MacquarieEvent• GRR completed a definitive feasibility study...

Macquarie

Event
• GRR completed a definitive feasibility study ("DFS") for its Southdown project (GRR: 70% attr).
Impact
• Slightly higher capex, opex in line with PFS. GRR is planning to produce 10mtpa of magnetite concentrate at A$58.50/t, in line with the April 2011 PFS of 30 year life-of-mine. 10mtpa concentrate production requires 110mtpa material movement.
• Well placed. GRR currently operates a magnetite mine and concentrator in Tasmania and so has relevant technical skills in house. Approvals are well advanced, with mine and port permits in place and the EPA recommending ministerial approval of the desalination plant. Early engineering and construction activities are in progress, with long-lead items currently under tender.
• Marketing advanced. GRR plans to produce a >68% Fe concentrate with <4% silica plus alumina, a high quality chemical spec. Offtake has been sold, with GRR’s major shareholder Shagang taking 56% at market prices, leaving only 1.4mtpa of GRR’s entitlement to be placed. Kobe Steel, a major Japanese steel producer, recently purchased a 10% stake in the project.
• Implementation target 2015 requires FID late in 2012. GRR has flagged FID by end 2012, once funding has been put in place. Work remains to be done on finalising funding. Under a 60% debt funded scenario, GRR’s capital call would be ~$800m (before working capital). We believe such a funding commitment is too large for GRR; we would see any reduction in GRR’s capital commitment (potentially by GRR selling down a stake in the project) as a positive catalyst for GRR.
Action and recommendation
• Outperform. We believe GRR remains well placed to capitalise on any tightness in the iron ore market given its installed pellet production capacity, by virtue of Savage River cash flows generating an attractive dividend yield.
Southdown currently does not contribute materially to our valuation; any value that can be realised by advancing the project would be upside to our numbers.