It has come to my attention that a broker has put out a report on EIO with a 35c price target. And better still, the report is on the web for all to see
The link to the report is here (you can see the images on the link that you cant in this post):
Energio Ltd (EIO.ASX, $0.16/sh, Mkt Cap ~$40m) – Iron ore in Nigeria with infrastructure solution in place and proven personnel.
· Emerging West African iron ore exploration play: EIO offers early stage exposure to the emerging West African iron ore region following the acquisition earlier this year of the flagship Agbaja Iron Ore Project in Nigeria. The Company is currently capped at <$40m, is expected to release a maiden JORC resource in Q3 2012 (target ~500Mt at ~38-40% Fe), has a potential infrastructure solution in place and proven Board personnel.
· West Africa – new iron ore province: With vast unexploited resources and favourable geology, we believe Africa’s share of the global seaborne iron ore trade is set to increase significantly. Given the declining domestic iron ore production in China and a growing desire from the government to secure future supply via project ownership, we also expect corporate activity to continue in the region led by the Chinese and global majors such as RIO, Vale, BHP, Xstrata and Glencore.
· Agbaja Project snapshot (EIO – 100%):
- The Agbaja Iron Ore Project is EIO’s flagship asset and comprises a large land holding in central Nigeria highly prospective for sedimentary hematite mineralisation.
- The Project is extremely well positioned less than 70kms from an existing rail head with a heavy haulage railway that runs for ~300kms and to within 30kms of Port Warri. The final 27kms of the railway line is under construction and expected to be completed by early 2013. The existing rail infrastructure is Government owned and is currently only used for passenger and freight services. As part of a number of studies to be conducted during H2 2012, EIO will determine the capacity of the rail line in its current form and seek to put in place a track access agreement with the Government. We estimate that a 70km rail spur would likely cost ~$150m based upon an assumed $2m/km.
- Port Warri is used primarily as a container port and it is expected that a transhipping operation to capesize vessels would be the most likely option for iron ore export from this port. The capacity of the port and export options will also be considered as part of the infrastructure studies to be completed during H2 2012.
- In addition to the existing rail and port infrastructure, there exists a 3.3mtpa beneficiation plant in current configuration (start-up capacity estimated to be ~2.5Mtpa) currently on care and maintenance (Government owned) located ~40kms away from Agbaja which could potentially be used and refurbished to beneficiate Agbaja ore.
- The current lack of infrastructure development in West Africa means those projects close to rail/port/coast should command a significant valuation premium.
In our view, infrastructure remains the primary risk for many projects in the West African region getting off the ground. The potential solution at Agbaja is significant and a key differentiating factor for the Project when compared with many of the other West African iron ore aspirant given it can significantly reduce capex and the project development timeline.
· Initial exploration program has delivering encouraging results: The maiden drilling program at Agbaja commenced in late 2011 and has focussed on an initial target area of 14km2, with 760 RC holes totalling 20,000m. The program is now almost complete with encouraging results suggesting homogeneous iron bearing sandstone material of ~30m covered by ~5-10m of overburden. Grades range from 35 - 55% Fe with likely beneficiation via a wet high intensity magnetic separation circuit similar to what Cape Lambert are proposing with their Marampa Project in Sierra Leone (grade at Marampa is lower however at ~30% Fe). Met test work is currently being undertaken by ALS and expected to be released in Q3 2012 which will determine the beneficiation characteristics. Coffey is undertaking resource estimation work with the maiden resource expected to be released in Q3 2012, targeting 500Mt at ~38-40% Fe (200Mt contained Fe). This resource will be enough to justify and underwrite feasibility and infrastructure access agreements in our view based upon a potential 2-4Mtpa initial operation. The Company will also complete step out drilling during H2 2012 which will be used in conjunction with previously completed airborne geophysics and historical test pitting from the 1950’s to generate an exploration target size for the whole Project, which is expected to be in the billions of tonnes.
· Nigeria – stable government, western mining code & fiscal regime: Similar to the Republic of Congo, Nigeria has historically been an oil producing region with little in the way of hard rock exploration or mining. The Government is making a concerted effort to address this and the country is now starting to attract investment in the industry. Glencore is understood to have recently made a foray into the country and EIO is now the other early stage mover. According to the 2012 World Bank ‘Ease of Doing Business’ ranking, Nigeria is amongst the highest in West Africa and ahead of other countries which are active in iron ore exploration/development including RoC, Guinea, Cameroon, Mauritania, Liberia and Sierra Leone. The current fiscal regime imposes a royalty of 4% and tax rate of 35% with no Government participation/equity. There is also a favourable depreciation regime with an accelerated schedule during the first year of operations in which 95% of the capex may be depreciated. This can have a material impact on cash flows (increase as lower tax payments) and profitability (decrease as higher depreciation charges).
· Proven Board personnel: The Board of EIO has a proven track record of project delivery and realising significant shareholder value. Joe Ariti and Ian Burston have teamed up again in West African iron ore following the highly successful US$350m takeover of their previous West African iron ore vehicle, African Iron (AKI.ASX), by Exxaro at A$0.57/sh after listing that company just 12 months earlier at A$0.30/sh. Tom Revy has been appointed CEO with significant experience in operations and project development through time spent with Worley Parsons and Minproc.
· Funding in place for current exploration program. Additional financing for the 2012/2013 exploration/feasibility program will likely be sought in H2 2012 and we would expect considerable interest from those institutions that have backed the key personnel in previously successful vehicles. The Company is fully funded for completion of the current drill program with ~$5m cash.
· Based upon a target maiden resource of 500Mt at 38-40% Fe (200Mt contained Fe) and EV/t of $0.40/t, we generate a maiden price target for EIO of $0.35/sh. We highlight that this is based solely on target resource tonnage in the ground and attributing no value to the potential infrastructure solution in place. We make reference below to two companies where the potential value of infrastructure has been clearly demonstrated:
· Equatorial Resources (EQX.ASX), which has an EV of almost $150m and is currently exploring for iron ore in the RoC. The company is yet to release a maiden resource but is in close proximity to a nearby rail line which is understood to have capacity of ~10Mtpa.
· The recent takeover of African Iron (AKI.ASX) by Exxaro provides a transaction precedent which highlights the value and corporate appeal of projects that have a potential infrastructure solution. Exxaro paid ~US$350m for AKI, which had a 92% interest in the Mayoko Iron Ore Project in the Republic of Congo and a resource of 121Mt at 46% Fe (DSO and bDSO material). The ~US$350m acquisition valuation represented an EV/t of more than US$6/t.
EIO Price at posting:
15.5¢ Sentiment: None Disclosure: Held
