The term 'total capability' or in other words 'mine to metal' is a rare claim in the resources sector, let alone at the small cap end of the spectrum, but that is exactly what Jubilee has achieved in its 8 years in existence.  The company is debt free, close to generating significant cash flows in the near term and experiencing strong industry interest for its unique PGE (Platinum Group Element) processing technology.

Jubilee's flagship assets are the Tjate PGE project in South Africa and the ConRoast processing technology brought on board through the company's 2009 acquisition of Braemore Resources.  The Tjate project is a vast platinum resource located in the eastern Bushveld complex in the North East of South Africa. It has a South African Mineral Resource Committee (SAMREC) compliant resource of 22.3 million ounces of 3PGE+AU (Platinum, Palladium, Rhodium and Gold) and is currently the subject of a preliminary feasibility study.

ConRoast is a processing technology which offers a unique method of processing chrome rich UG2 platinum reefs and platinum concentrates from treating chrome tailing dumps  Jubilee is in the process of developing the first commercial ConRoast smelter in Middelburg, South Africa and already has preliminary agreements with two companies capable of supplying the PGE concentrate to commence a viable operation.  However, all roads lead back to Middelburg which will be the site of Jubilee's centralised processing facility.

In terms of value, we attribute $168 million to Tjate and $14 million in costs for outright ownership of Thos Begbie.  These two assets alone yield a 50p target price for the company, but with two potential smelting scenarios with Sylvania and Northam potentially adding $143 million and $69 million respectively, our target price could jump to 107p.  Jubilee enjoys a unique position among its peers, and with a robust resource and near term cash flows expected, our stance at 28p is buy with an initial target of 50p but an upside target of 107p.

*Jubilee Platinum is a corporate client of Bishopsgate Communications, which is owned by Rivington Street Holdings (RSH), the ultimate owner of GE&CR. Another RSH subsidiary manages funds which own Jubilee shares.

Background

Incorporated in June 2002 before raising £2.2 million as part of its AIM listing a month later, Jubilee's immediate focus was on the PGE (Platinum Group Element) sector.  While early interests in Canada and Ethiopia have since been divested, interests in Madagascar and, most significantly, South Africa remain.  Early stage exploration assets were secured in Madagascar in 2004, while a 25% interest in the Black Economic Empowered (BEE) Tjate Platinum Corporation (South Africa) was acquired in December 2004 for £3.1 million.  This interest in Tjate was gradually increased through the purchase of another 10% by agreeing to invest £1.2 million to fund partly a feasibility study, while the purchase of a 49% interest in NewPlats took Jubilee's direct and indirect holding in Tjate to 48.72%.  The failure of Black Economic Empowerment (BEE) stakeholders to exercise their pre-emptive rights to acquire a further 15% in Tjate meant Jubilee picked this interest up to take its stake to 63% - a stake it maintains today.

A secondary listing on the Johannesburg Stock Exchange was made in November 2006 in order to raise the company's exposure in South Africa and to increase the range of funding options available.

Braemore

UG2 ore is composed primarily of chromitite and therefore has a relatively high chrome content.  Platinum mines in South Africa have traditionally targeted Merensky Reefs, which have little or no chromite compared to UG2 and a simpler processing profile but as mining costs increase, the easily accessible Merensky reefs are increasingly being mined out.  Thus, with platinum a significant part of the South African economy, the government, in 1994, through its wholly owned company Mintek, sought to develop a process to handle chrome rich PGE concentrates from UG2 reefs as well as to reduce the level of SO2 (Sulphur Dioxide) emissions produced.  The result is ConRoast Process, a smelting technology that controls emissions by removing in one pass sulphur from concentrates prior to smelting, while handling higher levels of chromite by dissolving the chromium in the slag.  More than a decade later Braemore Resources plc, having acquired exclusive global access to Mintek's proprietary ConRoast technology for the remaining life (2020) of its patents, was on the brink of providing a toll treatment service to miners of UG2 ore. 

Jubilee, seeing the applicability of ConRoast to its own operations, as well as the near-term cash flow potential from toll treatment, announced its intended takeover of Braemore on 3rd July 2009 after conditions and circumstances became conducive to the two companies coming together.  The acquisition was completed on the 30th of October 2009 and Braemore Resources was absorbed into Jubilee under the subsidiary Braemore Platinum Smelters (Pty) Ltd.

Operations

Having acquired Braemore in October 2009, Jubilee now operates across the entire resources spectrum from exploration and development to processing by way of smelting and refining.

