February 07, 2008 - 6:44pm EST by
2008 2009
Price: 0.28 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 150 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Investment Thesis:

The SRL stub is a long because you can create a stub (by buying SRL AU and shorting out it's holding in SAR SP)

that costs 0.28c (this flucuates....prices of as of a few days ago when I typed this up, as I'm about to submit this the cost of the stub is -0.15c), but is worth more than $3.
Business description:

The SRL stub represents all SRL business ex-its 51% ownership of SAR.  The core business includes the Whim Creek and Tritton Copper Operations in Australia, the Mt Muro Gold Mine in Indonesia, a recently acquired coal mine in Madagascar and a portfolio of mining investments, development projects and exploration ground throughout Australia and Indonesia.  The stub is created by shorting ~2.417 shares of SAR for every share owned of SRL. 


SRL - Per share analysis ($US)                 

Current SRL price                $6.34


NAV / share                

Sebuku                                         $6.07

Tritton - Cu                                 $1.18

Whim Creek - Cu                 $0.48

Hillgrove - Au/Sb/W                $0.52

Mt Muro - Au                             $0.35

Yannarie Salt                               $0.25

Madagascar - Coal               $0.67

Varomet                               $0.14

Total Operations               $9.66

Exploration                           $0.12

Corporate                            ($0.60)

Net Cash / (Debt)               $0.05

Net asset value/share              $9.23

   Premium / (Discount)             $2.89

Stub NAV                             $3.16

Stub Price                              $0.28



SAR’s Sebuku Coal Mine:

-          SAR, listed in Singapore, owns and operates the Sebuku Coal Mine in Indonesia with expected annual production in 2008 of over 4Mtpa

-          Recently acquired the Jembayan mine in East Kalimantan for $350MM, which doubles SAR’s production in 2008 to a combined 8+Mtpa (Jembayan has a resource base of 40Mt which could more than double as only 40% has been explored)

-          Also acquired the Northern Concession directly to the north of Sebuku for $25MM – this has 4Mtpa available for mining immediately with a resource base that could be in excess of 85Mt


(Mtpa)              2008     2009     2010


Sebuku              4.2 5.2 6.0

Jembayan          4.0 5.5 5.5

Total Production      8.2 10.7      11.5



Remaining Stub Assets:

The following is a description of SRL’s core assets:


Tritton Copper Project (NPV ~$300MM)

-          The Tritton copper mine, located near Nyngan in New South Wales (NSW) is 100% owned and operated by Straits and in 2006 produced 23K tons of copper concentrate, which contains about 25-30% of copper

-          In 2007 the mine had a resource base of 350Kt of Cu and a reserve base of 160Kt

-          Current expansion project is planned to increase the annual treated ore tonnage at Tritton, from 1Mt to 1.4 Mtpa and recover some 35Kt copper concentrate per year

-          Key assumptions:         2008                2009

Production (Ktpa)             35             40

Cu Price ($US/kt)      $7,000       $6,500 note: (we’ve assumed they lose 24% of this to TCRC charges)

Cash costs ($US/kt)   $1,984       $1,984 ($0.90/pound)

Capex               $35,000             Maintenance capex of 2.5% of total opex after this

Mine life            20 years


Whim Creek (NPV ~$120MM)

-          Whim Creek Copper Project is a wholly owned and fully engineered project, located adjacent to the North West Highway, midway between Karratha and Port Hedland in Western Australia

-          Whim Creek comprises two deposits – the Whim Creek and Mons Cupri deposits located 3 miles apart, both of which are mined using conventional open pit mining techniques

-          Key assumptions:         2008                2009

Production (Ktpa)             16             20

Cu Price ($US/kt)      $7,000       $6,500  

Cash costs ($US/kt)   $2,865       $2,865 ($1.13/pound)

Capex               $36,000             $24,000  (Maintenance capex of 2.5% of total opex after this)

Mine life            8 years


Hillgrove (NPV ~$130MM)

-          The Hillgrove Gold Project, located near Armidale in NSW, was purchased by Straits in 2004

-          Straits has commenced construction of a demonstration process plant capable of achieving initial mine production rates of approximately 10,000 tons per annum of antimony metal and 20,000 ounces of gold (equivalent to 90,000 Au ounces of total production output)

