Legacy Iron Ore: Undervalued ?play?, not lost on Indian and Chinese iron ore & steel groups Monday, August 08, 2011 by Andrew McCrea and Guy Le Page Legacy Iron Ore (ASX: LCY) has the potential to develop into a significant iron ore player in light of the growing resource at Mt Bevan and developments at the corporate level.
With low strip ratios, coarse grind size, low silica and an average concentrate grade of 69.8% Fe, Legacy?s Mt Bevan is beckoning a joint venture partner ? with attractive project development parameters.
Importantly, the project is located close to road, rail and an existing deep water port, mitigating the need for excessive investment in infrastructure, notably port facilities. There is potential for early cash flows from DSO hematite.
All this is not lost on Indian and Chinese iron ore and steel groups. NMDC, India?s largest iron ore group and looking to lock in iron ore supplies, has inked an MOU with Legacy to acquire 50% equity in the Company. This would enable Legacy to unlock and monetise the value inherent at Mt Bevan and gain large cash infusion.
Tellingly, the current JORC Inferred Resource at Mt Bevan is 617 million tonnes of iron at 32.1% (Fe). This is from drilling over only 4km of the 11km strike of the main iron ore target.
This Resource could be increased to 1.5 billion tonnes by the end of calendar year 2011 from next phase drilling over the remaining strike of this is target. This does not include the Exploration Target of 250 ? 350 million tonnes for Mt Alexander, and the totally unexplored Eastern BIF which extends for some 20km within the project area.
On an EV/Resource basis, Legacy is undervalued relative to its peers at A$0.025 per tonne compared to a peer average value of A$0.75 per tonne. Throw in the potentially transformative NMDC transaction and likely upgrade in resource by the end of 2011 and the undervaluation has short term and longer term catalysts for re-rating of Legacy?s share price.
Taking a line through neighbouring Jupiter Mines valuation of A$828 million (stripping out its non iron ore asset) for its Mt Ida and Mt Mason valuations, the mispricing in valuation of Legacy at A$32.6 million becomes more acute.
The undervaluation is good news for Legacy investors ? however at some stage market forces will bring this valuation up in line with intrinsic future valuation of Legacy?s project and potential.
Based on the foregoing, and after applying an appropriate discount, investors could see a Legacy valuation and share price greater than A$0.30 within six months and A$0.40 - A$0.45 within 12 months, if not sooner on the back of an NMDC offer.
Clearly, as the Legacy story starts to percolate the current valuation is unlikely to last.
COMPANY BACKGROUND
Legacy is a Perth-based Australian exploration company, established to search for iron ore and gold deposits and was listed on the ASX in July 2008. Since then, Legacy has focussed on iron ore exploration in the Central Yilgarn Province and Pilbara Iron Ore Province with the most recent development being the announcement of a maiden JORC Inferred Resource of 616.8 million tonnes at 32.1% Fe (15% Fe cut-off grade) on the back of their first phase drilling program at the Mt Bevan Joint Venture (Legacy earning 60%) for this first phase program.
EXPLORATION OVERVIEW-IRON ORE
Mt Bevan Iron Ore Project
Legacy is earning 60% in the Mt Bevan Iron Ore Project (E29/210/E29/713), from Hawthorn Resources (ASX: HAW) via the expenditure of A$3.5 million with a view to completing a pre-feasibility study. The tenements, situated in the Central Yilgarn, are in close proximity to infrastructure (road, rail, port) and are prospective for Direct Shipping Ore (DSO) hematite and magnetite iron resources.
First Phase Drilling Successful
The recently completed first phase drilling program was located in the southern part of the Mt Bevan project area, to the immediate north of the significant magnetite and hematite resources held by Jupiter Mines (ASX: JMS).
An initial 20 hole, 5,000 metre RC drill program covering approximately 4.6km (representing 40% of the 11km of known strike length) of the Western Banded Iron Formation (?BIF?) in the southern portion of the tenement area was completed in April 2011 at 1.0km line spacings and to vertical depths of up to 250 metres (ASX Announcement 23 May 2011).
Numerous ore grade intersections were returned with potentially mineable widths ranging from 80 ? 140 metres in width and dipping shallowly to the east. Selected sections are represented below.
