foster stock broker report

ARH Resources (ARH) - Price: $1.49ps

ARH’s share price has fallen to attractive levels from a high of $2.30ps to $1.49ps despite the significant upgrade to the Ore Reserve estimate at the Balmoral South Iron Ore project from 346 million tonnes to 547 million tonnes Probable Ore Reserve. The company also recently announced it will seek to realise the potential of two prospective uranium assets Copper Bore Well and Mt Salt which are located close to the Balmoral South Project in the Pilbara region of WA.

ARH’s major asset is the Balmoral South Iron Ore project in the Pilbara, which comprises 1.1bn tonnes of magnetite at 31.3% Fe, and 547mt of reserves providing for 13.5 year life. The deposit is located only 25km from the coast.

The company intends to supply three products from the resource - based on 11.5mtpa production this will comprise magnetite concentrate (5mt), pellets (5mt), and HBI (1.5mt). First production is expected in 2010. Capital cost of the project is estimated to be US$2.1bn.

ARH has entered into a strategic alliance with Shougang Corporation. Within 3 months of electing to proceed with the project, Shougang will loan the company US$2.1bn interest-free until production reaches 95% of capacity for at least three months. In exchange, Shougang will earn 50% of the project and rights to 100% of the offtake for 25 years. The company expects studies to be completed by March 2008, with Shougang deciding to proceed by June 2008.

The company has recently raised $56m. In addition the company holds 100% of the Sherlock Bay Nickel Project which is located east of Karratha, in the Pilbara region of Western Australia. The project has a Mineral Resource of [email protected]% nickel in sulphide which equates to 101,000 tonnes of nickel metal. Bacterial Heap Leach testwork has achieved nickel recoveries in excess of 90% and there is the potential for very low operating costs and a 10 year + year mine life.

We recommend ARH as Buy, with a 12-mth price target of $2.75/share. This is based on a 40% premium to Shougang’s implied valuation of the project. Further announcements from development of the Uranium prospects could see upside risk to our price target.



RECOMMENDATION: Buy PT $2.75ps



Talking Point is prepared by Foster Stockbroking's dealing department and is an expression of its views. It is not the product of its Research Department or Research Analysts.