With Gindalbie bouncing back from $0.80 to $1.80 in 2 weeks I reckon we should have a real go in these Sundance Resources (SDL.AU) that are also chaired by GBG`s George Jones. I know most Australians think “oh my god Africa” but Cameroon is not some war torn place where the hardest part about mining is keeping grenades out of the main pit it a country of 18 million people who speak English and French and have no civil wars going on (which helps the DCF valuation). The smartest resource investors in the world like private resource sector investor AMCI have recently taken placements in SDL at $0.40 as has wealthy Queensland Coal industry pioneer Ken Talbot who now owns 19.3% of the company.
The Gindalbie bank feasibility announcement yesterday just further reinforced in my mind that iron ore prices are not coming back in the next 3-4 years as why would Gindalbie`s Chinese partner Ansteel agree to numbers in the bank feasibility study using “south American pellet prices plus a freight differential” ? That in my mind shows the Chinese know that BHP`s freight equalization argument is likely to happen at some stage in coming years even if it isn`t this year.
While most of the larger new iron ore projects around the world are magnetite deposits SDL controls enormous high grade hematite deposits. In SDL`s last presentation their stated business case is mining at the rate of 35mpta from 2011 and back in July Sundance said the average operating cost of iron ore from this project would be around US$14.50 per tonne made up of the following.
US$5.40 t in mine and process plants
US$6.50 t in rail costs
US$2.60 t in port costs
Total US$14.50
Now that figure was derived using a conservative received price of US$40 FOB (which would equate to a conservative US$0.775 dmtu for lump) as opposed to the US$1.02 achieved for lump in calendar 2008 (pre any increases this year) , it still generates an annual cash EBIT of US$892m (at the 35mpta mining rate). Clearly if you use more optimistic assumptions on the iron ore price you can see how cash operating margins can be well north of US$1bn and payback on the entire project will be sub 2-3 years. If you use this years lump price of US$1.02 then the received price would be around US$62.00 FOB meaning that margin would expand to US$47.50 per tonne and multiply that by 35mpta of production and you get EBIT of US$1.6 billion meaning SDL is trading here at 50c (market cap US$740m) on 0.5x EBIT…I don`t mean 5x I mean 0.5x!! Thus SDL must be the cheapest iron ore company in the world in my view.
Worley are doing the pre feasibility study for Mbalam and that is due out in late 2007 and Worley have been responsible for the design work for Fortescue`s enormous rail,port and mining projects in the Pilbara and the process of building new rail and port facilities in Cameroon is no harder than building Fortescue`s rail and port operations..
There have recently been some enormous new iron ore projects announced in Africa that are being funded by either Chinese Steel related interests or guys like Mittal Steel who are funding huge new iron ore mines with as much as US$3-5bn of their own capex to fund these mines in Senegal and Liberia to feed Arcelor Mittal`s enormous European mills. Next door to Cameroon the China Machinery Export Corporation (CMEC) is spending US$3bn on the Belinga iron ore deposit building a similar railway and port infrastructure to what Sundance will need. The Belinga deposit is one of the last major undeveloped iron ore deposits in the world and while its next door in Gabon, the chance to link up Sundance with the rail link they are going to have to build from Belinga to the port looks unlikely and its more than likely Sundance find a partner to build the railway and port infrastructure for them rather than SDL having to somehow come up with US$2bn or more of capex. The Mbalam deposit is over 60% Fe with low phosphorous and alumina content and thus is perfect for the steel mill customers.
My view is that some of the larger European mills like Arcelor Mittal are worried that the Chinese and Indians are locking up most of the new sources of iron ore production and are thus keen to enter long term off take agreements with these large scale emerging iron ore projects like Sundance has. When you look at the attached map you can see Cameroon is perfectly located only 4,550 nautical miles from European markets and hence why the gorillas like Mittal are going ahead with large iron ore mines in Liberia and Senegal . Its also only 6727 nautical miles from Cameroon to India and 10064 miles to China and that is less than the China to Brazil shipping run as well.
I look at the current market cap of Murchison Metals (MMX.AU) at A$1.6bn and the MMX guys flag production of 25mpta from 2012 assuming all the rail and port infrastructure is built by Mitsubishi on time and on budget which in this environment seems highly unlikely. I then look at Sundance with a market cap of A$900m in a very similar situation and SDL have a management team with a history of brining on major projects which MMX clearly does not.
I must admit as much as I like SDL as a standalone story I can see the logic of George Jones who is a major shareholder and Chairman of both stocks merging the 2 groups. You would then have a that good mix between a magnetite and hematite production and once ramped up the combined group could have production of over 30mtpa of iron ore. . You would have the geographic spread of Africa,China and Australia in terms of your asset base and if Sundance lines up a European off take agreement with someone like Arcelor then you also have the geographic spread in terms of your client and don`t just rely on China for your iron ore demand. Merging the 2 would create a $1.6bn market cap emerging iron ore player that could have combined EBIT of around US$2bn out in 2011 onwards.
I think the right people are buying the Sundance story, guys like Hans Mende at AMCI and Ken Talbot are the smartest resource investors around and buying SDL now pre the feasibility study later this year and an off take agreement is like buying Gindalbie at sub $0.50 a few months ago and I would not be surprised if this stock got the attention of global investors looking to get into another Fortescue like stock. They have assets clearly that will support mine lives of well north of 20 years.
Attached is Sundance`s latest presentation…I reckon the guys investing in this stock are clearly of the view this is a $3-4 stock through time and right now on a risk reward basis it looks very cheap right now and I think the last market meltdown a few weeks ago shook a lot of the hot money of the registers of small and mid cap mining stocks and thus on any good news I can see how SDL can easily run to $1.00 on good news.
Iron ore remains the simplest long term story of any of the metals in my view. Anyway wants to come to Cameroon to take a look at the assets give me a call and I`ll get the canoe ready.
SDL Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