Resources and Exploration Potential
SRK Consulting completed a JORC compliant Inferred resource of 616.8 million tonnes at 32.1% Fe (15% Fe cut-off grade) based on this initial program. The Company has previously announced a magnetite exploration target in the range of 1 ? 1.5 billion tonnes grading 30%-40% Fe which has subsequently been upgraded to 1.5 ? 2 billion tonnes of similar grade for the southern part of the Western BIF mineralisation. Examination of Figures 3 and 4 indicate good continuity of mineralisation and grade both along strike and down dip.
The shallow dip and substantial thickness of the mineralisation will allow low waste ore stripping ratios, implying that final open cut depths could potentially far exceed the 250 metres vertical depth tested by drilling to date.
Recent reconnaissance field work to the north has identified Mt Alexander as having Exploration Potential for 250 ? 350 million tonnes grading between 30 ? 40% Fe, as well as potential for DSO hematite. The project area also contains the unexplored Eastern BIF unit that occupies some 20km strike within the project area. No drill testing for magnetite has been undertaken on this unit to date.
Given the extensive magnetite rich BIFs in the project area, the hematite resource on the southern boundary at Mt Mason, and recent nearby discoveries (Cliffs Mt Richardson deposit to the immediate west with a 100 ? 150 million tonnes resource), there is considerable potential for DSO hematite resources which could present a near term cash flow opportunity
Favourable Metallurgical Results
Recent Davis Tube Testwork (DTR) by ALS laboratories based on 206, 6 metre RC composite samples (ASX Announcement 20 July 2011), demonstrated that the magnetite mineralisation at Mt Bevan has the potential to produce a consistent, high quality concentrate with low impurities.
Based on a 75 micron screen (yielding an approximate P80 of 45 ? 50 micron) the average weight recovery was 44.63% with an average concentrate grade of 69.8% Fe. Silica content was low (3.28%) together with low levels of sulphur and phosphorus. In particular the silica content compares favourably with other magnetite deposits which typically grade in the range of 4.5 ? 6%. Put simply, even with a coarse grind size, a premium concentrate with low silica can be produced.
These preliminary results give rise to the potential for either blast furnace grade pellets (silica < 5.5%) which may be produced at a coarser grind size, or premium DR (Direct Reduction) grade pellets (silica < 3%) at a finer grind size.
Proximity to Jupiter Mine?s Iron Ore Deposit
The adjacent Jupiter Mines Mt Ida magnetite resource comprises 530 million tonnes at 31.9% Fe (15% Fe grade cut-off) and hematite Inferred Resources of 5.75 million tonnes at 59.9% Fe at Mt Mason close to the Mt Bevan southern boundary. This mineralisation is known to extend into Legacy?s Mt Bevan Iron Ore Project. Jupiter Mines has recently announced that positive scoping study results for Mt Ida (magnetite) and Mt Mason (DSO haematite) resources.
Scoping studies carried out by Promet Engineering were completed on the Mt Ida magnetite and Mt Mason hematite resource delivered financially robust results in both cases. Jupiter Mines commenced Feasibility Study drilling at Mt Mason during May 2011.
The YIOP is set to be the focus of intensive mining and exploration activity in the near term with projects such as Lake Giles (Macarthur Minerals (CVE: MMS) > 1 billion tonnes magnetite resource), Mt Forrest (Mindax Resources (ASX: MDX) > 2.5 billion tonnes conceptual magnetite target), Windarling, Jackson and Deception (Cliffs Natural Resources (NYSE: CLF), Market Cap: US$14.1 billion, > 60 million tonnes hematite Reserves) and Cashmere Downs (Cashmere Iron, 881 million tonnes magnetite Inferred Resource). A combined 250 million tonnes of hematite DSO has already been outlined in the district.
Infrastructure
The Mt Bevan project area is located close to existing road, rail and port facilities. One of the drivers of ongoing development of iron ore projects within the Central Yilgarn is the accessibility of port facilities at Esperance by local rail.
Development of Mt Bevan would hook into an existing rail line at Menzies, which would need to be upgraded; however, developers understand that infrastructure upgrades, to carry greater ore capacity can be completed at reasonable capital cost.
The rail line runs south to Esperance, the export port for 9 million tonnes of DSO produced by U.S. group Cliffs Natural Resources at the Koolyanobbing operation, 50km south of Southern Cross.
It is believed that the government-owned Esperance port is an expandable hub. From a recent site visit with NMDC representatives, it is understood that the port authority would entertain assistance in the expansion of the port. NMDC has significant experience in the development of large scale projects including port logistics which would assist Legacy.