Exploration / Development

South Africa

Tjate Project (63% interest)

The Tjate Platinum Corporation Ltd (TPC) holds the prospecting rights to three contiguous farms - Dsjate, Fernkloof and Quartz Hill – covering a total of 5,143 hectares in the eastern Bushveld of South Africa.  The farms are down dip of Implats' operating Marula platinum mine and Anglo Platinum's Twickenham platinum project.  Jubilee owns 63% of TPC with its BEE partners owning the remaining minority stake.

A SAMREC code-compliant resource, issued on 4th June 2009, estimated Tjate to include 22.3 million ounces of contained 3PGE+AU (Platinum, Palladium, Rhodium and Gold) hosted within two reefs - Merensky and UG2.  Geological losses of 16% on Merensky and 20% on UG2 were incorporated in the resource definition.

Tjate's geological advisers, believe that the current borehole and resource data, covering around 45% of the total Tjate project area, suggests that an exploration target of up to 52 million ounces of 3PGE+AU (after geological losses) is a realistic target and would give Jubilee an enviable deposit.

The estimated resource at Tjate is reflective of a wider trend in the PGE industry where an increasing proportion of platinum resources are being found in UG2 reefs which, with their elevated levels of associated chrome, have presented processing problems for traditional smelters.  Whilst this is an issue for other companies, Jubilee's ConRoast Process technology means it has an in-house solution and independence from external smelters.

Since the excitement generated by Jubilee's resource announcement in June 2009, the company has accelerated work on the Tjate bankable feasibility study which began in 2008, and has appointed Snowden Mining Industry Consultants to manage the engineering, financial and environmental assessments.  A preliminary feasibility statement is due in late 2010/early 2011, and will include up to 42,000 metres of infill drilling and metallurgical test work on the UG2 chromitite reef to strengthen the both the mineral resource estimate and the deposit's economic evaluation.  In the expectation that the preliminary feasibility study is positive, the definitive feasibility study would commence straight away.

Maude Mining & Exploration (65% interest)

Maude Mining & Exploration holds the prospecting rights for PGE's in the Bokfontein JQ448 and Elandsdrift JQ467 licences as well as the chrome rights at Elandsdrift in the western Bushveld Complex, South Africa. Early shallow drilling over a total of 600 hectares, at Bokfontein revealed a low PGE-bearing chromite reef, but such early discoveries were not repeated at Elandsdrift.  Preliminary results from 61 samples taken at a surface dump of material mined by others for chrome from its Bokfontein property returned an average of 2.5 g/t 2E (platinum and palladium).

Madagascar

Ambodilafa Project

Covering a licence area of 98 square kilometres the Ambodilafa licence, like Londokomanana, is prospective for nickel, copper and PGEs.  It is operated under an extended  joint venture with Impala Platinum Holdings Ltd, which is optioned to earn a 51% interest by spending $5 million over 4 years. Ambodilafa is located 160 kilometres south west of the capital city of Antananarivo.  The currently identified strike length is some 17 kilometres long and up to 5 kilometres in width.  Radiometrics identified a mafic-ultramafic intrusion zone with grid soil sampling completed in 2009 identifying an elevated nickel anomaly – an anomaly that will be tested with a scout drilling programme this year.

Processing

Braemore Platinum Smelters

The acquisition of Braemore Resources in October 2009 was strategically significant for Jubilee as it provided a downstream smelting technology to complement the pipeline of upstream PGM exploration and development projects it already possessed.  Braemore Resources was absorbed into Jubilee through the creation of a 100% owned subsidiary named Braemore Platinum Smelters (Pty) Ltd which took over the exclusive worldwide licence to Mintek's ConRoast technology through until 2020.

The acquisition came with a 3.2MW ConRoast furnace located in the Johannesburg suburb of Randburg.  In March 2010 the demonstration DC arc furnace smelted its 50,000th tonne of PGM material and shortly after the ConRoast research and development programme was concluded.  Ownership of the facility was passed back to Mintek who continues to support Jubilee as ConRoast enters the commercialisation phase. 

Jubilee's first major step in the commercial application of its ConRoast process technology was announced on the 4th of February when it announced a strategic partnership with Sylvania Resources.  A new smelting company is to be established to undertake smelting and refining activities using Jubilee's ConRoast technology, with ownership of the new venture to be split 70:30 Jubilee:Sylvania.  A second company (50:50 ownership split) will also be established to undertake the processing of future platinum tailings opportunities.

