Switching from iron to Copper - Austral Resources (AR1 ASU)

The report card isn't pretty. Along with other small miners in Australia, Fenix is down 1/3 from the original price. The good news is other small miners have fallen as well. I have been switching from Fenix into more West Wits and Austral Resources (new). Two reasons: i) gold and Copper offer more upside vs. iron ore, ii) more upside (and risk) in these two companies as they are still ramping production and yet to be proven.

Have a look at Pic 2. Iron ore price is expected to decline in 2027 vs. higher copper and gold prices in 2027 (per Jefferies). Guess market is not expecting any stimulus in China soon.

Turning to copper, the bull case for copper is well told. It is critical for electrification. Supply and demand will tighten as many mines are aging and grades are falling. Just look at copper production forecast at BHP and Chile.....Supply will remain challenged while demand will grow. Remember lead time for a new copper mine can be as long as 10-15 years.....

Now looking at the chart... Copper price are hovering at the high, while Austral is down almost 50% from its high in Jan 26. A lot of enthusiasm has faded in particular to Austral despite the secular trend underlying copper.

Austral is an interesting small mining company... MV is A$160M or so. Decent balance sheet.. Net cash of $31M. As recent as 2 years ago, it was in deep financial trouble. The current management team brought it back from the abyss.

1. It is a strange story. A normal junior mining company story goes like this... Find and define a deposit. Raise money to build a processing plant (and lots of dilution along the way). Then finally put the mine + processing plant into production.

2. The story for Austral goes the opposite direction. It has "solved" the capital heavy processing plant end first and now going upstream to secure more ores to feed its processing plants.

3. To make the story more compelling was it spend $25M to acquire its second processing plant (Rocklands)... Replacement cost for Rocklands is as much as $600M.

4. Its first plant in Mt Kelly is already in production (10k tons of copper). It is refurbishing Mt Kelly to bring capacity to 25K tons. It is in the middle of updating Rocklands to add another 25k tons in capacity by Q3 27. So we are looking at hockey stick growth from 10k tons to 50k tons between 2026 - 2028.

5. It does have its feed stock/ore for now.... 5-6 years only....So Rocklands is secured through 2033..... The next part of the story is Austral will seek to consolidate other smaller miners in the area of QLD (near Mt Isa). It has already announced its acquisition of Hammer Metals for 1160M shares (30% dilution). The Hammer acquisition will extend its mine life to around 10 years (from 5-6).

6. Hammer is an interesting case study. It has 420kt of copper-equivalent resource.... Using current copper price of US$14000/ton, we are looking at potential revenue of over A$8bn. The challenge facing Hammer as a stand alone company was its balance sheet and how could it fund its own processing plant (with its market cap of only $60M just before the acquisition).... This is the second part of the story = Austral will look to buy out other smaller miners close to its mills.

7. The third part of the story is it will look to further expand Rocklands in time... taking total capacity to as much as 67k tons a year.

8. And the longer term story is it will look to explore for more copper in its area, apart from M&A. Co seemed confident of finding more copper in its tenements.

9. Let's play around with some numbers... Copper price at present is around US$6.7/lb.. Austral figures once Rocklands is up and running in Q3 27.. Its cost will be around US$4.6/lb.... At 50k tons, we are looking at revenue of as much as $1bn (50k * US$14k)...Cash margin of 31%... Roughly $300M cash margin..... From that, Austral can invest in exploration and developing mines from the Hammer acquisition. Also note maintenance capX is only expected to be around $50M a year... it will be quite cash flow generative once it is ramped up.

10. What are the risks ? Rocklands was a failed copper processing plant.. Two previous owners could not make it to work.. struggled to secure feedstock/ore + the mill/crushing circuit was not optimal...... Austral figures it has identified the challenges and is now addressing these short comings..... Note its cost structure is high (for instance Freeport/Southern Copper cash cost is only around $2 vs. $4.6 for Austral). Bottom half of the global cost curve.

Upside ? Austral aspires to be in the top 5 copper producer in Australia. Its goal is to be part of ASX index..... Say it has cash margin of $300M.... Assume 1/3 goes to taxes... So $200M left.. And minus 50M for capX.... So potentially it can generate $150M in FCF a year in an ideal environment.. Upside if Cu price is higher or downside if Cu price is lower.... It has 10 years of mine life... Put it on 6-10X, upside of 5 to 10X in the next 3-4 years... Key risks we are taking on are: Rocklands ramp + Copper price.