Adavale Resources Limited [ASX: ADD]
Metals & Mining
Onto something special
We initiate coverage on Adavale Resources with a 12-month target price of $0.04 – representing a 91.9% upside from the current share price of $0.021. The company is focused on the exploration of nickel resources at its Kabanga Jirani Nickel Sulphide Project in Kagera, Tanzania. Adavale’s first two diamond drill (DD) holes at its Luhuma Central emerging prospect within its flagship Kabanga Jirani Nickel Sulphide Project intersected significant intervals of nickel sulphide mineralisation with nickel grades of up to 0.99%, validating a historically reported (1994) massive sulphide intersection by BHP. We believe Adavale’s first two DD results at Luhuma Central have largely validated Adavale’s exploration strategy and have built confidence in the prospectivity of the company’s other priority target areas within the Luhuma trend.
Targeting prospects adjacent to the world’s largest undeveloped nickel sulphide deposit
Adavale’s Kabanga Jirani exploration licences are adjacent and along strike from Kabanga Nickel Deposit, one of the world’s largest high-grade nickel sulphide deposits (58Mt at 2.62% nickel), indicating the geological prosperity of the project area for significant nickel sulphide discoveries. With the development of Kabanga Nickel Deposit towards production now underway, any possible nickel sulphide discoveries in the region, such as in Adavale’s Kabanga Jirani Nickel Project, are likely to substantially benefit in terms of cost reductions through the infrastructure improvements in the area.
Nickel, a green energy metal with soaring demand
While nickel demand from stainless steel manufacturing is expected to continue to grow steadily, demand for nickel is expected to double by 2040 due to the metal’s use in EV batteries. On the supply side, the lower environmental and operational cost of processing less abundant sulphide ores has made nickel sulphide deposits highly sought after in an ever-increasing ESG regulations environment.
Valuation range of A$0.037–0.043 per share
We value Adavale at A$0.037 per share in a base-case scenario and A$0.043 in a bull-case scenario using a cost-based comparable approach. BHP’s investment into the Kabanga Nickel Deposit valued the project at US$658m, 2.25x the cumulative exploration expenditure of US$293m at the project. Using a similar valuation multiple metric of 2.25x, times the cumulative exploration expenditure at Adavale’s Kabanga Jirani of A$10.9m, we calculate the fair value of the project at A$24.5m in our base case scenario. The key risks to our investment thesis include funding risk, geological risk, jurisdiction risk and commodity price risk.