euroz research tty

Territory Resources Ltd
(TTY $0.30) Buy, Re-initiation of Coverage
Comments Price Target: $0.42/sh
Territory reported a stellar June Q10 result which repaired the balance sheet. It shipped 564kt of Lump and Fines product from the 100% owned
Frances Ck iron ore mine. This yielded EBITDA of A$24.5m and was applied to $17.1m of debt reduction.
Debt to Noble Group is A$36.5m at June 30th. Territory believes that it can extinguish the remaining debt during the Dec H10 should iron ore price
remain above US$100/t fob. Thereafter all cashfl ow is to the benefi t of shareholders.
We estimate Territory will generate EBITDA of $78m and NPAT of $42m in FY11. This calls for shipments of 2.1mt at a cash cost of A$71/t. We have
assumed iron ore prices average US$115/t net fob, similar to that achieved during the June Q10, consistent with the current market.
We estimate that Territory Resources can accumulate some ~$130m of cash over the next three years net of retiring the Noble debt.
Frances Ck iron ore mine is constrained by a short life outlook. Ore reserves currently stand at ~ 5.7mt grading 57.8% Fe, giving a 3 year mine life.
The FY11 exploration budget of $4.7m is aimed at extending the mine life. The current mineral resources estimate from which the ore reserve is a
subset is 9.6mt grading 58.0% Fe. Exploration targets include:
Depth extension to existing open pits which will necessarily incur higher waste:ore ratio but yet still e conomic in the current environment;
Regional ground based gravity survey over prospective parts of the sequence which may highlight concealed prospects;
Helene 4, a known deposit within the mine area, is subject to ongoing negotiation with traditional owners for access and infi ll drilling;
Mt McCarthy, 25km SE of Frances Ck with prospective outcrop, Fe rights acquired for a 2% royalty and is subject to approvals.
Territorys major shareholder, Noble Group with 26.5%, has been supportive through the diffi cult period. It has:
Provided very fl exible short term working capital through a pre-payment facility;
Sold all iron ore produced by TTY, even through the depths of the GFC;
Acquired the former hedge providers debt and subsequently restructured it into one core facility with TTY;
Extended the amortisation period for the core debt facility to October 2011;
Not pursued a debt for equity swap which could have been highly dilutive to minority shareholders;
Territorys strategy is to retire debt and accumulate cash in order to fund an acquisition in the carbon steel materials sector. Major shareholder,
Noble Group, is supportive and would presumably assist in funding an acquisition. It is motivated by marketing rights with any new operation.
Investment Case
We have re-instated coverage of Territory Resources Ltd with a BUY recommendation and a $0.42/sh valuation and price target.
The valuation is leveraged to the spot iron ore price and exploration success. The leverage is augmented by its relatively high cost structure, geared
balance sheet and short life.
Territory Resources is cheap both in absolute terms (our npv based valuation) and relative to all listed other ASX iron ore producers. Consider TTY
with an EV of $120m in the context of MMX (EV$510m), AGO (EV $950m), NFE (EV $600m), BCI (EV$150m).
We believe TTY can at least incrementally grow it ore reserves to drive value uplift. The Mt McCarthy prospect is the biggest potential quantum
upside with drilling expected in Dec Q10.
The acquisition strategy does create some uncertainty however the value will be an overriding feature in the short term. We also believe that
Territorys near death experience last year will steer it away from any potentially careless high risk acquisition.
This analyst also declares that he has a benefi cial interest in Territory Resources Ltd.