Weatherly International- a Namibian copper company with plenty of potential

Weatherly International (WTI) has been on my watch list for quite a while now and last week it was added to the Contrarian Investor UK portfolio on the market sell off precipitated by the Egyptian crisis. WTI is not an easy company to research with a complicated history and varied assets some in production others in development. It certainly is a turnaround story having come back from the brink in 2009 during the global financial crisis when its shares dropped to a couple of pence after being close to 30p in 2007. It has a full portfolio of assets, some already in production, so there is no exploration risk.

Background and assets
AIM listed, Weatherly International (WTI), was founded in 2005 by Australian Rod Webster (current Chief Exec).

In 2006 Weatherley bought the insolvent assets of Ongopolo, a Namibian copper producer, with the objective of turning around the performance of its mining and smelting operations. However, by 2008 a global collapse in copper prices meant the project was uneconomic despite production of 2645 tonnes of copper and the mines were mothballed or shut in October of that year with production ceasing in December 2008. Focus moved to the smelter which was subsequently converted to a stand-alone tolling business.

Weatherly has the following major mining interests in Namibia:
Copper assets :Working Otjihase, Matchless, Development: Tschudi open pit, Tsumeb West, Tsumeb Tailings
Zinc assets: Berg Aukas

It also has Manganese assets in Burkina Faso with partner Wadi but this has been put on hold due to licence and railway issues.

The existing licences and resources are sufficient to sustain a copper mining business capable of 20,000 tonnes per annum at an average industry cost of production for the next ten years. Mining was restarted in July 2010 at the Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) (Central Operations) and full production is expected by the Second Quarter of 2011.

About Namibia
Namibia is a country in southern Africa whose western border is the Atlantic Ocean with a population of just over 2 million. It shares land borders with Angola and Zambia to the north, Botswana to the east and South Africa to the south and east. It gained independence from South Africa on 21 March 1990 following the Namibian War of Independence. Its capital and largest city is Windhoek. For an African country it is considered a stable, democratic country.

Funding
In mid 2010 a $7 million fund raising was complete with Louis Dreyfus Commodities Suisse S.A. Later in the year, the smelter (Kombat) was sold for $3.3million to Grove Export, contributing to a $9 million profit. In November 2010, the company raised further £4.4 million with a placing at 5p.Weatherly also has the benefit of $140 million of carried forward tax losses to offset agains future profits.

Major shareholders
Dundee Precious Metals 7.56%
Bank Windhoek 6.34%
RAB Special Situations Master 5.86%
Webster, Rod J 5.11% (Chief Exec. of Weatherley)
Gartmore Investment 4.73% (reduced following a disposal on January 12th)
Martinick, Dr Wolf G 3.60% (Chairman of Weatherly)
Ezenet 3.42%

Third party deals
In 2009 DPM (Dundee Precious Metals) subscribed for over 40 million shares in Weatherley at 3p per share for £2m, the company also signed a LOI (letter of Intent) with East China Mineral Exploration and Development Bureau (ECE) where they would subscribe for a 50.1% stake in WTI for £16 million. This latter deal with ECE was cancelled in 2010 when the Smelter assets were sold to DPM.

In July 2010, Weatherly signed a Memorandum of Understanding (MOU) with East China Mineral (ECE) to establish a joint venture company (ECE 65%, WTI 25%, WTI S/H 10%) to pursue development of Berg Aukas Lead/Zinc project in Namibia and set up a new UK company, China Africa Resource (CAR). In September, WTI signed a legally binding Implementation Agreement with ECE, whereby ECE will provide funding of £4.8 million for the transfer of the Berg Aukas mine to CAR. Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.

The company entered into an off take agreement with Louis Dreyfus Commodities Metals in mid January 2011 for around 10% of total production to effectively de risk the initial start up phase. The forward sales contract entered is for 975 tonnes of copper to be delivered progressively over an 18 month period at a fixed price of $9,260 per tonne (current copper price is $9,489/tonne). Concentrate production is expected to commence in mid February and the first delivery under the forward sale contract is scheduled for the end of April.

Future development
The Tschudi open pit already already has enviromental approval. Production estimated at 11,000 tonnes of copper by 2013.

Financials
The company currently has a market capitalisation of £68 million with 535 million shares in issue. Debt is £4.6 million (as of 2010) with cash of $14.7 million (£9.2 million). The company Chairman (Martinick) and Webster (Chief Exec) own 46.6 shares, 8.7% of the company.

SWOT
Strengths
Producing copper assets at  Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) with minimum 5 year mine life
Copper price strong at close to $9500 per tonne
Low cost of production $3,258 per tonne at Otjihase and Matchless
No exploration risk
$140 million of losses able to offset future production
Good institutional shareholder base e.g. Gartmore and Blackrock
Namibian government large shareholder which may derisk licences etc.

Weaknesses
Success geared to copper price
Activity focused on one country - Namibia (but low risk for Africa)
Blighted history
AIM listed so volatile

Opportunities
Investors in Weatherley will get shares in CAR (China Africa Resource) when CAR is floated in AIM in Spring 2011-  Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.
Good development pipeline e.g. Berg Aukas, Tschudi open pit
Continued weakening of dollar boosts commodity prices priced in U.S. dollars

Threats
Delay in listing of China Africa Resources
Namibian political situation (considered low risk)
Delays in production ramp up at Otjihase and Matchless copper mines
Further fund raising (low risk due to forward selling contract with Louis Dreyfus Commodities Metals
Collapse in copper demand and price e.g. China

Outlook
If every falls into place during Q1 2011, things look very positive for Weatherly given its undemanding rating and low market capitalisation of just £68 million. With full scale production from Otjihase and Matchless of over 4000 tonnes in 2011 and close to 8000 tonnes in 2012 plus some interesting development projects such as Tschudi coming on stream in 2013 . So this should be a year to put its past mistakes behind it and look forward to 2012 and 2013. If we conservatively assume net profit of $4,500 per tonne of copper in 2012 and production of 7500 tonnes, that would make earnings of $34 million (£21.5 million).

The usual risks of investing in Africa have been reduced by Rod Webster's excellent work in getting the Namibian government to have a large shareholding and thus incentive for future success.

NOTE FOR THIS POST:
I may well have missed a pertinent fact for WTI. Please comment here or contact me directly to correct any errors or inform me of any additions. It's a complicated but compelling story. Thanks!