dfs due any day, page-21

Grange Resources Overweight
GRR.AX, GRR AU
Southdown DFS completed with no major surprises;
but financing remains key
Price: A$0.58
Price Target: A$0.95
Australian Resources
Mark Busuttil AC
(61-2) 9220-1553
[email protected]
Joseph Kim
(61-2) 9220-7882
[email protected]
Luke Nelson
(61-2) 9220-1629
[email protected]
Andrew Muir
(61-2) 9220 1579
[email protected]
J.P. Morgan Securities Australia Limited
YTD 1m 3m 12m
Abs 3.6% -13.4% -3.3% -11.5%
Rel -5.3% -15.9% -8.1% -3.1%
Grange Resources (Reuters: GRR.AX, Bloomberg: GRR AU)
Year-end Dec (A$) FY10A FY11A FY12E FY13E FY14E
Total Revenue (A$ mn) 311 410 455 514 482
EBITDA (A$ mn) 163.9 195.2 196.1 270.8 250.2
Net profit after tax (A$ mn) 77.24 216.57 103.27 167.06 163.29
EPS (A$) 0.058 0.188 0.089 0.078 0.076
P/E (x) 10.0 3.1 6.5 7.5 7.7
Cash flow per share (A$) 0.106 0.182 0.156 0.094 0.107
Dividend (A$) 0.000 0.050 0.050 0.050 0.020
Net Yield (%) 0.0% 8.6% 8.6% 8.6% 3.5%
Normalised* EPS (A$) 0.058 0.095 0.089 0.078 0.076
Normalised* EPS chg (%) -38.4% 63.5% -5.8% -13.3% -2.3%
Normalised* P/E (x) 10.0 6.1 6.5 7.5 7.7
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data
52-week range (A$) 0.68 - 0.37
Market capitalisation (A$ bn) 0.67
Market capitalisation ($ bn) 0.70
Fiscal Year End Dec
Price (A$) 0.58
Date Of Price 01 May 12
Shares outstanding (mn) 1,154.8
ASX100 3,611.8
ASX200-Res 4,658.2
NTA/Sh^ (A$) 0.98
Net Debt^ (A$ bn) -
See page 8 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
0.35
0.45
0.55
0.65
A$
May-11 Aug-11 Nov-11 Feb-12 May-12
Price Performance
GRR.AX share price (A$)
ASX100 (rebased)
Grange released the results of the Southdown DFS today. While this was an
important step, finding a financing solution remains the key hurdle ahead of
the FID at the end of the year. A successful sell-down of GRR’s stake in order
to fund the company's equity share of cap-ex would be a very positive outcome
in our view, as it would relieve risk of an equity raising. Grange remains our
preferred of the mid-cap iron ore stocks on the basis of valuation.
? Grange releases details of recently completed Southdown DFS: Grange
announced today that it had completed the DFS for the Southdown project.
The 10mtpa magnetite concentrate project is now expected to cost A$2.885
billion (12% higher than A$2.57 billion from the pre-feasibility study), with
operating costs of A$59/t starting in 2015. With no major surprises in the
release, the changes we have made to our forecasts are relatively modest.
? Key hurdle remains finding a suitable financing solution: The key
hurdle before the final investment decision remains finding a suitable
financing solution for the project. If we assume that the project is 60% debt
financed, Grange’s current 70% share would require capital investment of
A$850 million. However, management indicated recently that the company
is contemplating selling down to fund its equity share of capital. If we
assume that Grange sells down to 40%, then the company’s share of capital
would fall to A$500m. The sale proceeds as well as Grange's own balance
sheet could then be sufficient to fund the company’s share of capital,
without the need to raise equity, in our view.
? Arranging a suitable buyer and price for the sell down could be a key
catalyst: The recent sale by Sojitz of 10% of the project to Kobe Steel is a
positive indicator, but it remains to be seen in the current environment
whether Grange can find a suitable buyer and receive a suitable price. We
believe a successful sale would relieve the risk of a raising and act as a
significant, positive catalyst.
? Grange remains our preferred mid-cap iron ore stock: Grange is our
preferred of the mid-cap iron ore stocks, largely on the basis of valuation.
The stock currently trades on a P/NPV of 0.58x. In our view, the key risk is
the development of Southdown and particularly how the company expects to
finance it.