foster stock report

Australasian Resources (ARH), Price: $1.40ps, Diluted M.Cap $760m
Chinese want more. The prospects for development of ARH’s Balmoral South magnetite project look promising following the announcement this week that CITIC wishes to proceed with development of a second 1bn tonne magnetite project in the George Palmer Deposit (GPD). ARH’s project lies adjacent to GPD.

Infrastructure being built. But it’s not just the willingness of the Chinese to commit to the project that helps ARH’s cause. CITIC is already developing a port at Cape Preston and other infrastructure that ARH will be allowed to have access to. This will certainly be a positive factor when the decision to progress with the development of Balmoral South is made by ARH and Shougang at the end of the BFS in mid 2008.

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 has recently upgraded reserves to 680m tonnes. 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. The capital cost of the project is estimated to be US $2.1bn.

ARH has entered into a strategic alliance with Shougang Corporation. Within three 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 will have rights to 100% of the offtake for 25 years. The company had ca. $50m cash as at the end of June 2007.

We recommend ARH as Buy, with a 12-mth price target of $2.00/share. This is based on our estimate of Shougang’s implied valuation of Balmoral South ($1.92/share) and $0.08/share for ARH’s other assets.

RECOMMENDATION: Buy, Price Target: $2.00ps.


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.