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Hartleys Express Note
Centrex - WISCO Deal Bodes Well for Ridley
Stock:
Atlas Iron Limited (AGO $0.75)
Valuation:
386cps
Recommendation:
Buy
Impact

· Deal Bodes Well For Ridley Sale – This latest magnetite deal announced today bodes well for Atlas and its Ridley deposit. The deal indicates that Chinese steel mills are still willing to do deals and have a long term view on the sector and are still looking to secure offtake. Significantly, WISCO has agreed to pay A$0.18 per inferred resource tonne.

· Implies Ridley is Worth at Least A$360m – Using this latest deal as a benchmark gives Ridley an implied value of A$362m. Our DCF valuation for Ridley is $386m (equivalent to ~A$0.192/t).

Note that Ridley actually has a resource, of which 55% is in the indicated category, as compared to the Centrex’s magnetite projects, which only have an exploration target. The Centrex magnetite projects also require the construction of a port, whereas Ridley is close to an existing port in Port Hedland.

This would imply that Atlas may be able to achieve a higher price per tonne than Centrex as Ridley has:

o lower geological risk,

o better infrastructure,

o a better concentrate grade,

o is considerably closer to China,

o a completed scoping study, and

o the feasibility study is due for completion soon.

We see this latest deal as very positive for Atlas and highlights the requirement by steel mills for long term magnetite concentrate offtake. If Atlas intends to sell 70% of the deposit as previously indicated, the Company should therefore be able to receive at least ~A$250m for this share. We continue to rate Atlas Iron Limited as a Buy.



Details:

· WISCO to pay A$0.18/t for South Australian Magnetite – Centrex Metals Limited (“Centrex”) has singed a binding Heads of Agreement (“HoA”) with Wuhan Iron & Steel (Group) Co (WISCO) (subject to government approvals). The HoA Covers an acquisition agreement, whereby WISCO agrees to purchase a 50% interest in Centrex’s Southern and South Central Eyre Peninsula magnetite deposits to form a 50:50 joint venture. The purchase price is A$0.18/t of inferred magnetite resource. WISCO will pay for a maximum of 1,000 million tonnes, which equates to A$180,000,000 in staged payments.

· No Resources Defined to Date – Though the deposits have been historically drilled, no resources have been defined on the properties as yet. Centex has an exploration target of between 1.0 – 2.3 billion tonnes. Based on information released by Centrex, the iron grades for the magnetite concentrate range from 63.5% to 69.1% Fe.

· Requires New Port – The deposits are located between 20 and 50km from the South Australian coast. WISCO has agreed to work with Centrex to jointly develop a deep water port at Sheep Hill, 20kms north of Tumby Bay on the south east coast of Eyre Peninsula. Centrex proposes to build the port in conjunction with other mine and processing infrastructure needed to export iron ore products produced by the Joint Venture.

About WISCO from the announcement:

Wuhan Iron & Steel (Group) Co (WISCO) is ranked third in its sector in China, with a current annual capacity of 30 million tonnes of steel. WISCO’s operations are predominately located in Wuhan in the Hubei province of central China. WISCO operates an integrated supply chain comprising mining, coking, sintering, pelletising, iron making, steel making and rolling operations. WISCO’s assets were valued at 118 billion RMB (A$26 billion) in 2007. WISCO has a 48.3% interest in Kunming Iron and Steel Corporation which is located in Yunnan province. WISCO also has an 80% interest in the Guangxi Iron and Steel Group which currently has approval to construct a new 10 million tonne steel plant in the Guangxi port of Fangchenggang, with further plans to expand the facility to 50 million tonnes per annum by 2011.