The Independent Investment Research (IIR) firm’s recent data indicates lower base case 12-month price target for Mustang Resources.

IIR previously gave the company a base case 12-month price target of $89-million, or $0.169 a share.

The firm elaborates that the lower cash position and contingent liability of A$1.5-million, which are the funds to be drawn down less the face value of the note, is the main reason for the changes to its valuation.

“Although the results of ongoing work at the company’s projects and the sourcing of finance have derisked and increased value in Mustang since our initiation, our view is that the increase in value will be crystallised, with the key milestones at Montepuez and at the company’s Caula graphite project, which is located to the west of Montepuez being met over coming months.”

The firm says that 80% of its predictions are based on a risked discounted cash flow (DCF) valuation for a hypothetical operation, including bulk sampling, with its target predicated on milestones being met, including successful results from the planned ruby auction later this year and positive bulk sampling results leading to a meaningful initial mineral resource estimation at Montepuez.

IRR comments that bulk sampling and test pitting within the newly acquired 8245L licence area at Montepuez are delivering high-quality stones from this secondary deposit.

It says the quality of the stones is reportedly similar to that of stones from coloured gemstone mining and marketing company Gemfields’ nearby Mugloto deposit, which has been ‘instrumental’ in delivering the high-value stones to Gemfields’ auctions, which have generated $280-million in revenue over the past three years.

“With Gemfields having delisted from Aim, following the takeover by diversified mining company Pallinghurst, Mustang is the only listed ruby producer globally, and thus provides an ideal entry into this growing and exciting market,” IRR said.

Meanwhile, the firm notes that Mustang has successfully completed upgrades to Montepuez’s processing plant and the near completion of commissioning should result in Mustang meeting its planned 550 000 t/y production target. This is using only one shift a day and, therefore, if required, production can be significantly increased by adding extra shifts.

Moreover, IRR highlights that the company expects first revenue from its rubies from a planned auction of 200 000 ct in October.

“Mustang is ideally placed to take advantage of growth in the global ruby market, which has been limited in the past by scarcity and unreliability of supply”.

“However, the discovery of Montepuez and original production by Gemfields have brought certainty into the markets, with wholesalers and producers looking to capitalise on [the situation] and develop a stable, mature market similar to (the one) set up historically by diamond company De Beers for diamonds.”

The firm points out that rubies are the most valuable of coloured gemstones. In 2014, the ruby market was estimated at $2-billion of the total coloured gemstone market of $5.9-billion. IRR adds that increased demand has caused ruby prices to increase 63% over the past eight years.