Based on the future operations of Sylvania, the new smelting company envisages installing up to three 8MW ConRoast  furnaces with a centralised refining facility, and Sylvania to conclude an off-take agreement to provide all of its uncommitted PGM concentrate.  The new tailings company will also conclude a similar agreement for its own PGM (platinum group metals) source material.

The centralised refining facility agreed with Sylvania (and subsequently Northam) was announced on the 4th of May 2010 after Jubilee acquired a 70% interest in Thos Begbie Holdings, the owner of a ferro-alloy smelting facility in Middelburg, South Africa.  The Middelburg site has a 10MW gas-powered generator facility and separate 6MW municipal (Eskom) supply, as well as two 2MW arc furnaces. Thos Begbie through Jubilee is in the process of completing the construction of a 3.2MW DC arc furnace for ConRoast.  Of the expected ZAR14 million capital cost for the new furnace, ZAR5 million has already been incurred and Jubilee will fund the remaining ZAR9 million.   Middelburg provides Jubilee with an operational site already hosting significant usable infrastructure, power and skilled labour, as well as the requisite environmental permits for the smelting of precious metals.  Permit applications have already been submitted to increase the site's smelting capacity, while Jubilee has now commissioned Environmental & Process Solutions (EPS) to undertake the engineering and design study to fast track the commissioning of the new 3.2 MW ConRoast DC ARC furnace at Middelburg.  Funding has been secured for the ConRoast furnace, and current timetables have it commissioned in early 2011.

Jubilee paid $10 million for the 70% interest in Thos Begbie and has also been granted an option over the remaining 30% interest, with the option expiring on the 31st of December 2010 and exercisable at a total price of $4 million. 

The roll out of Jubilee's ConRoast technology continued on the 15th of July with the announcement of a Memorandum of Understanding (MOU) with Northam Platinum Limited.  The Agreement will see the two companies establish a joint venture to evaluate the feasibility of constructing and operating a 5.6MW DC arc furnace facility to treat the PGM concentrate from Northam's soon to be productive Booysendal mine in the north west of South Africa.  Jubilee has an existing relationship with Northam after the company provided platinum concentrate for testing campaigns at the Mintek operation.  Any future furnace would be constructed at Jubilee's Middelburg site and concentrate transported from the Booysendal mine.

In the long term, in addition to slag and tailings dump toll treatment, a ConRoast furnace will be used to process the ore at Tjate.  Being able to process Tjate's ore in-house will not only save Jubilee time and money but also offer superior recovery rates and lower emissions which will further enhance the project's economics. 

Strategy

The vertical integration (total capability) provided by the addition of Braemore's ConRoast technology is the envy of Jubilee's capitalised peers and gives the company an expected cash flow profile which will enable it to reduce its reliance on external assistance for funding its development plans. At an operational level, securing access to tailings dumps is a high priority for Jubilee and the upgrade of the company's newly acquired Middelburg smelter to incorporate a 4MW ConRoast DC arc furnace goes  hand in hand with this search. 

Jubilee's strategy for its ConRoast technology is to develop a smelting and base metals refinery complex, capable of treating an annual 360,000 tons of concentrate to produce up to 1 million ounces of PGMs, 30,000 tons of nickel and 15,000 tons of copper.  This will not only provide near term cash flows for the company, but also a base from which to develop and eventually process concentrate from Tjate.

Further market acceptance and desirability is evidenced by the signing of an MOU with Northam Platinum Limited.  The proposed Joint Venture intend to  construct, pending the outcome of the feasibility investigation a new 5.6MW DC arc furnace facility using ConRoast technology to treat the PGM concentrate soon to begin flowing from Northam's Booysendal mine.  However, with such fervent activity occurring with ConRoast and Tjate, the Madagascan projects will be maintained as greenfield exploration sites until current priorities are satisfied.

At a corporate level Jubilee is targeting the mid-cap arena, where it can expect to gain a greater institutional following and the scale necessary to bring sizeable projects into production alone.  The development of Tjate will necessitate the assumption of debt, but until then Jubilee is poised to remain debt free and the cashflow generated by Braemore will make it easier for Jubilee to secure project funding for Tjate's development.

Board of Directors

Chief Executive Officer, Leon Coetzer.  Having spent 20 years with the Anglo American group, Coetzer left to become the chief executive officer and managing director of Braemore Resources plc.  Having trained as a chemical engineer, Coetzer is a member on the process engineering faculties advisory boards at both the University of Pretoria and the University of Stellenbosch, as well as an executive member of the South African Council for Automation and Control.

