INITIATING COVERAGE ON JUNIOR IRON ORE COMPANIES • We initiate coverage on six junior iron companies – Atlas Iron, Western Desert Resources, BC Iron, Centaurus Metals, Mount Gibson and Gindalbie Metals.
• These companies face the headwind of falling iron ore prices as new, low-cost supply increases faster than demand. We forecast prices to fall from USD130/t (62% Fe cfr China) to USD86/t (2013 real) in 2016.
• Relative winners should be those companies with volume growth, robust margins and balance sheet strength. Of existing producers, our preference is for Atlas Iron. We also like the new project upside in Western Desert Resources and Centaurus Metals, although Centaurus has a significant funding challenge.
KEY STOCK VIEWS – AGO AND WDR PREFERRED • AGO - we view AGO as fair value on its current producing assets, with option value if the company can unlock value from its Horizon 2 resources and underutilised port capacity. • WDR - we see upside for the stock as the Roper Bar DSO project reaches full production in 2014. There should be substantial valuation upside if the BFO project proves to be commercial.
• CTM - there should be significant upside if CTM can progress the Jambreiro project in Brazil to full production in 2014. However, we expect CTM is unlikely to trade at valuation until it outlines how the project will be financed.
• BCI - valuation support and positive earnings momentum should support the share price but we consider the stock to lack positive catalysts outside iron ore prices surprising on the upside.
• MGX - we expect MGX to underperform its peer group due to negative earnings momentum.
• GBG - on our basecase forecasts, the Karara JV has a negative equity valuation with over $1.6b of debt in the JV.
Figure 1: Iron ore equities - recommendations and price targets Price Price Target Upside Recommendation Company ASX (A$) (A$) Rio Tinto RIO 58.20 75.00 29% Overweight Fortescue Metals FMG 3.92 5.10 30% Overweight BHP Billiton BHP 34.54 38.00 10% Neutral Atlas Iron AGO 1.02 1.32 30% Overweight Western Desert Resources WDR 0.77 1.20 56% Overweight Centaurus Metals CTM 0.19 0.35 91% Overweight BC Iron BCI 3.35 3.35 0% Neutral Mount Gibson MGX 0.53 0.50 -6% Underweight Gindalbie Metals GBG 0.17 0.15 -9% Underweight Source: IRESS, CBA estimates
AGO Price at posting:
78.0¢ Sentiment: Buy Disclosure: Held