buy at 6, page-15

Comments from Merrill Lynch research note dated 19June.

Mitsubishi anchors the JV - Buy to $6/sh

Mitsubishi has entered into an agreement to buy 50% of Murchison's Jack Hills iron ore mine, and 50% of the necessary related infrastructure. In doing so, Mitsubishi add credibility to the project, largely remove the financing risk, and create a mark to market project pricing event inside the next 12mths against which MMX equity valuation can be assessed.


Timing on the buy in: by mid 2008.

Mitsubishi will purchase its 50% share by paying MMX $100m on final signing (around Oct 07), and $50m into the JV company, and a deferred payment equal to an agreed valuation less half the $150m initial payment. The deferred payment is based on an ungeared financial model, with already agreed discount rate, commodity and currency assumptions and tax structure, with only final costings to come.


Value of buy in: $6.76/sh before tax. New NPV $4.74/sh

While we have no guide to the discount rate, the positive tone of management presentations implies that the deferred payment valuation will be positive news, even at current price levels. Using an estimate of Mitsubishi's WACC, we calculate a buy in value of $6.76/sh but this is not at MMX's market WACC and does not include capital gains tax.


Risks: Reserves and costs

We have yet to see a JORC compliant resource statement for the 380mt, and we have not seen the final feasibility capex and opex, and hopefully retain conservative estimates. Mitsupishi are paying $150m in advance of the resource number, and would have done due diligence on more recent drilling.