West African iron ore companies: mind the gap, broker saysBy...

West African iron ore companies: mind the gap, broker says
By John Harrington
April 09 2013, 1:00pm

The discrepancy in market valuations between producers and developers 'offers the aspirants the potential for quantum upgrades in valuations should they succeed in bringing even moderate components of their planned production into fruition,' Investec postulates.The discrepancy in market valuations between producers and developers "offers the aspirants the potential for quantum upgrades in valuations should they succeed in bringing even moderate components of their planned production into fruition," Investec postulates.

Investec has been casting its eye over West African iron ore companies and identified what it calls a “value abyss” between the undeveloped ones and the developed companies.

The latest research from the City broker follows up on a previous research note it issued in July last year, entitled “Valuing what the market doesn’t want to value”, and once again highlights the market’s reluctance to fully value even the initial phases of iron ore production.

Investec prefers to use risked net present value (NPV) models in its calculation of target prices for miners, but the market appears to be applying “a far more simplistic method” of valuation for the non-producers, based on enterprise value per tonne (EV/t).

In the undeveloped camp are Bellzone Mining (LON:BZM), Afferro Mining (LON:AFF) and Zanaga Iron Ore (LON:ZIOC), and these companies all trade “at the exact same US$0.04 per tonne of recovered iron units,” the broker notes.

Meanwhile, the likes of African Minerals (LON:AMI) and London Mining (LON:LOND), both of which are producing iron ore in West Africa, trade at 30 to 40 times the levels of the undeveloped companies.

The EV/t for recovered iron units is US$1.59 for African Minerals and US$1.26 for London Mining. Investec notes that two Aussie listed companies, Sundance Resources (ASX:SDL) and Equatorial Resources (ASX:EQX), which are neither producers nor primarily magnetite ore body plays, are both valued at 72 cents per tonne of recovered iron ore, somewhere in the middle ground.

While this suggests the market is out of love with the early stage developers at the moment, it also opens up the possibility that the ratings will change dramatically once the companies move further along the development curve, Investec postulates.

The broker has its recommendations and target prices for West African iron ore companies under review pending quarterly adjustments to its commodity price assumptions.