-          Key assumptions:         2008                2009

Sb Production (Ktpa)              15             20

Sb Price                    $4,500       $4,000  

Au Production (oz. in K)               20             20

Au Price                 $700         $700

Cash costs ($US/kt)   $2,204       $2,204 ($1.00/pound)

Capex               $45,000             $1,102  (Maintenance capex of 2.5% of total opex after this)

Mine life            10 years


Mt Muro (NPV ~$80MM)

-          Straits operates the Mt Muro Gold Project under a 3rd Generation Contract of Work agreement with the government of the Republic of Indonesia

-          Mt Muro is expected to generate between 80-100k gold equivalent ounces with a 7 year mine life

-          Key assumptions:         2008                2009

Au Production (oz. in K)              80                  100

Au Price                 $700         $700

Cash costs ($US/kt)      $450         $450

Capex               $10,000             $2,250

Mine life            7 years


Yannarie Solar (NPV ~$65MM)

-          Yannarie Solar located on the west coast of Australia will involve the formation of a solar salt field with an initial annual production of 1.5MM tons of salt starting in 2012, eventually ramping to 4MM tons by 2015

-          It is expected to generate this in perpetuity given the renewable nature of the project

-          Key assumptions:         2012                2013

Production (Mtpa)           1.5            2.5

Price (t)                    $23           $23

Cash costs                $11           $11

Capex                     $1.5          $1.5 ($150MM capex spent in the prior 3 years to develop)

Mine life                  Perpetutity once it hits 4Mtpa


Varomet (NPV ~$50MM)

-          Has 2 main businesses:

o        Supplies Ferro alloy and aluminum to car manufacturers - a smaller piece with higher margins (~10-15%)

o        Trades copper cathodes – larger piece but only has 1% margins

-          Currently trying to deconsolidate this piece and expects to get around $50MM for it (note that ideally management would like to maintain a 30% interest to be close to their end markets)

Note: ~$430MM of debt on SRL’s balance sheet is non-recourse debt from Varomet, which we’ve excluded from the company’s total debt


Exploration (NPV ~$30MM)

-          Should be able to get $30MM net of all costs incurred till date if they were to sell these assets today


Madagascar Coal Mine (NPV ~$150MM)

-          In January 2008 SRL announced that it was purchasing an initial 35% interest in a private company, Red Island Minerals (RIM), which owns an 80% interest in a coal mine in Madagascar for $45MM

-          While it is still early management expects to be able to produce 3-5Mtpa in the next 2-3 years and believes that this could get as high as 6-10Mtpa in a couple of years

-          Key assumptions:         2010                2011

Production (Mtpa)          3.0                         3.0

Price (t)                  $100           $90 (assuming they pay royalty fees of 5%)

Cash costs                $40           $40

Capex                    $100         Maint capex of 7% of total opex ($200MM capex to double prod in 2014)

Mine life                 13 years (could be more though as this is still very preliminary)


Investment Merits:


·         The stub is exceptionally discounted: For ~$160MM investors are getting assets with an NAV of ~$900MM. In addition, upon comparing the stub assets to some publicly traded firms it is evident that they trade at a significant discount (see following table comparing FCX with Tritton and Whim Creek).


SRL Stub Cu Assets vs. Freeport-McMoRan             

            FCX     Tritton  Whim Creek

Mkt Cap     $34,823       $272     $110

Shares         381.9    229.9    229.9

Price           $91.18   $1.18    $0.48

2008 P/E    8.8x      7.5x      3.4x

2009 P/E    8.7x      3.8x      2.4x

2008E EPS $10.39   $0.16    $0.14

2009E EPS $10.47   $0.31    $0.20



Investment Risks:

·         Mine disruptions like the force majeure that crippled Sebuku last year may persist leading to production shortfalls and cost overruns

·         Exposure to commodity prices

·         Persistent discount of the stub without a strong catalyst



·         NAV was calculated using a DCF with a 10% discount rate based on project production and cost assumptions per company management.  



·         Increasing awareness of the valuation of the stub

·         Potential sale/spin-off of some of the stub assets



· Increasing awareness of the valuation of the stub

· Potential sale/spin-off of some of the stub assets
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