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1
11 October 2007
Analyst
Analyst: Alex Passmore
Phone: (+61 8) 9263 1239
Email: [email protected]
Murchison Metals ($5.38) / Midwest Corp ($4.75)
Investment Highlights
• MMX has launched a 1 for 1.16 (base price) to 1.08 (higher price) unconditional
scrip offer for all of the shares in MIS. The final acquisition ratio depends on the
quantum of a future tax liability upon the sale of assets to Sinosteel Corporation
by MIS.
• This takeover offer comes as both companies move to develop their large
tonnage, stranded, direct-ship-ore (DSO) hematite projects Weld Range (MIS)
and Jack Hills (MMX). These deposits require a new deep water port at Oakajee
and new 450km+ railway line connecting the deposits to the coastal export
point.
• Infrastructure investment needs both projects. Currently delineated
resources at both projects do not justify the infrastructure alone. Preliminary
estimates indicate the capital cost of building the requisite infrastructure is circa
$3bn. The impetus for consolidation is driven by the need for great enough
throughput to justify this expenditure. On our estimates 50 to 75mtpa
throughput is required to achieve a 10% return on invested capital given
average operating margins for rail and port.
• Premium EV/resource tonne rating allows MMX to act as consolidator. The
ability for MMX to act as consolidator comes from its premium rating in terms of
EV/resource metrics ($42.7/t of resource versus MIS’ $7.1/t of resource). It has
achieved this premium with a stated ‘target’ mineable inventory of 400mt and
the exploration potential of Jack Hills seems likely to deliver this.
• This bid is not about iron ore supply. With the iron ore production from MIS’
Weld Range project fully contracted to Sinosteel we believe MMX’s move to
consolidate the sector is not about securing future supply.
• Strongly value accretive for MMX on current EV/resource metrics. The
sector average for enterprise value per ton of DSO hematite resource
(EV/resource) is $22.8/t. MMX currently trades on $42.7/t and MIS on $7.1/t
(post-bid announcement). Accordingly this proposal is strongly value accretive
for MMX based on currently delineated resources. We note that MMX could
adjust the bid value upwards to well above 1:1 with the takeover remaining
EV/t accretive for MMX.
• A protracted battle likely from here. MMX’s bidders statement is due on or
before 19 October following which holders of MIS can tender into MMX offer.
However we believe progress will be slow with the bid’s current all-scrip
structure.
• MIS valuation and recommendation. Our NPV for MIS is $5.41/share which
assumes a 300mt resource target at Weld Range is achieved. We believe the
stock will trade at marginal premium to the MMX offer in the expectation of an
additional sweeteners to the offer currently proposed. We retain our BUY
recommendation and note the stock is trading at a 15% discount to our
valuation.
• MMX valuation and recommendation. Our MMX valuation assuming a
successful takeover is $6.69/share (pre-bid is $6.48/share) giving a takeover
valuation of MIS of $5.76. Accordingly we continue to rate MMX a BUY however
see MIS as a cheaper entry point into any combined entity.
Murchison Metals Ltd (MMX) launches scrip bid for Midwest Corporation Ltd (MIS) - BUY MIS
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
2 Patersons Securities Limited
Takeover offer emerges - Two-tiered and unconditional
MMX has announced an unconditional scrip takeover offer to acquire all of the shares in MIS on
the basis of 1 MMX share for 1.16 MIS shares.
The bid is pitched in a two-tier structure whereby MMX will offer 1 MMX share for 1.08 MIS
share if MMX is reasonably satisfied (prior to close of offer period) that MIS will not incur a
material tax liability (>$20m).
Tax dependent bid
MMX believes that there is a potentially significant tax liability that may result from Sinosteel
acquiring a 50% interest MIS’ Weld Range hematite and Koolanooka magnetite projects.
Provided that the tax liability is not greater than A$20m (importantly, this is after any available
tax losses have been utilised) MMX will increase its offer to 1 MMX for every 1.08 MIS.
Publicly disclosed information by MIS does not allow the potential tax liability to be measured.
There are three key unknown variables to be determined before we can form a view on the
likelihood of any CGT exceeding MMX’s threshold:
1) The consideration paid by Sinosteel – Patersons estimate of circa A$320m
2) The cost base of the asset(s) sold to Sinosteel – too difficult to estimate and dependent on
tax planning undertaking by MIS
3) Availability of existing tax losses to offset tax liability – again we are only able to speculate
Based on our estimated consideration of A$320m to be paid by Sinosteel and assuming a worst
case scenario of no available tax losses, the cost base of the asset sold to Sinosteel cannot be
below A$250m. We believe that if the JV with Sinosteel involves the sale of a direct interest in
the Weld Range and Koolanooka projects, the cost base for capital gains tax (CGT) will be well
below our lower limit of A$250m. However, this cost base is highly contingent on any tax
planning carried out by MIS.
Rationale behind the Offer
Capital expenditure savings, development timing security and minor operating cost savings are
likely with a merged MMX-MIS entity.
Capital expenditure saving
Given the proximity of MMX and MIS projects (both Weld Range and Jack Hills share adjoining
tenements owned by each company) the combined development of infrastructure will lead to
capital expenditure savings. We estimate this could be in the order of $200m assuming joint
crushing and screening facilities are built.
Timing risk reduced
The Western Australian State Government recently announced the implementation of a
contestable process for a new deepwater port at Oakajee and various options for the
construction of railway lines from Weld Range and Jack Hills to Mullewa or directly to Oakajee.
We believe this process will lead to potential delays in the construction schedules of MIS and
MMX’s projects. Accordingly a merged entity would reduce this risk as the contestable process
would be redundant.
MMX’s 1:1.16 scrip
offer for MIS moves
to 1:1.08 should MIS
tax liability be less
than $20m
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
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Figure 1: Expected Iron Ore Production from the Mid West Region 2011+
Source: Patersons Securities Ltd
Potential operating cost saving
Further reduced duplication of processes and blending opportunities given similar ore types is
likely to lead to operating cost savings under a potential merged entity however MMX’s proposal
presentation provided little detail on this.
Return on investment in infrastructure argument is compelling
Both MIS and MMX (or their associates) have plans to build A$3bn in new port and rail in the Mid
West region. Neither company has sufficient resources currently identified to justify this
infrastructure (from a return on capital standpoint) hence the impetus to combine the two
companies.
On Patersons estimates, expected port and rail operating margins for Oakajee and associated
infrastructure will be between $4/t to $6/t. This implies an annual tonnage throughput of 50mtpa
to 75mtpa for returns of 10% on invested capital. With current resources of 50mt and 124mt this
throughput rate is unlikely to be achieved.
We believe the return on infrastructure philosophy is the most compelling reason for MIS and
MMX to combine corporately. This also implies that MMX has the greatest to gain in terms of
synergies and therefore it can a higher premium for MIS than other potential acquirers.
Return on
infrastructure
investment
provides significant
gains if MMX and
MIS operations are
combined
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
4 Patersons Securities Limited
Figure 2: Combined DSO Hematite Reserves & Resources
Midwest Corporation Mt Fe (%)
Total Reserves 8.4 57.8
Total Resources 124.2 58.6
Murchison Metals Mt Fe (%)
Total Reserves 8.5 63.0
Total Resources 50.50 60.7
Combined Entity Mt Fe (%)
Total Reserves 16.9 60.4
Total Resources 174.74 59.2

