As outlined in our initiation report all of WPGs projects lie within the Woomera Prohibited Area (WPA). This a region that over the past few years has been become increasingly problematic for resource companies to access.
On the 5th of November 2010 the preliminary Hawk Review was released by the Federal Defence Minister. We had been anticipating that the report would recommend providing a transparent framework for the use of the WPA by both mining and defence. The draft report has exceeded our expectations.
The interim report has recommended a reduction in the core sensitive region and greater access for resources companies, along with allowing Defence to retain certain rights.
We see this as big win for WPG as it potentially frees up the locked hematite resource at Hawks Nest, virtually doubling WPGs DSO resources.
For the development of the magnetite resources at Hawks Nest we see that the issue of foreign ownership will need to be resolved. The report does propose that foreign ownership should be possible provide that Defence retains the rights to inspect and shut down mining operations.
Whilst we are reassured by the intent of the Hawk Review there is still risk that the recommendations will not be adopted in full. Therefore we are still to incorporate a value for the Hawks Nest deposits into our valuation.
BFS Results The 2007 BFS was updated and the results released in October 2010.
The key estimates are:
Infrastructure Capital Costs; Mine Site and rail loader $84.9m, Port Pirie $53.6m Total $138.5m (we had assumed $120m in our initiation estimates)
Working capital; Pre-strip, mine, process and transport first 160,000t: - Total $29.3m (in line with our estimates)
Total initial capital: $167.8m
Operational Costs: LOM FOB cash cost $64.35/t, plus royalties $5.61/t
Total opex (FOB) $69.96/t (our estimate was $70 - $75/t)
Total opex (CIF China) ~$87/t
Production rate 3.3mtpa iron ore fines
Also as part of the BFS the reserve size was upgraded to 16.7mt @ 63.2% Fe from 15.4mt @ 62.7% Fe.
With scope to add an additional 7mt in reserves by increasing the pit depth by 60m. This would add two more years to the mine life Decision to mine still on schedule for late 2010
Based on the BFS a decision to mine is expected to be made by board in late 2010, we anticipate a positive decision and long lead items to be ordered immediately.
Major approvals outstanding are the Mine and Rehabilitation Plan for the mine infrastructure and the Development Plan for the Port Pire site. The DA has been submitted, with the approval process expected to be concluded in 1QCY11.
VALUATION Target $1.66, current price $1.07 Our valuation of $1.66/share (previously $1.56/share) is based on risk weighted NPV/share for the Peculiar Knob mine and nominal values for the coal assets and exploration potential. Production 3.3mtpa In our DCF valuation for Peculiar Knob we have assumed a 5.5 year mine life at a rate of 3.5mtpa, with a short ramp up period. Ore is to be trucked and railed to Pt Pire for export utilising transhipping loaders. Risk Weighting We have risk weighted the production profile by 15% to reflect the fact that there are still some permits required and that the debt financing is conditional.
WPG Price at posting:
76.4¢ Sentiment: Buy Disclosure: Held
