The Cobar Comeback... Pt 2

Revisiting an old story

In the prior version of this blog two and a half years ago I wrote up a turnaround story on Aurelia Metals (“The Cobar Comeback”) which I mentioned I still own today in the rehash (“We’re back (for now)”). I pitched the play for a number of reasons which I’ll briefly recap below and gave a ballpark valuation of 28cps (it was ~11cps at the time). So with the stock today trading around that target valuation of ~A$450m you may ask why I haven’t cut and run already.. this note looks into why I still hold a position; gives a brief overview of what’s happened in the past two and a half years (including the most recent quarter which dropped today) and looks into what’s next.

Brief recap:

Aurelia was a basket case at the start of 2024. It had one Asset that had just gone on care and maintenance (Hera), another about to enter care and maintenance (Dargues), a mine that was running sub-optimally processing <500ktpa through a ~800ktpa mill (Peak), a development project that required a lot of time and capital (Federation) and effectively a brand new management team. And if that wasn’t enough.. it had torched shareholders funds for the prior two years (SP from ~50cps to ~10cps) and was on every fund manager and retail shareholder’s blacklist. Nobody wanted to touch it (except Lyn Brazil).

The bet back then was that the new management team would be able to execute on the high grade Federation project which would bring both high grade and low cost ore given it was utilizing latent processing infrastructure the company already possessed. Big bump in revenues plus very small bump in operating costs = winning!

The basis of my valuation was that a combined Federation & Peak operation would generate A$150m margins per year (A$150/t ore x 1.0mtpa) and that at 3x multiple (given Asset quality, risk & mine life) you’d have a ~A$450m company (plus/minus some adjustments for capex and net debt/cash). It was trading at ~A$185m MCAP.

---

The last 2.5yrs

It’s been a solid 2.5yrs of execution for Aurelia.. they closed Dargues out - rehabilitating the site and repurposing its ball mill and other pieces of infrastructure at their Cobar operations.. they executed the build at Federation where it approaches nameplate capacity, are at the closing stages of a plant optimisation project to expand and improve the Peak process mill from ~0.8mtpa to ~1.2mtpa and have begun works on developing an exciting new copper mine (Great Cobar).

The only caveat/s to the above was a poorly timed hedge book that cost the company over A$30m… and the major one - finding out that the Federation deposit was drilled out at the wrong angle (one last hand grenade from prior mgmt!).

Without boring you with the detail on that last point - the interpretation of the orebody before opening it up was it was a fairly continuous ENE trending ‘blob’ but in reality it turned out to be a series of smaller stacked NNE lenses in an overall ENE trending orebody. What does this mean (note I am no technical expert)? In simple terms - compared to initial expectations it’s harder/more complex to rip the rock out of the ground (smaller stope sizes, added development, higher dilution) which means lower productivity/higher costs. The company has done extensive infill drilling, updated JORC resource/reserves and redesigned the mine plan.. and this was much of the reason for the huge rug pull that occurred in the stock in June 2025.

The Aurelia story for the past 2.5yrs has been one of execution rather than growth - with the drill bit prioritised on infill drilling to give more confidence to the next few years of the mine plan.. and managements focus has been on optimising operations. But with the tunnel boring exercises at Federation (to push the decline to the bottom of known mineralisation) and Great Cobar (to push the decline from New Cobar to Great Cobar).. nearing completion it will mean exploration drill pads can soon be established allowing for underground drilling to target resource extensions.

The below charts summarise how the company has performed over the past 2.5 years operationally and financially. As you can see - there has been huge amounts of capital sunk by the company to improve operations and those investments I believe are about to bear fruit (you only need look at todays quarterly release).

Aurelia has just finalised the refinancing of its debt and rehab bonding facilities with new enlarged facilities from a syndicate of reputable financial institutions. With no debt (the new facility is undrawn), A$143m cash at 30-Jun, the hedge book extinguished, the Federation and Peak mill optimisation projects in the final stages of execution and an exciting growth (copper) project underway, the future looks bright here..

---

The Future

All extractive industry projects are finite but they can differ materially in how they deplete and thus the economics. Take a look at the oil industry for example where you have shale oil projects that are quick and relatively inexpensive to develop but deplete rapidly and require constant capital reinvestment. Contrast this to offshore deep water oil projects or Canadian oil sands which require enormous amounts of upfront capital, but deplete far slower and require far less ongoing capital once established.

This is much like base and precious metals projects. You can have a giant porphyry system which costs a gazillion dollars to get up and running but can then go for multiple decades without much new capital investment… or you can have a system of many small high grade pods of ore which are cheaper to bring into production but deplete every other year and the capital earned from one orebody needs to be reinvested to open up another.

The trap with the latter category (like in Shale) is they give the illusion of a cash printing machine (especially when looking at EBITDA only).. only the cash never seems to make it back to shareholders pockets and instead needs to be recycled into the ground.