Company Resources:
0 0 10 10
27 27
50 51
86
108
124
175
0
50
100
150
200
SDL YML TTY AGO RHI GBG GWR MMX MGX SRK MIS Comb.
(Mt)
Company Reserves:
0 0 0 0 0
4 5
11
17
57
8 9
0
15
30
45
60
YML RHI SRK GWR SDL AGO TTY MIS MMX GBG Comb. MGX
(Mt)
Source: Patersons Securities Ltd
Comparative Enterprise Value (EV) to Sector Players
At current levels MIS has an EV marginally below $900m, which is lower than its peer
developers, while MMX’s EV is $2,157m a premium to the sector.
Post-bid announcement MIS is trading on $7/t EV/resources still cheap relative to the sector.
This discount is in our view attributable to legacy issues surrounding Weld Range (it has been
considered for development over the past three decades) and its historical average grade of
55% Fe being at the lower end for DSO operations.
Whereas MMX is trading on $43/t EV/resources a premium which looks stretched relative to
MIS although may reflect a positive market rating for the exploration potential of the Jack Hills
project and its lead role in infrastructure development.
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
Patersons Securities Limited 5
Figure 3: EV to Reserves & Resources
Metrics Based on 1 for 1.16 Offer MIS MMX Combined Entity
Fully Diluted EV (A$m) 888.0 2157.6 3044.8
Reserve (Mt) 8.4 8.5 16.9
EV/Reserve (A$/t) 106.2 253.8 180.6
Resource (Mt) 124.2 50.5 174.7
EV/Resource (A$/t) 7.1 42.7 17.4
EV/Resource EV/Reserve
Scrip Offer: 1 MMX for 1.16 MIS (A$/t) 17.4 180.6
Scrip Offer: 1 MMX for 1.08 MIS (A$/t) 17.8 184.8
Scrip Offer: 1 MMX for 0.6 MIS (A$/t) 22.5 233.5
Sector Average (A$/t) 22.8 96.2
Scrip Offer: 1 MMX for 0.5 MIS (A$/t) 24.6 255.4

EV/Resources:
0 0 2 4 4 7
17
21 23 24
29
42 43
0
10
20
30
40
50
YML SDL SRK GWR RHI MIS Comb. TTY Ave. MGX GBG AGO MMX
(A$/t)