Aside from the infrastructure advantages with its proximity to Kalgoorlie/Southern Cross and potential to rail ore to either Kwinana (capacity upgrade to 15 ? 20 million tonnes per annum) or Esperance, the province is well endowed with hematite and magnetite mineralisation. Cliffs Natural Resources has announced on 20 September 2010 its intention to spend over A$320 million in the district to ramp up production and further develop its resource inventory.
PILBARA IRON ORE PROJECTS
Robertson Range Projects
The Robertson Range Project (Figure 6) lies between 100 - 120km east-northeast of Newman in the East Pilbara region (Western Australia) and consists of three Exploration Licences (E45/3394, E45/3395 and E46/818) covering approximately 800km2.
The tenements adjoin those of FerrAus (ASX: FRS) and Atlas Iron (ASX: AGO) where recent exploration has outlined total Inferred and Indicated hematite resources of approximately 200 million tonnes.
In addition, E46/818 lies approximately 25km south-south west along strike from the recently commissioned Nicholas Downs manganese mine which contains a total JORC Resources exceeding 15 million tonnes.
Hamersley Project
The Hamersley Project (Figure 7) is situated 60km west of Tom Price in the West Pilbara (Western Australia) and consists of E47/1868 and E47/1869 that together cover around 48 km2. E47/1869 abuts Rio Tinto?s Hamersley Iron Beasley River deposit (400 million tonnes iron ore) which is situated on a series of Mesas and ridges that occupy an old drainage line. The potential exists for hematite occurrences under shallow cover which have recently been the subject of intense exploration by adjoining mining companies Murchison Metals (ASX: MMX), who have recently outlined 89 million tonnes at 59.9% CaFe (53.2% Fe at 50% cut-off) and AusQuest (ASX: AQD) who recently sold their Rocklea CID resource (63.1 million tonnes at 60.4% CaFe (53.4% Fe at 50% cut-off) to Dragon Energy (ASX: DLE).
National Mineral Development Corporation MOU
Legacy MOU with NMDC Limited
Legacy has recently executed a memorandum of understanding (?MOU?) with National Mineral Development Corporation Limited (?NMDC?); a Government of India fully owned public enterprise. Under the terms of the MOU, (subject to FIRB, shareholder and other regulatory approvals) NMDC has the right to acquire up to 50% of the Company by subscribing for fully paid ordinary shares (?Shares?) at an issue price to be mutually agreed based on an independent valuation of Legacy?s tenements.
This MOU will provide Legacy with substantial financial resources to explore and develop its exploration portfolio. Both Legacy and NMDC have announced that subject to the execution of a deal, the enlarged Legacy / NMDC group would seek additional iron ore projects sufficient to give a critical size to Legacy's resources and the ability to be a long term supplier.
Upon formal completion, the agreement will provide a unique platform for Legacy to source and secure additional resource projects for development and financing with the backing of NMDC as Legacy?s largest shareholder. NMDC has indicated their intention to utilise Legacy as an Australian vehicle to acquire large-scale bulk commodity projects. We would also envisage that the enlarged group would look to acquire other commodities used in the vertical chain of steel making and energy supply, such as coal, nickel and phosphate.
NMDC is controlled by the Ministry of Steel and has total assets of A$3.2 billion as of 30 June 2010. NMDC is involved in exploration for, inter alia, copper, phosphate, diamonds and tin in addition to being India?s largest Iron ore producer with annual production of around 30 million tonnes of iron ore (62%+ Fe) on the back of total resources in excess of 800 million tonnes.
OTHER PROJECTS
South Laverton Project: The Company holds approximately 560 km2 of ground along the Keith Kilkenny Tectonic Zone and the southern part of the Laverton Tectonic Zone. These regional structures are none to host a number of major gold mines (including Wallaby, Sunrise Dam and Granny Smith gold), containing in excess of 20 million ounces of gold.
East Kimberley Project: Four tenements in the Halls Creek area cover approximately 1920km2 and are prospective for gold, base metals, REE and manganese.
PEER COMPARISON
Our iron ore peer comparison includes a handful of Yilgarn explorers/developers set against the average of all ASX listed explorers/developers (Figure 8). Proactive Investors considers that the Yilgarn has been harshly dealt with by the market despite relatively easy access to port/roads/rail, particularly in comparison to the Midwest, however we believe this valuation gap will rapidly close once a number of these explorers move closer to development.
