badondo drill results, page-12

Pete

The general rule of thumb amongst analysts is that every 1m tonnes of IO production is worth 200m maket cap wise.

If in the next few years Mayoko gets to 5mtpa which is what the current infrastructure apparently allows for you are looking at a $1bn market cap.

Add a nominal $100m value for Bandondo and you get a $1.1bn market cap. Based on the shares on issue this results in $9.40.

In my numbers I have factored in a $90 Iron Ore Price and a $50 cost of production. I am actually expecting the cost of production to be closer to $40 however lets just use $50 to be conservative giving us a gross margin of $40.

$40 operating profit x 5mtpa = $200m. Of this the ROC govt take 10% so we are looking at $180m before taxes. Lets say after all taxes and royalties we are left with $150m. Apply a PE of 5x (conservatively) and you get $750m + Bandondo value.

The above is very rough but for every $1 move up in Iron Ore or move down in cost of production the market cap moves up by around $20m. So an Iron Ore price of $100 gets you back up to around $950m + Bandondo.

There are 3 big variables here though:

1. Dilution
2. Iron Ore Price
3. Cost of production

My view on all 3:

1. I think dilution is inevitable but the question is how much. I feel once we have a JORC and the numbers around the project are out we should be trading around $3. The question is how much Cap EX will it take to get this project up and running. My guess is $250-$300m. However if we work closely with Exxaro perhaps this could be as low as $200m. At $200m I think we will have the ability to put $50m of our own money to the project and debt fund the other $150m. Lets face it based on the above numbers the payback period of the debt would be 12 months so I am hopeful this is not too much of a stretch. Obviously we will have to wait and see what happens but dilution is a likely chance but my hope is it will not be too significant if any.

2. Iron Ore Price - Anyones guess. But the average cost of Chinese domestic production is around $120 a tonne and from what I have read Chinese producers still supply 50% of the Iron Ore used by Chinese steel makers. Therefore the longer the Iron Price stays below $120 we are likely to see a significant drop in Chinese domestic production which should put a floor under the Iron Ore price at around $100 long term. However there are so many moving parts in regards to Chinese demand that I am only using an educated guess. In reality it could be anywhere from $75-$140 a tonne in 2 years time. I feel my $90 assumption is quite conservative however I would prefer to be conservative.

3. This is the big one for me. The lower you sit on the cost curve the more likely you are going to survive any form of economic cycle. This is why the likes of BHP and RIO are so highly regarded, as their projects are always world class and as such are at the very low end of the cost curve. The big players cost of production is around $40-$50 a tonne. My hope is that we will sit in this region. While we may not have the economies of scale like the big players we have a wonderful location close to existing rail and port and we get the benefit of very low cost labour. It is my hope that these factors combined will see our production cost sit at around $40 a tonne. This will make us one of the lowest cost producers in the world and will ensure that in a pretty severe pullback we will be one of the last producers standing. Don't underestimate how important it is to be low on the cost curve and I am very hopeful this is a big box that EQX can tick.


Overall with an enterprise value after cash of $135m I think this is way to cheap. Our next door neighbour just got purchased for $350m this year! Plus we have another massive project in Bandondo.

EQX need to get their numbers out asap. I think when some of the bigger market players get their heads around this project and the multiples on offer the stock price will re-rate.

As always DYOR. This is all back of the envelope stuff and I would love any input into my numbers above. I think the above variables is what we should be discussing and I would love to hear the views and opinions of fellow holders.