Non Executive Chairman, Colin Bird.  A Chartered engineer, Fellow of the Institute of Mining and Metallurgy and Certified Mine Manager in both the UK and South Africa, Bird is an industry veteran with in excess of 40 years of mining and exploration experience.  Past positions include mine management with Anglo American Coal, Mining Manager of the Selebi Phikwe nickel copper mine in Botswana, and General Manager, and subsequently Technical/Operations Director, at Costain Mining's Spanish, Argentinean and Venezuelan gold, industrial mining and coal assets.

Executive Director, Andrew Sarosi.  A member of the Institute of Mining and Metallurgy UK, mineral processing engineer and consultant Sarosi has been developing, managing, and commissioning gold, silver, tungsten, tin, copper and zinc projects in Saudi Arabia, Ethiopia, South Africa and the UK for over 35 years. Currently a consultant to the mineral resources industry and an advisor to Lion Mining Finance Ltd, Sarosi has worked as the senior metallurgist at Amax Hemerdon Ltd, commissioning engineer and mill superintendent at the Saudi Arabian Mahd Ad' Dahab Mine and metallurgical advisor and representative commissioning engineer at Mackay and Schnellmann Ltd.

Finance Director, Eduard Victor. Having acquired his industry accounting qualifications with Malan & Du Preez, Victor became financial manager of Harmony Gold Mine from 2000 to 2006, including a period as acting mine manager with their Evander gold mine. Before facilitating Braemore's financial integration with Jubilee, Victor was an executive business manager with Pan African Resources plc from 2006 to 2009.

Non-Executive Director and Deputy Chairman, Dr Mathews Phosa.  Former non-executive chairman of Braemore Resources and Premier of the South African province of Mpumalanga, Dr Phosa serves on the National Executive Committee of the ANC and is Treasurer General of the ANC.  Having pioneered planning interaction between the private sector and government, Dr Phose sits on the board of several prominent South African companies including Vuka Forestry Holdings Pty Ltd, the University of South Africa and Technikon Southern Africa Council.

Non Executive Director, Chris Molefe.  Current Non-Executive Chairman of Merafe Resources Ltd and Non-Executive Director of Astrapak Ltd, both of which are publicity listed companies in South Africa; Molefe has over 20 years of experience in corporate banking and industry.  Initially Group Human Resource Manger at Union Carbide Africa Corporation, Molefe subsequently gained the roles of Corporate Affairs Manager at Mobil Oil Southern Africa (Pty) Ltd, Executive Director at Black Management Forum, Financial Analyst at Chase Manhattan Bank, Marketing Manager at African Bank Ltd, Executive Manager at Transnet (Propnet) (Pty) Ltd, and Executive Director at Dipapatso Media (Pty) Ltd.

Significant Shareholders

Of the 254,463,290 Jubilee shares currently in issue, the following shareholders each hold over 3% of the issued capital.

In addition, there are 5,345,000 Jubilee options in issue at exercise prices ranging from 16p to 95p.

SWOT Analysis

Strengths

Total capability – Braemore gives Jubilee the total capability to take a green field project through development and into production entirely in-house and thus avoiding the expense and inconvenience of third party involvement.

Major resource – Tjate is a truly world class resource and with a controlling 63% interest in the project, Jubilee can dictate development plans and schedules.

Impending cash flows – pre-production cash flows are usually nothing but a pipedream for junior miners, but Jubilee will achieve just that when it begins treating smelter slag and then third party tailings dumps in the short-medium term. 

Exclusive ConRoast access – Braemore has secured the exclusive global rights to use the ConRoast technology until the end of its patent in 2020.  Being a superior treatment process to traditional methods, and with UG2 reefs forming an increasing percentage of mined platinum resources, ConRoast puts Jubilee in a position of strength.

Financial strength – Jubilee is debt free and should be generating its own cash flows shortly.  While the company has historically funded its activities through equity issues, this may be confined to major project funding once Middelburg is established with ConRoast smelters.

Weaknesses

Company size – now that Jubilee is looking to develop Tjate, the level of finance required takes a major step up from exploration.  While the increased funding needs are a clear sign of progress, the amount of funding required to develop Tjate is many multiples of Jubilee's current market capitalisation and thus financing could prove challenging.

Opportunities

Exploration potential – while major upside remains at expanding the resource at Tjate, Jubilee's other prospects are also worth remembering as being capable of expanding Jubilee's total resource base.

3rd party treatment – while the roll out of ConRoast as the PGM industry's smelting process of choice is the eventual goal, the first steps of this objective are already happening with agreements with Sylvania and Northam.  The acquisition of Thos Begbie will also provide the capacity to treat 3rd party concentrate for a fee.

