Comments Price Target: $2.10/shLST continues to trade at a...

Comments Price Target: $2.10/sh
LST continues to trade at a 25-30% discount to its underlying Net Tangible Assets (‘NTA’) which in our view is excessive based on the quality of its
underlying investments, quality management and strategic value of some of its investments.
Post merger with Auselect, LST has a 30% interest in the low cost Cracow gold mine which produces ~ 100koz at an operating cost of A$350-400/oz
which is currently valued at ~ $58m book value – arguably this could be worth considerably more than this.
LST is in a strong position to acquire the remaining 70% interest in the Cracow JV due to its pre-emptive right after Newcrest Mining announced its
intention to sell this interest through a tender process.
Ownership of 100% of Cracow would transform LST into an operating mining company with an recurring earnings stream and has the potential for a
market re-rating as LST becomes rated more as an earnings multiple story than the traditional NTA.
If you assume the remaining 70% of Cracow is acquired for ~ $140m, Cracow could contribute ~40% of the total NTA up from currently ~ 15%.
African Lion continues to perform well and the recent disposal of its Platmin investment netted a profi t in excess of $100m – or 10x the original
investment. Approximately $30m fl owed to LST from this transaction.
In addition a small number of poorly performing assets have been sold. In recent times the bid for Allegiance Mining by Zinifex is a positive with LST
holding ~ 39m shares in AGM.
Investment Case
We see little downside in LST at current prices and signifi cant upside if it can acquire the remaining 70% of Cracow at a good price.
Quality domestic gold assets are hard to fi nd and we rate Cracow highly. In FY’07 it produced ~120koz at an operating cost of $318/oz and as LST
has closed out the associated hedge book current margins are ~ $550-600/oz. This implies potential EBITDA of $55-60m pa.
Whilst formal reserves are a modest 3-4yrs these types of underground epithermal gold deposits often occur in clusters and usually mine life
signifi cantly exceeds formal reserves.
LST is in the box seat with its pre-emptive right as we believe it would be diffi cult for another party to pay a signifi cant premium to acquire only 70%
of the asset. In addition it also has market risk as we understand the pre-emptive does allow a reasonable period for of time LST to make a decision.
Alternatively LST may have the option to sell should an outrageous bid be made.
Whilst diffi cult to do a formal valuation on every asset in LST portfolio, its major investment Indophil we value at $2.12/sh, +100% above its current price.
Just based on this valuation and assuming the other investments remain stable implies a LST NTA of ~ $2.70/sh – or 60% above the current price.
We maintain our Buy recommendation. LST is a low risk way to play the junior/mid resource end of the market. Since the end of July’07 LST has fallen
~ 18%, versus a 3% decrease it the underlying NTA’s ($2.16 to $2.10) making the current price an excellent entry point.
Lion Selection Limited
(LST $1.60) Buy
1.00
1.50
2.00
0
500
1000
1500
2000
LST Volume ('000)
LST Share Price ($)
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08
Directors
Ewen Tyler AM Non Exec Chair’n
Robin Widdup Managing Dir
John F O’Reilly Non Exec Dir
Graham R Freestone Non Exec Dir
Alistair Croll Non-Exec Dir
Shareholders
Select Asset Mgt 8.5%
Creasy 5.4%
Share Price $1.60 A$/sh
Issued Capital
FPO Ord Share 191m
Options ex 26/4/09 @ $1.50/sh 5.8m
Market Capitalisation $305m
(fully diluted)
Net Tangible Assets $370m
NTA/share $2.02/sh
Cash $68m
Debt nil
All information and advice is confi dential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any
account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document.
Resources Quarterly �� January 2008
AUSTRALIAN RESEARCH
Lion Selection Limited
Analyst �� Andrew Clayton
Ph: +61 8 9488 1427 Email: [email protected]
Lion Selection Market
Holding Investment Value
At 8/01/2008 Code Country/Commodity % ($m) ($m)
DIRECT INVESTMENTS
Allegiance Mining AGM Australia - nickel 5.0 5.2 40.6
Exco Resources EXS Australia - copper/gold 10.5 5.4 7.6
Havilah Resources HAV Australia - gold/base metals 19.0 4.2 28.9
Indophil Resources IRN Phillipines - copper/gold 25.7 22.6 84.9
View Resources VRE Australia - gold/nickel 9.0 8.7 7.0
Westonia Mines WEZ Australia - gold 44.4 14.6 16.1
Other Investments <2% of Net Assets & includes ARX, DEG and LAF 44.8 14.5
TOTAL DIRECT INVESTMENTS 105.5 199.6
AFRICAN AND ASIAN LION
African Lion Funds 27.4 8.9* 51.7
Albidon ALB Zambia - Ni 5.7 3.3 34.7
Sphere Investments SPH Mauritania - iron ore 1.9 1.4 9.5
Other including cash committed 7.5
Asian Lion Fund 32.4 8.0 12.5
Total invested (including cash) 3.4 4.7
Cash committed 4.7 7.8
TOTAL AFRICAN & ASIAN LION 17.0 64.2
NET CASH 69.8
TOTAL INVESTMENTS and CASH 333.6
Net Tangible Assets (NTA) after tax & diluted for options (cents per share) 1.73c
OPERATIONS - 30% Cracow (including project debt)** 56.5
TOTAL NET ASSESTS 390.5
Net Tangible Assests (NTA) before tax and diluted for options (cents per share) 202.9c
Net Tangible Assests (NTA) before tax and diluted for options (cents per share) 202.9c
For NTA purposes, all listed investments at market price. Ordinary shares on issue 191.003m*
*Lion investment remaining in the African Lion Funds after capital returned Options on issue 5.818m
** NTA Value for 30% of Cracow based on accounting carrying value.
Resources Quarterly �� January 2008
AUSTRALIAN RESEARCH
page 88
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