kribi port december start, page-23

Hi (Zwilliam),

SDL has huge upside/potential, and with the speed that we saw SP moving over the last few weeks, SP could reach the range of 70-80c level as mentioned by Nectar, and I would say a high probability that it could get there in less than 3 to 4 months from now.

SDL will be driven by fundamentals, and the velocity of SP will be measured by sentiment and especially news that will be flow from now till Q1 2011, and I guess people will lock into share price at early stage.

From where I can see is SDL SP is still undervalued, and through my modelings, it is reasonable to say that SP above $1 mark is still an comfortable target of valuation:

Recall that SCE valuation of SDL is $1.09 (a 12 month valuation), and applying 30% dilution = $0.77

But things that may surpise few people are that SCE put a 12 month SDL valuation rises to $2.43 at spot prices, so there are quite a big jump and we're only talking of base case model.

All I can say is through various DCF modelings for SDL Base case, SP could reach the range of $1.30-$1.74, for projections using models 30Mtpa to 50Mtpa, and 30Mtpa to 70Mtpa, and it's quite possible considering Mbalam project could be managing 100Mtpa of exports from region. Last SDL AGM presentation (p.2) confirmed the vision of the company to "grow annual iron ore production beyond 35Mtpa; regional potential over 100Mtpa"

The above projections assume SDL start with 30Mtpa in Y2014 and progressively increase its tonnage from Y2019 ownwards.
Phase 2 with Itabirite/Feed Ore could be introduced from Y2024 onwards, meaning the first 10 years, SDL will be operating with low-cost and high-margin DSO production (confirmed by GJ in AGM chairman's address to shareholders, p.2)

And this is a conservative valuation using LT price of 100USc/dmtu (the one used by SDL and SCE):
Avg FOB price (DSO) = US$63.12/t
Avg FOB price (Concentrate/Pellets at +65% Fe) = US$66.30/t

A very strong net Cashflow along with Capex1 payback periods less than 4 years make SDL's IRR looks very attractive for the 2 above models, 22 and 25% respectively.

Going back to valuation at spot prices, my what-if modelings showed that if the FOB price is US$100 or US$130, SDL SP would be at A$2.95 or A$4.82 respectively.

The spot-price valuation showed that higher spot prices will bring more cashflow and reduce the payback periods (less than a year), hence the noticeable increase in SP and IRR (46% and 65% respectively).

This scenario should not to be excluded with GJ providing some good hints re. global demand for iron ore (excellent summary from Pythagerous):
http://www.hotcopper.com.au/post_single.asp?fid=1&tid=1316232&msgid=7409939

"- GJ stated that interest in the project was strong as was the global demand for iron ore. He was confident that he and RIO couldn't see supply catching up with demand until around 2018 if at all.

- GJ sated that if IO prices remain the same as today that it will be paid of in 12 months instead of 4 years
could happen considering."

The above valuations are still very conservative considering the following SDL potential/upside that I mentioned from previous post:

- Mbalam project could be managing 100Mtpa of exports from region:
* What it means is SDL SP will go much higher once production tonnage increase from 35Mtpa

- SDL could offer an infra solution for the stranded deposits, close to proximity to Mbalam:
* meaning SDL wil recoup the cost of infrastructure (Capex1): EQX, Core/Severstal, CMEC/Belinga will be paying max if they want to join the party.

- Large, low cost and long life producer:
* meaning less risky project and with more potential in long run
* Will be top 10 Iron Ore producer

- Comparison of peers, SDL is the cheapest of the stocks.

- Mbalam is now a de-risk project:
* Project resources are world scale, with high margin
* Capex payback period is less than 3 years
* Resource, infrastucture and financing risk is relatively low for Mbalam project.
* Project is globally competitive. Through Mbalam convention, Cam Gov will favor SDL tax regime with 5 year tax holiday, 25% corporate tax and 5% withholding tax, and 2.5% mine gate royalty
* As a first start mover of this scale, SDL will have support from Gov and local communities
* Mbalam is close to hydro power:
..meaning SDL don't have to struggle (with water shortage), particularly when it comes to phase 2 Itabirite
* with progress of FID (Financial Investment Decison) towards mid next year, SDL SP will be re-rated significantly

Also quite good to note Southern Cross Equities recent visit to SDL:
"SCE visited the Mbalam site in November 2010. The camp is well established with accommodation units for 200 people, maintenance and laboratory facilities to service the exploration program, and a sophisticated communications set-up.
Access is by road or air. Supplies from Perth are shipped in containers and arrive by road with a lead time of up to 6 weeks. Access has been established to the Nabeba deposit with a new border crossing just south of the Mbalam exploration base.

SDL Staff/employees on site are growing substantially (From last SDL AGM presentation, p.6 and 7):
"Cameroon: Today about 200 people employed in country, about 63 Congolese Nationals employed on site (through 3rd party labor
company)"

Cheers,
BigStar