OMH is recapitalizing with an underwritten non-renounceable 1:2...

OMH is recapitalizing with an underwritten non-renounceable 1:2 rights
issue at $0.22/sh raising $16m. The funds will be used to retire debt
$5.5m, fund working capital and capital expenditure.
OMH have completed an independent review on Bootu Ck which has
developed a viable life of mine operating plan. Inclusive of this plan
ore reserves have been upgraded from 5.6mt to 7.2mt grading 25%
Mn. Total resources comprise 15.9mt grading 25% including 3.2mt of
inferred resources. Our forecasts are based on production of ~550ktpa
of 43.5% Mn ore in lump and fi nes products.
Bootu Ck production achieved design rates in December 2006 with
production of 45.7kt grading 43.4% Mn. January and February have
since been rain affected and lower production and shipments occurred.
Several debottlenecking modifi cations have been effected during last
few months. Further enhancements to the plant to minimise future wet
weather interruption are included in the capital budget for 2007.
Paul Thomas will commence as MD of OM Manganese (Bootu Ck)
in March’07. Paul had been with Equigold for 10 yrs, recently as RM
Kirkalocka.
CBA has agreed to a standstill agreement until 31st Dec’07 provided
$5.5m of principal is paid by end April’07 and another $0.5m is set aside
for future interest payments. This commitment has signifi cantly derisked
the outlook for shareholders.
Following the rights issue and principal repayment we estimate the
consolidated balance sheet will comprise $23m of debt (Bootu Ck &
Trading) and cash of $22m (before capex, post sale of TFE trading
rights 1st tranche). In addition OMH retains its investment in Territory
Iron which is currently valued at $13m.
The manganese price has shown modest uptrend of ~10% so far this
year from lows of ~US$2.05/dmtu. Further gains in the order of 5-15%
appear achievable over the medium term. This sentiment is consistent
with messages from Consolidated Minerals. The price uptrend has
resulted from consistent strong demand throughout 2006 with ore
inventories in China now having depleted to tight levels.
Our valuation has been revised to $0.47/sh. OMH is currently priced at
~1.5x EV:EBITDA for 2007, considerably under the fair market multiple
of 3-4x EV:EBITDA. OMH’s valuation sensitivity to Mn price changes
are approximately $0.05/sh per US$0.10/dmtu movement.
We have upgraded our recommendation from Hold to BUY as risk has
reduced following improved Mn prices, the recapitalization plan, key
management change, development of an independent life of mine plan,
achieving design production rates in Dec’06 and the CBA commitment
to a standstill. Perhaps the stronger A$ is the remaining nagging risk but
this will be outweighed by the underlying commodity price strength