We have been asked by clients whether the $234m acquisition by Aeris Resources (ASX:AIS) for Washington H Soul Pattinson’s (ASX:SOL) Round Oak Minerals is a good deal?

Prior to the transaction Aeris Resources had 2.26b shares on issue, and with a $0.105 share price a market capitalisation of $237m, and an enterprise value of $206m after we deduct the $31m of net near cash on hand at 31 December 2021.   

As detailed previously, Aeris Resources is expected to produce around 60,000 ounces from the 100 per cent owned Cracow Gold, located 500 kilometres north-west of Brisbane. Cracow has a four-year mine life and a strong history of replenishing its reserves and resource and early signs of exploration success are encouraging.

In addition, the company has had a successful drilling program which has led to an increase in the expected future Copper production at the 100 per cent owned Tritton mine, about 50 kilometres north-west of Nyngen, Central NSW, from the current 19,000 tonnes p.a. to around 31,500 tonnes by Fiscal 2025.  Importantly the life of the mine has been extended from three years to at least eight years.  So more metal for roughly the same costs and a much longer mine life, two large factors that the valuation regimes for resources stocks.

AIS forecast EBITDA for Fiscal 2023 was $182m, placing the company on an Enterprise Value ($206m)/ EBITDA ratio of around 1.2X (taking into account some additional exploration expenditure on the net cash position).

What is AIS getting from SOL for $234m (being 1.467b AIS shares at $0.105, which equates to 30.3 per cent of the 4.84b shares on issue, plus $80m cash)?

Essentially, AIS is paying 1.9X forecast Fiscal 2023 EBITDA ($124m) for the Round Oak Minerals (ROM) acquisition, and the assets include:

1. The Mt Colin Copper Mine, located midway between Mt Isa and Cloncurry, QLD which produces around 12,500 tonnes of copper and has only a two-year mine life with good regional exploration potential.
2. The Jaguar base metals operation, located 65 kilometres north of Leonora, WA which produces around 15,500 tonnes of copper (equivalent) and has a four-year mine life with the potential to extend this.
3. The Stockman Development Project, located in North-East Victoria, has the potential to produce 30,000 tonnes of copper annually for at least ten years. However, there are two complications. First, this project is in the middle of a Definitive Feasibility Study and while primary approvals and permits are in place the project is yet to receive final regulatory approval; and second, the cost of transforming the development into an operating mine is expected to approximate $300m.  Once funded, permitted and built (which are by no means a certainty) Stockman would be a high-grade long-life copper mine, the “grade” benefit coming from the high zinc credits, in a Tier 1 jurisdiction of Australia.

While the anomaly of the much lower multiples (AIS: 1.2X F’23 EBITDA v ROM: 1.9X F’23 EBITDA) is not lost on the market, the main arguments for the transaction – which assumes Stockman is producing by Fiscal 2025 – include:

1. The copper mineral resource has more than tripled from 343,000 tonnes to 1,094,000 tonnes while the copper ore reserve has grown five-fold from 79,000 tonnes to 418,000 tonnes. Although its worth noting that the resource base for AIS hasn’t yet seen the expected benefit from the drilling work that has lifted the mine life expectations at Tritton, with more news in the next 12 months expected there.
2. The average grade of the copper resource has jumped from 1.42 per cent to 2.22 per cent, while the average grade of the resource has jumped from 1.35 per cent to 2.42 per cent.
3. AIS now has a market capitalisation (at a $0.105 share price) of $508m and with SOL a 30.3 per cent shareholder, the company is a little more investible. Post the transaction, AIS is on a forecast Fiscal 2023 EV/EBITDA of 1.6X, making it cheap relative to its Australian copper producing peers trading on 3-5x EBITDA range.

The principal arguments management make to support the transaction are that at double the market cap (at the cost of doubling the share count) the new Aeris Resources will get on the radar’s of those institutional investors and that should go a long way to close some of that valuation gap to peers. 

Whilst combination of the capital structure set up (cash balance) plus cash generating assets mean – commodity price assumptions allowing – that the future development of Stockman has the potential to be internally funded, and that brings growth.  This positions AIS as having two long life copper production assets in Tritton and Stockman eventually producing at levels not inconsistent with SFR and 29M, stocks trading on materially higher valuations.  The cost of this is of course the share count doubling which dilutes existing AIS investors and the benefit they may otherwise have received from what we believe is the material re-rating potential from AIS standalone as they brought the asset driving a longer mine life at Tritton into production.

Overall, the success of the Round Oak Minerals acquisition by AIS will be dependent on the transformation of Stockman into a long life, relatively low-cost copper mine, and to a lessor extent extending the life of the other two short-life ROM assets. 

In the short run its also likely that AIS will now appear on the radar of bigger funds and we will find out if management are right that this will drive a re-rating.  The Montgomery Small Companies Fund took up its rights in the funding transition to support the Round Oak acquisition.

You can read my previous comments on Aeris Resource here:
Aeris Resources – drilling is the truth; and successful exploration is transformational

The Montgomery Small Companies Fund owns shares in Aeris Resources. This article was prepared 29 April 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Aeris Resources you should seek financial advice.