Aurelia’s Cobar deposits have previously been described as “rats and mice” deposits that fall into this latter category … and historically this hasn’t been untrue. But I think the market is missing the fact that the company has or will soon have two anchor orebodies that are high grade, have a combined JORC resource of ~16mt at >3% CuEq (which at a processing rate of 1.2mtpa is a 13yr LOM) and have ample room to grow with additional drilling.. especially as I noted previously that the nature of Cobar deposits are that they extend far greater vertically than they do laterally which you can see with CSA, Endeavour and Peak - they all go >2km below surface.

Last June Aurelia held an investor day where they provided three year guidance out to FY28 (30 June end financial years). Below is the actuals for FY25 & 26, the guidance the company provided for FY27 & FY28 at that investor day and my guestimate on FY29 with Great Cobar ramped up.

As you can see I believe the earnings and cash flow are about to explode as both capex winds down and production ramps up. And you only need to look at today’s 2Q26 report to see this… they generated A$53m operating cash flow (A$212m annualised) despite building 43kt of inventory as the plant is constrained until the expansion projects are finished this coming quarter (ore mined: 273kt; ore milled: 230kt).

Recall in part1 I believed Aurelia would generate A$150m EBITDA by processing 1mtpa at a A$150/t ore margin. Now I think they can do A$300m EBITDA in the not too distant future by processing 1.2mtpa at a A$250/t ore margin. That margin growth has primarily come about from commodity price inflation as gold doubled (from US$2,000/oz to US$4,000/oz), copper went up substantially (from US$3.90/lb to US$6.30/lb) and zinc too (US$2,400/t to US$3,600/t). Furthermore smelter charges (TCRC’s) have dropped from ~A$30m to ~A$10m pa despite higher concentrate volumes. On top of this the growth & optimisation work they have done by spending A$286m of capital in the past 2.5years has allowed for added volume and increased productivity (which has kept a lid on costs). So the margins have exploded despite the change in geological interpretation at Federation which has caused higher dilution and lower productivity at that operation.

---

Valuation

I decided to be consistent with my prior valuation work here which is to price this thing at 3x EBITDA. This may be conservative given there is a high probability the mine lives of the two anchor Assets are multi decade and the capital requirement (the gap between EBITDA and FCF excl tax) should be quite low post the next years spend to open up Great Cobar. You could also argue this is very conservative considering what the operation next door (CSA) sold for last year (A$1.7bn) which has a similar production profile (treating ~1mtpa at 3.5% Cu)…. or what copper multiples are today (AMI will shift to copper dominant from FY29 as you can see above). At the end of the day it’s a crude estimate and the intention is to be on the conservative side (but go and do a DCF or similar if you prefer).

---

The End Game

I mentioned at the start that nobody wanted to touch this thing a few years ago.. except one man - Lyn Brazil… who started buying shares in Aurelia in late 2022 and had amassed a ~19% holding by June 2023.

Well Brazil hasn’t stopped there.. he acquired a further ~80m shares or ~5% of the company in the past two years… at a cost of A$17.6m (average cost ~22cps). and now holds ~24% of the company. The below purchases show something quite interesting.. every year in early September and early March - Brazil appears on market bidding for stock.. and usually acquires around 20m shares.

For those not familiar with asx rules - there is something called the “creep rule”… which states that if someone has built a position over 19% they are restricted to adding to their position at a rate of 3% every 6months without making a takeover offer. Brazil appears to be timing his purchases around the 6 month mark in order to abide by the creep rule… and he’s been buying as high as 31cps earlier this year.

So what is Brazil’s end game? My amateur google searches places Brazil around his late 70’s and has a net worth around A$400m. If correct - this would mean his Aurelia position would be around 25-30% of his net worth. That is quite a sum for such a risky business and for someone of his vintage.

Brazil has been probed on his intentions before at the AGM - and his response is below.

To me there is really only one exit for Brazil which is to sell the business. And a sale makes sense for more than one reason…

---

A case for a sale/consolidation

There have been calls to consolidate the plethora of juniors sitting in and around the Cobar region for years… but nothing has really eventuated.. absent a recent deal by Aeris Resources to take out part of Peel Mining. Why has this been the case? I’ve no idea.. perhaps just ego’s. Have a listen to this interview of Mick McMullen the prior CEO of the company that owned the CSA copper mine in the Cobar up until it was bought out by Harmony Gold last year (relevant minutes= 22 - 36).

The case to combine CSA and Aurelia just makes too much sense to me. CSA sits ~5km north of the township of Cobar. Aurelia’s Peak mine sits just ~10km south of Cobar. But proximity alone doesn’t provide a reason to combine - it’s the complementary nature of these two operations….

• one is mill constrained, one is mine constrained…

• one is water constrained, the other has excess water..

• one has a copper concentrator, the other a zinc/lead concentrator (with CIL plant on back end)..

and then you have the synergies around sharing of the talent pool in a labour constrained remote location; the sharing of logistical infrastructure in addition to consolidating procurement and general overhead.

