I dont think this report has been posted previously on HC. Wilson HTM has AGO as one of its top 3 picks for this quarter. Obviously not based on today's dismissal performance.
Atlas Iron Limited (ASX Code: AGO) Recommendations
We have reduced our target price for AGO by application of risk factors that we apply to NPV of undeveloped projects to the respective future values of franking credits of those projects. This has reduced our target price for AGO from $3.82 to $3.17/share, an 85% premium to the current share price, which values AGO at 3x operating cashflow for FY2011.
Atlas is an iron explorer, developer and producer in the Pilbara, Western Australia. Atlas is mining at its Pardoo Iron Ore Project, planning to export 1Mt during its first 12 months of operation, growing to 3Mtpa in 2010. When combined with its Abydos DSO Project, Atlas is targeting exports at an annualised rate of 6Mtpa by 2010, growing to 12Mtpa by 2012.We retain our BUY recommendation for AGO.
Key Points •We have adjusted the construction of our risked target price for AGO reducing it from $3.83/share to $3.17/share with modification of our application of risk factors used in deriving the target price. We calculate an un-risked DCF value ($4.64/shr) and also a risked 12 month forward price target. The un-risked DCF value is unchanged. •To calculate the risked price target we apply risk factors reflecting the proportion of each project’s 12 month forward NPV that we include in the target price, according to the project’s stage of development and or technological maturity. i.e. A factor of 100% is for full value and 0% is none. •The item reflecting valuation for franking credits in our valuation is derived by taking 47% of the NPV of future tax payments, a method that has been determined by empirical studies and validated in market prices. •We have now adjusted our price target calculation for AGO by application of the same risk factors we use to risk project NPV’s to the NPV values of the forecast tax payments by each project that are used to construct the valued of future Franking Credits. This has reduced our 12 month forward target price from $3.82 to $3.17/share still an 85% premium to the current share price. •We also tested the assumption that the market is attributing little or no value for the Ridley magnetite project by assigning a 0% risk factor to Ridley (instead of the current 35% risk factor). We also removed the effect of an assumed capital raising that we had assumed would be required to develop the Ridley project and had diluted for in our AGO valuation. If no value is ascribed to Ridley, say by way of sale of the project as is, the effect is to reduce the risked target price further, to $2.63/share, still a 54% premium to the share price. AGO is however receiving good levels of interest from parties wishing to either joint venture into the project or to acquire it. We consider this last value is conservative. •We have a BUY recommendation for AGO which we retain, with the target price $3.17/share at a 85% premium to the share price, which valued AGO at 3x operating cashflow for FY2011 as its strong production growth profile begins to emerge.
To discuss Atlas Iron Limited in more detail please talk to your adviser.
Report dated 5th November 2009.
AGO Price at posting:
$1.76 Sentiment: LT Buy Disclosure: Held
