Woulfe Mining (WOF.V) - significant increase in our valuation

Update by Objective Capital , Aug 24, 2011 download full report
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Key Points:

• Continued drilling at Sangdong has allowed the preparation of a mineral resource estimate
  Woulfe Mining has wrapped up a Phase 1 drilling programme at Sangdong that has produced assays exceeding expectations of both grade and width across the three mineralised zones. The drilling programme targeted the remaining mineralisation in the upper section of the mine above the second level, for mine planning and feasibility reserve estimation purposes.

  The Main zone yielded 0.64% tungsten oxide (WO3) over a true width of 10.2 metres. The Footwall zone yielded 0.43% WO3 over 10.4 metres, while the Hangingwall zone yielded 0.49% WO3 over 7.5 metres.

  In July, Woulfe received an NI 43-101-compliant mineral resource estimate prepared by Wardrop for the upper portion of Sangdong, accounting for approximately 25 percent of the mineralisation. The estimate, which is based on modern drilling only, included an indicated resource of 5.968 million tonnes averaging 0.42% WO3 and 0.04% molybdenum disulfide (MoS2). This resource is based on drilling at 25-metre centres and has a high degree of confidence. A further inferred resource of 18.57 million tonnes averaged 0.45% WO3 and 0.05% MoS2.

  In 2010, Wardrop prepared a mineral resource estimate for the entire Sangdong deposit. This included a 45.8 million-tonne inferred resource in the Hangingwall zone, which averaged 0.32% WO3 and 0.05% MoS2, and a 57.4 million-tonne inferred resource in the Footwall zone, which averaged 0.37% WO3 and 0.04% MoS2. This resource was based on extensive historical drilling data, but which did not meet current NI 43-101 quality standards, resulting in an inferred classification.

• Woulfe has obtained a US$300m valuation opinion for Sangdong
  The company commissioned Ross Glanville and Associates to prepare a valuation opinion of the fair market value of Sangdong. This work arrived at a net present value, discounted at 8 percent, of US$300m, within a range of US$200m to US$400m. Some of the key assumptions used by Glanville were a US$375 per metric tonne unit price for WO3, a mine operating at 1.2 million tonnes per year for 21 years, and an average grade of 0.41% WO3.

• Woulfe has refined its proposed mine plan, reducing costs and shrinking timelines
  The company has prepared a new capital cost estimate for a Sangdong mine, based on construction of a 1.2-million-tonne-per-year operation. Woulfe commissioned Contromation Indonesia, an independent company with extensive experience in design and construction of projects in Asia, to design and cost the processing plant for Sangdong. Based on the crushing and milling portion of the design, the company now expects the capital cost for development at US$135m, approximately 10 percent less than our earlier assumption of US$150m for a comparable operation. The company’s scoping study had projected a capital cost of US$289m for a 2.4-million-tonne-peryear mine.

  The revised estimate carries a level of accuracy of approximately 20 percent. As a result, we have decreased our capital cost estimate to US$145m, whilst retaining our more conservative view.

  Woulfe’s current plan calls for an underground drift-and-fill mining operation focused on the top 25 percent of the deposit, which lies primarily above the valley floor on the eastern side of the deposit. This area, which hosts the recently calculated resource estimate, has sufficient indicated resource to support a five-year mine life, and probably in excess of 10 years, assuming a substantial portion of the inferred resource can be upgraded.

  We continue to hypothesise that Sangdong will eventually yield a significantly larger resource, allowing for further expansion of the mine plan in future years. As a result, we continue to hypothesise expansion in future years at Sangdong, reaching a rate of 2.4 million tonnes per year at a cost of US$105m before inflation.

• Woulfe is maintaining its aggressive timelines with no discernible slippage
  The company has an aggressive development plan for the next year at Sangdong. Woulfe continues with its prefeasibility study of Sangdong, and anticipates publication of the report by the end of September. This would immediately be followed by a full feasibility study, expected to be complete early next year. Final permitting and construction would follow, and Woulfe’s management anticipates placing Sangdong into production by the end of 2012.

• Higher tungsten prices have a positive impact on our valuation
  Since our initiation note of April 2011, the price of ammonium paratungstate has increased significantly, in excess of 15 percent. This short-term variation has a significant impact on our model, given tungsten’s lengthy time to revert to the longterm mean, some 12 years, and the relatively short timeline to commencement of production. Lower interest rates also have a positive impact on our valuation.

• An agreement with Korea Zinc remains an uncertainty for valuation purposes
  Korea Zinc, a large Woulfe shareholder, had a 60-day option to take up 51 percent of the project for an investment of C$38m into Sangdong Mining Corp, a joint venture company. This option expired in February 2011. Woulfe subsequently agreed to provide Korea Zinc an exclusivity period during which Woulfe would not finance the project until the drilling programme was completed and KZ had an opportunity to make a revised offer.

  Woulfe remains in discussions with Korea Zinc and with other parties to secure non-dilutive equity financing, followed by debt financing to cover the majority of the capital costs. Woulfe’s management believes the company has several options to obtain required financing.

  As a result, we continue to value Woulfe based on a 100-percent interest in Sangdong. Should the remaining terms of the agreement close as originally negotiated, Woulfe’s interest in the project would decrease to 49 percent, reducing the value flowing through to Woulfe by approximately one-half. This would be mitigated, at least in part, by a concurrent cash contribution to Woulfe, or more likely, to a joint venture company.

• Our revised valuation is adjusted upward, to C$0.69 per share
  Based on these developments, our base-case valuation of Woulfe increases from C$0.46 per share to C$0.69 per share. Our more optimistic assessment, based on higher confidences of exploration and development success, increase modestly from C$1.20 to C$1.33 per share. Assuming success at all stages through feasibility and permitting, our base-case and optimistic assessments increase to C$1.50 and C$2.92 per share respectively.