Highlights

Based on its exchange listing, NVB has on 4th Oct taken up an opportunity to subscribe for 975m ordinary shares of A$0.003 each, representing 19.9% of the enlarged issued and paid-up share capital of Alcyone resources Ltd (ASX: AYN), at an issue price per share of A$0.005 for a total cash consideration of A$4.875m (RM14.7m).

Upon completion, Alcyone has agreed to issue NVB free 487.5m Alcyone Options (ASX: AYNOA) with an exercise price of A$0.01 expiring on 31st Jul 2015 and entitle NVB a non-executive Board seat.

Alcyone is a pure play low cost silver producer based in south-east Queensland, Australia. Its Texas Silver Project includes the Twin Hills Mine and Mount Gunyan which have commenced silver production in July 2011.

Alcyone’s FYE 30th June 2013 financials: A$20.7m sales, A$10.4m LBT, A$10.3m LATAMI, A$13.4m net assets and (-A$0.0068) EPS.

NVB justified that the subscription would allow it to extend its current expertise of working with metals to explore the possibility of further downstream and value added activities for silver and other metals.

Besides, this exercise will provide Alcyone sufficient funds for certain mine upgrading works to bring its rocks crushing capacity up and construction of a power saving grid power line and a reagent mixing plant. All of these cost savings projects will be completed by end of Dec 2013 making it sustainable and profitable.

Alcyone is a turnaround silver mine with recorded silver production of 490k oz in 2011 and 700k oz in 2012. In order to reach economies of scale and its nameplate production of 1.2m oz per year, these mine upgrading projects will ensure profitability by Jan 2014.

Assuming options are converted, NVB will hold ~27.1% equity in Alcyone (assuming no other conversions by holders), hence becoming an associated company of NVB.

Comments

Slightly negative on this development as we view this as non-core asset and limited synergy to be extracted. Instead investment should be ploughed into new ventures (O&G, robotics, aerospace and consumer electronics).

The Alcyone subscription price of A$0.005 is 42.9% above the last traded price of A$0.0035 (on 3rd Oct).

Alcyone’s share price movement is highly correlated to silver’s price movement (see Figure #1).

Risks

FOREX, raw material, labour costs and execution risks.

Forecasts

Maintained.

Rating

Hold, TP: RM0.85

Positives – NVB is in a better position compared to its peers as it has diversified away from HDDs. The company is well positioned to benefit from growth opportunities in the highermargin camera segment. Appreciation of USD against MYR.

Negatives - Increasing raw material prices and SSD as substitute.

Valuation

Maintain our HOLD call on the equity with unchanged TP of RM0.85 derived based on DCF with WACC of 11.6% and TG of 0%.

Source: Hong Leong Investment Bank Research - 7 Oct 2013