Source: Patersons Securities Ltd
While return on infrastructure provided the impetus for MMX to launch a takeover bid for MIS,
EV/t metrics provided the mechanism. With the trading premium of MMX over MIS, we believe a
combined entity would trade on $17/t EV/Resources still well below the sector average of $23/t/.
On this basis a takeover of MIS is value accretive for MMX up to the sector average EV/t of
resource meaning the takeover offer could be increased to 1 MMX for 0.6 MIS shares.
What the combined entity will look like
Notwithstanding further valuation upside with potential operating cost savings our combined
operating asset valuation for MMX and MIS is $4.128bn with MMX contributing the majority of
this as Jack Hills is a higher value operation on our current assumptions.
This valuation implies the assets currently held by MMX would account for circa 71% of the
combined entity while MIS assets would account for 29%.
On a fully diluted basis (and excluding operating synergies) we value MMX’s proposed new
entity (new-MMX) at $6.69/share if the bid is successful including $200m in capital expenditure
benefits.
Infrastructure is the
rationale, EV/t of
resource differential
providing the means
‘Target’ resource
bases used in DCF
valuations therefore
combined metrics
favour MMX
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
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Figure 4: PSL Valuation of Combined Operations
(A$m)
Jack Hills Stage 1 DSO 134.5
Jack Hills Stage 2 DSO + Earn-in 2432.9
Koolanooka / Blue Hills DSO 194.8
Koolanooka Magnetite + Earn-in 154.8
Weld Range DSO + Earn-in 573.7
Jack Hills Exploration 200.0
Other 437.0
Total DCF Valuation @ 10% Discount Rate 4127.8
(A$m) (%)
MMX Contribution 2991.9 72%
MIS Contribution 1135.9 28%
Total 4127.8
Ordinary Shares + Options (m) 617.3
Valuation Per Share (A$/share) 6.69

Jack Hills Stage 1
Jack Hills Stage 2 + Earn-in
Koolanooka / Blue Hills DSO
Koolanooka Magnetite + Earn-in
Weld Range + Earn-in
Jack Hills Exploration
Source: Patersons Securities Ltd
Takeover is not about iron ore supply
MMX in our view have not launched this takeover for iron ore supply or off take agreements
from future production at MIS’ operations.
Production from Weld Range is contracted 50% to Sinosteel Corporation, who also hold an
option to take the remaining 50% of production.
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
Patersons Securities Limited 7
How will this play out?
While it makes sense to put the operations of the two companies together we note that there
are several stumbling blocks.
A Prolonged Takeover Battle May Ensue
The presence of large steel industry players namely Sinosteel Corporation (MIS), and Mitsubishi
/ Posco (MMX) lending financial support to MIS and MMX sets this takeover battle between
historical iron ore industry rivals China, Korea and Japan. We also highlight the recent
breakdown in the Mid West Iron Ore Alliance, which indicated MIS and MMX management are
unlikely to agree on development scenarios.
We believe the tightly held register of MIS is likely to prove a hurdle in this takeover. Around
50%+ of the current capital of the company is held by investors who are supportive of board and
management.
In our view the all scrip bid is likely to be the biggest stumbling block for the largest
shareholders with a cash alternative likely to win these parties over should it eventuate.
Figure 5: Major Shareholders
Substantial Shareholders Shares (m) %
Armadale Offshore Inc 24.1 13.0
Citicorp Nominees 14.2 7.7
Vital Rays Investments 14.2 7.6
Dawn Star Ventures 8.3 4.5
Blue Bay Investments 6.7 3.6
Top 20 102.9 55.5

Source: Bloomberg, Company Reports
Are there any other potential acquirers of MIS?
In our opinion any other potential acquirers of MIS do not have the same synergy benefits
available to MMX given the shared infrastructure possibilities.
Mount Gibson Iron Ltd have been named as a potential acquirer of assets in the industry,
however management have previously mentioned they see the growth path of the company
outside of the Mid West region post-Extension Hill development.
Sinosteel probably present the best chance of a ‘white knight’ in this case. However we believe
this is unlikely to eventuate with Sinosteel not needing to takeover MIS with iron ore supply
already secured under its existing JV arrangements.
Likely bid sweeteners
We believe the ratio of the all scrip offer for MIS could be raised well beyond 1:1 and still be
EV/t resources accretive for MMX.
A cash component additional to the scrip bid cannot be ruled with MMX’s cash balance currently
equating to $0.60 per MIS share.
_______
Disclosure: Patersons Securities Ltd acted as lead manager to the share placement that raised $29.2m at $1.46 per
share for MIS in May 2007. Patersons Securities Ltd also acted as lead manager to the share placement that raised
$37.7m at $1.46 per share for MIS in May 2007. It received a fee for these services.
We believe a cash
alternative would be
received in a more
positive light by
major shareholders
11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)

8 Patersons Securities Limited

11 October 2007 Murchison Metals ($5.38) / Midwest Corp ($4.75)
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