Text from M/Lynch's latest valuation: More ore, but not what was expected: Cost $0.16/sh NPV
97mt of mainly indicated resource in the Saddle region of the mineralization, a 46% upgrade on previously published. The surprise was that while 50.5mt was the expected normal Direct Shipping Ore, grading 60.7% Fe, 46.5mt was magnetite grading 42.6% Fe, which will need upgrading to remove carbonate, resulting in a reduction in our NPV from $5.77/sh to $5.61/sh.
Issue 1: Magnetite at depth. Not a big issue
The presence of high grade direst shipping magnetite is unusual, but is not a major issue in itself, in our view (CVRD sell DSO magnetite and who has noticed?). The blast furnace market is able to accept lump and fines magnetite direct shipped ore on the same basis as hematite, with pricing on a similar basis.
Issue 2: Carbonate requiring processing. An issue.
Some 40% of Saddle resources has carbonate and talc inclusions that the company plans to remove, Crushing to 80% passing 100micron is required. We estimate that ore that needs to be processes to eliminate carbonate will be 25% of the saleable ore in total, and we are allowing $200m extra capital in year 4, and $4/t of carbonate extra operating costs from year 5 for processing.
Price target ($7/sh) and investment basics unchanged
We continue to run with a number of very conservative assumptions, and have added additional costs to ensure we remain on the conservative end on valuation. We remain convinced that management will deliver 380mt of resource, a financed infrastructure deal, and a Mitsubishi buy-in at around $7.20/sh
MMX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
