Aeon’s Queensland copper-cobalt deposit could become too much for majors to resist

The imminent drilling program to expand Aeon’s Walford Creek copper-nickel resource will be keenly watched by growth-hungry mid-tiers. Plus, David Flanagan’s Battery Minerals secures its mining licence, putting it on track for graphite production at its first project this year, while studies on its second operation are returning strong results.

OZ Mineral’s premium-busting $442 million agreed takeover bid for ASX-listed Brazilian copper and gold producer/developer Avanco has got the pundits wondering if OZ’s move signals more acquisitions of the juniors by the mid-tiers to secure growth opportunities are on the way.

That OZ was happy to pay a 116% premium to snare Avanco with its suite of Brazilian production and developments assets was as sure a sign as there is that growth is back on the agenda for the cashed-up mid-tiers.

M&A activity is of course not without its risks. But executed properly, it is the sure-fire way to replenish project development pipelines in a hurry. In the case of the Avanco acquisition, OZ potentially goes from a one-mine operator (Prominent Hill) to a seven mine operator in half-a-dozen years.

The question now is who might be next amongst the juniors in the ASX space to attract the attention of a growth hungry mid-tier?

There are dozens of them in the gold space, but not so many in the base metals space.

One name that does crop up as a likely future target is Aeon Metals (AML). It is trading at 27.5c for a market cap of $164m (there are also 85m vendor warrants with a 16c strike price expiring in December next year).

Aeon owns the Walford Creek copper-cobalt-zinc project in north-west Queensland which it acquired in 2014 from the receivers to the unlisted Aston Metals, the base metals exploration arm of Nathan Tinkler before the former electrician’s coal and horse racing empire came crashing down.

Explored by Western Mining Corporation (now part of BHP) between 1986 and 1994, and several other groups before Aeon came along, Walford Creek’s status as a development candidate has soared in recent times.

A new geological model that enables drilling to be targeted to higher grade zones and the delineation of the highest-grade “significantly” sized cobalt deposit in the country, has the company talking itself about Walford Creek being world-class.

There is a long way to go before that is confirmed but a fully funded Aeon is not about to leave us guessing. Next month it kicks off a 30,000m infill and extension drilling program along the 20km of strike along the Fish River Fault prospective for high-grade copper-cobalt zones.

If the in-fill and step-out drill holes return anything like those from the 2017 program, Walford Creek’s status as one of the biggest undeveloped base metals deposits around will take another step up.

Last year’s drilling led to a substantial resource upgrade to 15.7m tonnes grading 1.24% copper and 0.15% cobalt (along with lead, zinc and silver) for 194,000t of contained copper and 24,000t of cobalt from a small section of the prospective strike.

Aeon also reported a separate and flanking cobalt zone of 18m tonnes grading 0.11% cobalt for another 19,500t of the high-priced metal, making for 43,500 tonnes of cobalt all up, firmly plugging Aeon into the boom lithium-ion battery thematic.

Bell Potter, which has raised funding for Aeon in the past, has a just tickled up its Aeon valuation from 48c to 50c. As was the case for Avanco, Aeon’s trading at a discount to valuation will not go unnoticed by any would-be acquirers.

Mind you, the 30,000m drilling program shows the company is out to grow its value with the drill bit and without the help of any M&A mumbles.

To prove we’re not making up the M&A mumbles around Aeon, it is worth quoting Bell Potter analyst David Coates in his Monday valuation upgrade note.

“Walford Creek is already a significant project in its own right. Further exploration success with this drilling campaign has the potential to propel Aeon further ahead of its peers and emerge as a project that will be hard for large, established producers to ignore.”

Battery Minerals

There’s lots of discussion in this market around where-to-next for the metals that make up the cathode side of lithium-ion batteries.

That’s kind of funny as it was graphite for the anode side of things which originally turned the local market on to the boom lithium-ion battery thematic in the first place.

Nice to see then that graphite is doing okay, trending upwards in recent times despite the arrival of the big Daddy of the natural graphite sector Syrah (SYR) with first production from its world-class Balama project in Mozambique.

Syrah could swamp the market if it wanted to. But that would be suicide, so it is only going to get to its initial capacity of 350,000t annually when it can do so without destroying prices.

That leaves an opening for niche players in the market. But it will be a matter of the quick and the dead for the smaller guys.

It is against that backdrop that bustling David Flanagan has positioned his fellow Mozambique graphite developer Battery Mineral (BAT) to ship its first production from its Montepuez project in the December quarter this year.

It recently cleared a major milestone on its way to first production – the award of its mining licence. The award was announced without any fanfare by Battery earlier in the week, such is the nose-down, tail-up approach by Flanagan to get into production.

Maybe as a result of the lack of fanfare, the market in Battery has continued to knock around the 7.9c a share level for a market cap of $61m. Given analysts following the stock value it at 26c or more, there are clearly other milestones to pass, most notably completion of the $70-$80m in financing required.

It is going to help that Battery has covered more than 80% of its planned stage one annual production of 45,000-50,000 tonnes with binding offtake agreements. And the embedded growth story at Montepuez, and Battery’s own Balama project, will be attractive to an end-user/off-take partner.

Future planned expansions could see Montepuez grow to more than 100,000 tonnes annually by 2020, with a development of Battery’s Balama making more than 200,000 tonnes possible come 2022.

So not everyone is going to need to buy from Syrah if they don’t want to. And while a big part of Syrah’s story is a downstream push in to the battery anode materials, Flanagan is keeping it simple.

Given expectations that battery makers in China are going to have to import increasing amounts of graphite, that is kind of interesting from a strategic perspective.