for Mpama North process plant. The PEA for the Mpama South project assumes a LOM recovery of “at least” 70% with a grade of >60% tin concentrate. These recoveries have been adopted for this valuation.
Economic Valuation – Bisie Mine
Metal Prices and Off-mine Charges
For the Base Case of this valuation, the tin spot price on 19 January 2024 of US$25,175/t Sn was used to determine the value of the discounted cash flow.
The technical report does not give specific terms for off-mine charges and some of these had to be derived in a roundabout way. Table 3.7.1_1 shows numbers provided in Table 21.4 of the technical report for off-mine charges assuming a tin price of US$40,000/t and how Crux Investor converted these to rates in more relevant units for cash flow modelling.
The table shows the considerable impact of off-mine costs on the total cost structure. At a tin price of US$40,000/t this is almost 19% of gross revenue. For lower prices, the proportion increases.
For a reality check that the above terms are long-term applicable Crux Investor referred to an expert tin trader to obtain typical marketing terms for tin concentrate. The advice was:
- Payability terms: a minimum deduction of 1.7 units at 70% Sn grade and an additional deduction of 0.1 units for every percentage below 70% Sn. At a concentrate grade of 61% this converts to a deduction of 4.26% of the price. At a tin price of US$40,000 this would result in a reduction of US$1,705/t, only US$169/t more than modelled.
- Treatment charge of US$550/t at 70% plus US$5/t for every percentage point below. This converts to US$595/t concentrate, much lower than the US$1,295/t concentrate modelled.
Without impurity grades, the provided information on penalties could not be compared to the modelled overall penalty of US$133/t concentrate.
The overall conclusion is that there is no obvious optimistic bias in the modelled marketing terms.
Production Schedule
Crux Investor has adjusted the forecast throughput in the 2020 LOM plan for Mpama North for actual production numbers during the 2020-2023 period. These show that the actual annual feed grades differ by respectively -3%, -13% and -4% and -4% from the forecast. It seems that actual dilution has been larger than accounted for in the plan. For this reason, Crux Investor has included an additional 109,000 tonnes to the Mpama North LOM production as of 1 January 2023 to reduce the suggested feed grades by 4%.
The Q3 2023 MDA reveals that the company now expects the Mpama South plant commissioning to start one month later in January 2023. As a simplification, this valuation has modelled commercial production from 1 January 2024 with initially the same throughput rates as per PEA but extending the LOM with the additional Mining Inventory derived from additional resources.
The production schedule is best presented by a number of graphs. Figure 3.7.2_1 shows the amount of material treated in the Mpama North and Mpama South plants together with the forecast feed grade.
Figure 3.7.2_2 shows the forecast tin production over the LOM from Mpama North and Mpama South.
According the Alphamin, at full production from Mpama South the mine would supply more than 6% of the global tin production.
Operating Expenditure
Before adopting any operating expenditure rates suggested by Alphamin, Crux Investor carried out a review of reported actual costs to get numbers against which such expenditure could be compared. Unfortunately, the company gives very little detail on costs in its reports and Crux Investor could only get overall cost numbers.
Table 3.7.3_1 derives the earnings before interest, taxes, depreciation and amortisation (“EBITDA”) from numbers reported by Alphamin and the EBITDA quoted by the company. The two are the same and prove the validity of overall on-mine cost, which translates to unit cost between US$157/t ROM and US$172/t ROM over the last three years. The royalty amount calculated is based on 3.5% applied to at-mine revenue.
Alphamin is inconsistent in its cost breakdown and provides in the technical report the cost in 2022 as per Table 3.7.3_2, expressing these for Mpama North in US$ per tonne of tin sold from which Crux Investor could convert these in US$/t ROM. The total of US$190/t ROM compared high to the unit cost derived in the table above.
For Mpama South the technical report gives cost rates per conventional breakdown: mining, processing and G&A. The report maintains that there will be substantial savings as a large number of costs will not apply with the unit benefiting from existing services. Whereas there will be considerable savings in overheads, Crux Investor is of the opinion that the much lower mining costs is far too optimistic. Crux Investor has used for Mpama North a mining cost rate of US$110/t ROM, processing of US$37/t and G&A of US$43/t treated (total US$190/t) and for Mpama South the rates suggested in Table 3.7.3_2, but with the G&A rate converted to an annual rate of US$8.7 million).
Corporate Expenses of US$22.5 million per annum have been included, based on current actual cash cost.
Capital Expenditure
The PEA for Mpama South forecasts an investment of US$127 million after contingencies to complete the project. Table 3.7.4_1 gives the breakdown under the “Initial” column.
The contingencies under “Mining” amount to 12.5% of expenditure excluding Mining Equipment. Given the level of confidence of estimates in a PEA study, this is very low. Similarly, the contingency for Plant and Infrastructure is very low at 14.3%. An EPCM rate of 7% is also optimistically low. Whereas the contingencies appear low, the statement in the Q3 2023 MDA report on capital expenditure implies that the project will be completed without needing any contingency:
By quarter-end, the Company had spent US$99 million of cash resources on the Mpama South project of which US$24.5 million was spent in Q3 2023. The project is forecasted to be substantially completed within the budget of US$116 million.
For this reason, this valuation has accounted for the remaining capital expenditure by reducing the 30 September 2023 cash balance by US$17 million at 31 December 2023.
The latest technical report gives very little information about sustaining capital expenditure for Mpama North apart from mentioning that after 2022 it expects to spend US$10 million annually. Crux Investor had used this rate until 2 years before mine closure with half this rate in the year before mine closure and nil for the last year of construction. As the footprint of Mpama South is at least as large as for Mpama North, the same rates and tail off have been used.