Threats

Project risk – incorporating development and reserve/resource estimation risk, project risk exists as the difference between expected and actual operating costs, cash flow returns, ore volumes and grade of ore mined / processed.  These are not unusual, but demonstrate the inherent uncertainty in the resources sector.

Market risk – includes commodity price volatility and raising the money to fund project development.  Commodity prices are at the mercy of global production and economic trends, currency exchange rates and industrial demand fluctuate, while there is no guarantee that the necessary funds can be raised even if partners are brought in.

Tailings dump access – the competitive market for access to tailings dumps means that should the company fail to secure access to these resources there will be a large gap in its expected cash flows in the medium term.

Political Risk – to date South Africa has avoided the sort of majority rule problems experienced by Zimbabwe and – in the past – Mozambique. However, there are concerns that the ruling ANC party is moving in a more business-unfriendly direction.

Licence expiration – the expiration of Braemore's exclusive licence to use Mintek's ConRoast technology in 2020 looms large on Jubilee's horizon.  While the company would hope to have established itself as the ConRoast king by then, if the process becomes as successful as Jubilee envisages, the queue to use ConRoast from 2020 will be long.

Valuation

The overwhelming majority of our basic valuation on Jubilee comes from the Tjate project as this is the most tangible and measurable asset in the portfolio.  We have assigned no value to Maude and the Madagascan assets as the absence of a resource estimate or definite route to value creation means a valuation would be beyond speculation.  The tie-ins with Sylvania and Northam will, if executed, flow through to substantial bottom line cash flow, but hinge on developments at Middelburg.  While the agreements are yet to be formalised there is considerable upside potential as two scenarios below attest.

With production not expected until at least 2015, we have valued Tjate based on its defined resource.  On the assumption that the extracted 3PGE+AU mix is 60% platinum, 30% palladium, 8% gold and 2% rhodium, and using per ounce metal prices of $1,300 for platinum, $400 for palladium, $1,000 for gold and $1,800 for rhodium, we derived a weighted average metal price of $1,016 per ounce.  Applying 99% and 97% in-situ risk weightings to the inferred and indicated Tjate resource of 20.365 million ounces and 1.964 million ounces of PGE+AU respectively, we derive an in-situ value on Tjate of $168.1 million after applying Jubilee's 63% interest and $1,016 average metal price.

As for the Sylvania agreement, a single 8MW ConRoast furnace, one of three discussed with the company, would be capable of treating in the region of 5,500 tonnes of concentrate per month.  If we assume that the concentrate contains an average grade of 100 g/t 3PGE+AU at a ratio of 60:30:8:2 platinum:palladium:gold:rhodium, that the concentrate cost is 75% of the revenue received ($1,016 as per our basket of metals above) and that operating costs were 2000 SAR ($285) per tonne, such an operation would yield Jubilee (70% interest) $29 million per year.  Assuming it takes a year to establish and then operates for the remaining life of Jubilee's exclusive agreement to use ConRoast (up until 2020), at a capital cost of $10 million and discount rate of 10% per annum, the single furnace has an NPV (net present value) to Jubilee of $143 million. 

A 5.6MW DC arc furnace as proposed with Northam, under the same assumptions as above for Sylvania, but treating approximately 4,000 tonnes of concentrate per month, would yield Jubilee $14.6 million per year under a 50:50 agreement.  With a similar 1 year delay, 9 year operating life and $7 million capital cost, the NPV to Jubilee is $69 million.

After adding the $168.1 million valuation of Tjate to the $14 million cost of acquiring a 100% interest in Thos Begbie, applying a USD/GBP exchange rate of $1.30, dividing by the 254 million shares in issue and applying a 10% secondary risk weighting to incorporate such risks as country, financing, permitting, delay and currency, we derive a target price of 50p per share.  However, incorporating both the Sylvania and Northam smelting scenarios outlined above sees the target price jump to 107p per share.  While these scenarios are unlikely to be as described here, our analysis provides a guide as to the potential of such operations. 

Jubilee has a solid core and exciting potential.  With its total PGE capability we rate the company a buy and value its shares at 50p, with strong potential to go higher and an upside target price of 107p.

*Jubilee Platinum is a corporate client of Bishopsgate Communications, which is owned by Rivington Street Holdings (RSH), the ultimate owner of GE&CR. Another RSH subsidiary manages funds which own Jubilee shares.

This research note cannot be regarded as impartial as GE&CR has been commissioned to produce it by Jubilee Platinum*, it should be regarded as a marketing communication.

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