2 July 2020:  Canaccord Genuity: Breaker Resources NL (BRB): Precious Metals - Developer/Explorer

CG maintain a "Speculative Buy" call on Breaker (BRB) but have lowered their target price to 60 cps (from 70 cps).  BRB closed today (10th July) at 26.5 cps, so there's more than 100% upside from here if CG are correct.

Excerpts:

Focused on Resource growth

Third potential source of Resource growth: The initial three drill holes at the Carbineer prospect, located 400m east of Bombora, have returned gold mineralisation (4m at 21.8g/t, 2m at 3.83g/t and 16m at 0.12g/t) confirming a new source of potential Resource growth for the project. In addition, recent drilling at Kopai-Crescent (3km north) and Bombora Deeps (directly beneath) has also returned mineralisation providing a sound platform for BRB to increase the existing Resource which currently totals 23.2Mt at 1.3g/t for 981koz (82% indicated). Drilling has been largely focused on delineation of the larger system (wide spaced and extensional) which will allow target generation for areas requiring follow up definition drilling. We see this as a logical process given the significant scale of the project (+6km strike length).

As per the new company strategy: BRB pivoted its strategy to Resource growth in late 2019 and deferred pre-feasibility studies considering developing the existing Bombora Resource. While we believe the scale, grade, level of geological confidence and orebody characteristics could potentially underpin a case for project construction, delineation of additional inventory would bolster overall economics and might attract corporate interest. Identification of Bombora Deeps, Kopai-Crescent and Carbineer is evidence of this new strategy materialising and with further extensional drilling planned, we expect newsflow to be of similar nature (defining orebody extents before transitioning to Resource drilling).

Bombora - OP/UG optionality: The Bombora Deeps prospect has introduced the concept of extraction via underground mining methods, noting the existing Resource has assumed Open Pit extraction utilising a cut-off grade of 0.5g/t. Reported intercepts suggest mineralisation is relatively continuous (no trend at depth) and intercepts appear to be of adequate grade and widths to support underground Resources. Application of a higher cut-off grade and a more selective mining method would result in a higher Resource grade (and eventually Reserve grade) which has benefits when scoping/ designing processing plants (lower throughput requirement). If adequate open pit Resources are defined at other prospects and the existing Bombora Resource can be extracted via underground methods at higher grades, BRB will have increased flexibility on project design, which is a positive in our view.

Modeling updates: Following transfer of analyst coverage (see Developer/Explorer Wrap - MarQ'20) we have reviewed our prior DCF(NPV10%) assumptions and made the following changes; delayed development timeline by 12-months (first ore DecQ'22), construction capex increased 33% to A$200m, LOM total production (mined) reduced 10% to 790koz (98% of Indicated Resource) and increased equity funding by 25% to A $100m at A$0.25/sh (valuation diluted for assumed raise, debt to equity ratio 1.5x). As a result of the changes, gold production averages ~100kozpa at an AISC of ~A$1,410/ oz over a 7.5 year LOM producing ~A$110m operating CF annually.

Valuation & recommendation: Our valuation is underpinned by the Bombora production scenario (NPV10%), diluted for assumed future equity raisings and net of corporate and other adjustments. As a result of the changes outlined above we have revised our price target down to A$0.60/sh (from A$0.70/sh). We highlight that our valuation does not capture any Resource growth which is actively being pursued by the company and while it is difficult to quantify, we see upside on discovery or growth of Resources given our base case is derived from the existing inventory.

On a YTD basis BRB has relatively underperformed, returning -2% vs its peer group (ex DEG and MGV) at +65%, we are of the view this is driven by the strategy change late last year and the time it takes to scope, plan, execute and analyse results. We see this value lag as opportunistic for investors should the company achieve it goals to grow the Resource base and further de-risk the project, maintain SPECULATIVE BUY rating.

--- click on the link at the top of this straw for the full broker report ---  [I don't hold BRB]

I do note in the "Required Company-Specific Disclosures (as of date of this publication)" section on page 4 of the report, they say: "Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking services from Breaker Resources NL in the next three months."

This is not unusual, but it is something to keep in mind when using these reports as a guide to whether a company might be a good investment or not.  Or, in the case of this company, as with all zero-revenue companies, whether this might make for good speculation - as these companies are not investment grade.  I own shares in such companies myself, but I don't regard them as investments, because you are owning them on the basis that you'll be able to sell them one day for more than you bought them for (speculation) rather than owning a share of a company that produces something or otherwise generates revenue from doing something productive - OR you own them because you believe that they are going to (or are likely to) become a producer at some point and then become investment grade. 

I will only expose a relatively small percentage of my capital to such companies, basically only as much as I feel I can afford to lose 100% of without it being too much of an issue for me - if it comes to that.  You don't expect to lose all your money on a position in any company, but it does happen occasionally with some of these ones. 

BRB has been around for about 8 years, and they've always had a good story, probably never more so than now, however we have Canaccord Genuity here still plugging them but lowering their target price by 10 cents at the same time, while admitting that they expect to have BRB as Investment Banking clients within the next 3 months.

Like I said, that's par for the course (not unusual at all), however it's a good idea to remember that when trying to place a value on the information and opinions (and projections/forecasts) contained in reports like these.  It's not all bulldust by any stretch, but it is likely to be written from a biased viewpoint, as most things are.  Based on verifiable facts, but perhaps tilted towards optimism rather than pessimism, similar to the sort of material that the company might produce themselves.