IRON ORE JUNIOR MINERS – WINTER IS COMINGINITIATING COVERAGE ON...

IRON ORE JUNIOR MINERS – WINTER IS COMING

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