Working Capital
Being located in a very isolated area with little infrastructure and producing a concentrate with a long pipeline to get to off-takers implies considerable investment in working capital. This valuation has referred to actual net current asset and liability balances at 30 September 2023 and converted these into units that are suitable for the cash flow model. Table 3.7.5_1 shows the conversion.
Royalties and Taxes
There is very little information provided by Alphamin about applicable royalties and taxes. Crux Investor had to indirectly establish that the 3.5% royalty is applied to revenue net of off-mine charges. Similarly, Crux Investor had to establish from Table 3.7.1_1 that the Export Taxes are levied at 2.0% of revenue net of off-mine charges.
The income tax rate for mines is 30%, but with a possibility of a “super profit tax” of another 20 percentage points when the metal price exceeds the feasibility study price by 25%. The feasibility study for Mpama North used a price of US$21,400/t, whereas the PEA used a price of US$40,000/t for Mpama South. This means that the thresholds for super profit is US$26,750 for Mpama North and US$50,000 for Mpama South.
Page 34 of the annual financial statements for the year ending 31 December 2022 gives more detail about when superprofit tax applies. It states:
“In the case of superprofit tax applying a calculation using ABM’s “Excédent Brut d’Exploitation (EBT)”, an OHADA or Francophone Africa accounting term that is loosely equivalent to EBITDA for the year. Where the EBT is greater than 25% higher than that stipulated in the feasibility study then a superprofit tax of an additional 20% applies, taking the effective tax rate on that incremental portion of the profit from 30% to 50%.”
The implication of the above is that the two operations are ringfenced and the cash flow and taxes are established individually.
One of the important determinants of effective tax payable is the rate at which capital expenditure may be amortised and depreciated. No information is provided, but Crux Investor referred to an IMF Country Report No 22/82, which states in Table 8 that exploration and development expenses can be depreciated over two years on a straight-line basis. A 2019 fiscal guide by KPMG gives depreciation rates of up to 5% for buildings, 15% for plant and equipment, 20% for vehicles and 33% for IT equipment. This valuation has assumed the accelerated depreciation to apply to all capital expenditures introducing an optimistic bias.
Dividends to foreign beneficiaries are taxed at 10%.
Results
Table 3.7.7_1 gives the forecast financial performance at Base Case metal prices from 1 January 2024 onwards.
There are many striking aspects to the financial performance of the operations:
- The off-mine charges and taxes on revenue take a huge chunk out of gross revenue (25.7%)
- Whereas the operating costs at Mpama North are low enough to give a decent gross profit cash margin on at-mine revenue (i.e. 43.1%), the EBITDA is only 27% of gross revenue because of high off-mine charges.
- Fortunately for Mpama North, the feasibility study only had EBITDA estimates for 2021 and 2022 at which superprofit tax would be applicable. It is not clear what applies when there is production at the end of LOM not accounted for in the feasibility study. Crux Investor has assumed that super profit tax may apply for 2032 should the tin price and profitability thresholds be exceeded.
- The after-tax cash flow for Mpama North is only 20.5% of gross revenue.
- The gross profit cash margin at Mpama South is also very good at 47.6%, but EBITDA is only 30% of gross revenue.
- The after-tax cash flow from Mpama South is only 20.4% of gross revenue.
- The taxation regulations of the DRC are so onerous the total government take amounts to US$281 million (not accounting for the 5% free-carried interest benefit), which is 70% of the cash received by Alphamin in Mauritius (US$402 million).
- After deducting the corporate expenses and taxes due in Mauritius only US$192 million remains attributable to Alphamin shareholders with an NPV5 value of US$162 million.
Figure 3.7.7_1 shows the modelled cash flow attributable to shareholders.
Table 3.7.7_2 expresses the sensitivity of the value of Alphamin as the change in Net Present Values per percentage point change in the economic main parameters.
The table shows that, for every percentage point increase in tin price (i.e. US$252/t) the NPV5 increases by 5.8% (i.e. US$9.3 million) and for every percentage point increase in the cash operating cost (i.e. US$1.47/t treated) the NPV5 drops by 2.3% (i.e. US$3.7 million. Sensitivity to changes in capex is negligible given the small base.
It should be noted that at a tin price exceeding the super profit threshold of US$50,000/t the above relationship does not apply as super profit taxes would kick in at Mpama South.
Given the high-risk nature of the DRC jurisdiction and in particular the Kivu province there is much to be said to apply a higher discount rate than 5%.
THE ENTERPRISE VALUE OF ALPHAMIN AT 20 NOVEMBER 2023
At the share price of C$0.83 on 19 January 2024 and with 1,275.3 million shares issued, according to the TMX money website, the market capitalisation of Alphamin is C$1,058 million, or US$784 million. At 30 September 2023, the company had no share warrants outstanding and 9.1 million share options, all of which were in the money with an average exercise price of C$0.72.
At 30 September 2023 total debt and lease liabilities, including the current portion, amounted to US$65.2 million to which Crux Investor has added US$17 million to cover the remaining capital expenditure.
As the model accounts for the realisation of working capital at the end of the LOM Table 4_1 has ignored this in the estimation of diluted Enterprise Value.
The diluted Enterprise Value is 5.4x the NPV5 value. It is clear that the market has an inflated view about the prospects of the company - expecting much higher tin prices as well as exploration success that will substantially increase the LOM beyond 2032.
Given that each additional year of production would add approximately US$30 million, there is little chance for investors ever realising the current Enterprise Value.
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