Vital Metals (VML.AX) - significant value to be realised in its Watershed project

Full Report by Objective Capital , Mar 12, 2011 download full report
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Key Points:

• The Watershed tungsten deposit is Vital’s flagship project
  Vital Metals’ management is focused on aggressively developing its 100‑percent owned Watershed tungsten project in the far north of Queensland, Australia. To advance its timetable, Vital has entered into a formal earn‑in agreement with Japan Oil, Gas and Metals National Corp (JOGMEC), whereby JOGMEC will contribute A$5.4m in exchange for a 30‑percent interest. The money will be used to complete a definitive feasibility study.

• Watershed hosts a substantial tungsten resource
  A JORC‑compliant resource compilation completed in 2008 estimated Watershed contained an indicated 15.3 million tonnes of scheelite, averaging 0.46 percent tungsten oxide (WO3), based on a cut‑off of 0.1 percent WO3. This translates to 69,000 tonnes of contained tungsten. Watershed is a large deposit and remains open both along strike and at depth.

• Vital had largely completed a feasibility study in 2009
  Vital Metals had been advancing Watershed on its own prior to the economic turmoil that developed late in 2008. By early 2009, the company had nearly completed a feasibility study of the project, based on a plan to mine approximately 3.7 million tonnes of ore at 1,750 tonnes per day. The economics were attractive, based on a projected capital cost of A$69m and operating costs just under A$65 per tonne.

• A definitive feasibility study is expected next year
  With the participation of JOGMEC, Vital’s management expects to complete a definitive feasibility study later next year. With the bulk of the required work already completed, the only outstanding items are metallurgical testing and model confirmation, as well as the application of new cut‑offs, processing rates, mining schedules and a revised pricing of required components and goods.

• Vital also has an early stage gold prospect under option in Burkina Faso
  Vital has currently earned a 60‑percent interest in the Doulnia and Kampala tenements in southern Burkina Faso. A major drill programme took place during the year, with 12,000 metres of drilling completed at Kollo. Among the encouraging intercepts was a near‑surface interval that returned 6.39 grammes of gold over 44 metres.

• Vital is sufficiently financed with the injection of A$5.4m by JOGMEC into the Watershed project
  As at June 30 2011, Vital Metals had A$3.6m in cash, trade and other receivables and A$0.6m in accounts payable. With JOGMEC contributing A$5.4m to complete the definitive feasibility study of Watershed, the company should have adequate financing in place to advance its Burkina Faso gold prospect. As a result, additional financings may not be required until late 2012.

• Our assessment of Vital yields a base-case valuation of A$0.15 per share
  Our assessment of Vital Metals and its Watershed project, based on reasonable probabilities of exploration success, yields a base‑case valuation of A$0.15. Assuming success at all stages of future exploration and development, our assessment would increase to A$0.25, and with more optimistic assumptions, to A$0.49.