Let’s try quantify some of these synergies…

Firstly a reminder of the geology in the Cobar.. which is polymetallic.. you have zones of Cu rich ores (Chalcopyrite), zones of zinc (sphalerite) and lead (galena) rich ores and in amongst all of that varying degrees of precious metals. When CSA started out in the 1960’s it was processing both high grade copper and zinc ores through a polymetallic mill… but in the 90’s the big zinc rich orebodies were depleted and the mines focus shifted to deeper copper only lenses.. and with that the concentrator was reconfigured to be copper only. 10% Zinc lenses back then were likely considered waste.

Fast forward to today and CSA has had a further 30 years mining copper only and are near 2km deep underground. This depth (including ventilation) is a constraint to mining productivity. What CSA has done recently is define numerous, near surface zinc (and lower grade copper) zones. They even published a maiden JORC compliant resource last year at what they call the Merrin mine of 2.4Mt at 7.3% Zn, 0.6% Cu, 2.2% Pb & 23gpt Au (~2.8% CuEq).. they’ve also had promising zinc exploration results. But CSA has no means of processing this material at their own site… which is why they entered into an agreement in 2024 with the owner of the Endeavour mill, 40km north of CSA.

I’ll come back to the Endeavour agreement and compare versus a Aurelia tie up for CSA.. but the above also mentions another constraint CSA has which is water. Have a further read of comments by the prior owners (MAC Copper) CEO Mick McMullen.

Mick is saying above that CSA (which is running at 1.0mtpa) is mine constrained up until 1.45mtpa and then becomes water constrained after that. The Endeavour agreement which gives 150ML/year for 4 years alleviates that constraint to 1.7mtpa… which is still below the milling capacity.

Now consider that Peak has 1.0-1.5GL of ground water sitting in the historical Great Cobar pit.. and have built a reverse osmosis plant and pipeline on site to treat and use this water. This water will be removed before they start mining the extension of the Great Cobar orebody underground later next year. Peak also have an allocation from the Cobar Water Board.. so have more than enough water for their needs.

So here’s an idea. Aurelia send CSA the copper ores from Great Cobar mine at a rate of 5-600ktpa. With some debottlenecking at the CSA mine this could increase mill utilisation at CSA from 1.0mtpa to 1.8mtpa.. they would no longer be constrained by water. In return the trucks that carry copper ores from Great Cobar to CSA pick up ~500ktpa of Zinc ores from the shallow CSA deposits (ie Merrin) and return it to the Peak plant. Both plants are full and by treating the same types of ores continuously (rather than patch processing different ore types at Peak like they currently do) they can optimise the blending and recoveries.

The below I have tried to quantify just the zinc ore treatment and compared with the Endeavour agreement.

The above shows there is some ~A$50m pa of added margin by mining out the zinc ores that sit close to surface at CSA and treating them at Peak whilst treating the Great Cobar copper ores at CSA given latent capacity. If CSA were to utilise the Endeavour toll treat agreement I estimate they lose most of this margin in lower recoveries, longer haulage and Polymetals taking an additional cut of profits via a 35% over cost processing charge. Endeavour also have limited capacity whereas depending how much copper ores CSA take from Peak it could free up something in the order of 500ktpa milling capacity.

So A$50m pa “synergy” for the Zinc ore processing. Probably another A$20m pa in lower overheads (no board, no duplicate management). And by using Peak’s excess water there could be a further A$30m in copper margin as the CSA mill would not be water constrained. That’s A$100m pa of “synergies” I’ve just dreamt up there... Throw a multiple on that of your choosing and you’ve probably got something close to A$500m of value there. A reminder AMI trades at A$420m MCAP and if there are synergies with CSA in excess of that.… well I hope you get my point.

Finally - I’ll also point out that Aurelia is without a CEO given Bryan Quinn will move on at the end of the month which was telegraphed way back in January.. and AMI is yet to name a new CEO with its CFO going into the acting role despite a lengthy ~6mth recruitment process. Perhaps global giant Harmony Gold who acquired CSA last year can solve for Aurelia’s vacant CEO position? Afterall I believe they have grander ambitions than just a CSA acquisition.. but I’ll save the reasonings for another time.

---

Summary

I pitched Aurelia Metals two and a half years ago when it was a A$185m company and had a price target of A$450m. In the 2.5yrs following Aurelia has sunk ~A$286m of capital into various growth and improvement projects, have grown the net cash balance by ~A$50m (from ~A$100m to ~A$150m) and have seen the price of the commodities it mines all but double. As a result - I believe the companies margins are destined to improve from ~A$150m pa to ~A$300m pa.. and with that my price target has moved to something closer to 60cps.

I think there is strong potential of M&A here soon given the shareholding dynamics and the synergies with neighbouring operations. If not I see the company today trading at 1x EV/2028 EBITDA that has a potentially a multi decade mine life with two anchor orebodies (Federation & Great Cobar)… And having gone through 2-3 years of investment and execution I see a strong platform to target resource growth and to harvest cash.

Let me know your thoughts (this is not investment advice etc)

Respeculator