hotfire stateone report, page-26

This was the latest recommendation freely available on their website until withdrawal.

25th July 2007

Admiralty Resources Ltd (ADY) SELL 12 month target: $0.45

Share Price $0.54 Admiralty Resources has recently gained the attention we believe its strong projects deserve, rocketing to a high of 67c on the back of

Ord Shares 893.4m awakening market familiarity and recognition of the value of lithium in Admiralty’s flagship Rincon Salar alkaline brine lake project.

Rincon Salar, with 1.4 million tonnes of lithium (worth US$6,000 per tonne on today’s Japanese import prices) is a giant accumulation of lithium and alkali salts. In theory, there is US$44Bn of metal. In reality, we believe the market has become confused as to the difference
between in-ground value and earnings potential.

Admiralty is planning a now-delayed brine processing facility, consisting of extensive evaporation ponds and refining ponds, with a lithium production capacity of 20,000 tonne per annum. Admiralty’s guidance so far has been an expectation of a 25% nett cost of production on current lithium prices – ie, a after-cost profit of
US$4,500 per tonne of lithium produced, which allows us to predict an in-production cash flow model, shown on the next page.

Admiralty Resources Ltd 12mth Share Price Admiralty has formed a solid base of iron ore production upon which
the company should be trading fairly solidly at the moment, with perhaps some speculative premium from the Rincon Salar brine project on top.

Admiralty is involved in a joint venture (50%) in a magnetite iron ore processing and exporting operation which is currently exporting 2.4Mtpa of high-grade magnetite iron ore from the Chilean port of Candelaria. Permits have been issued by the Chilean government to
increase capacity to 3.9Mtpa. This, therefore, on ADY’s 50% interest in the project gives the company an attributed 1.95 million tonnes per annum of iron ore exporting capacity.

Admiralty plans, ultimately to ramp up iron ore production from Santa Fe, Santa Barbara and Mariposa to 7.3Mtpa by 2009. This will underwrite significant earnings growth, but not enough to justify its current dizzying share prices which have been ramped up by cunning and perfectly timed release of exploration drill results, with a major upgrade of the lithium reserves the cherry atop a teetering cake with layers of speculation and hype.

Please, do not become confused on our opinion of Admiralty.

We will hop in the ring and defend Admiralty Resources as a fantastic long-term growth story and a great way to become exposed to the lithium market – which will only become hotter as battery use in electric vehicles, mobile phones and ceramics takes off. However, we
think the stock has run too far and therefore, at the prices right now, Admiralty Resources is a firm sell.

Please read the valuation methodology overleaf. Bear in mind that we reiterate our 2009-2010 price targets do not justify paying 67c right now, on any form of projected earnings.

Rincon Salar Project Valuation – ADY 100%

Rincon Salar Argentina Li Brine
Ore Reserves Million Tonnes
Proved to One 7.46 +/- 0.6Mt Li Carbonate
Std Deviation 50.8 +/- 1.9Mt KCl

Metal Production 20Kt Li Carbonate
70Kt KCl
Mine Life 260 to 300 years

US$6,000 LiCO3
Revenue US$130 M & US$175/t KCl
Cash Costs US$30 M @ 25% Margin
Operating Profit US$60 M NPAT
Nett Profit A$70 M NPAT

Shares on Issue 890M
EPS Estimate 7.9c 2009-10 FY

The table at above is our economic model for a full year’s production of lithium brine and potassium chloride salts from the Rincon Salar brine lake.

We note that the full-scale brine plant proposed by Admiralty (capital cost US$100M approx.) is now due to be completed mid to late 2009. This means that at best, Admiralty will receive a smidgin of earnings in the 2008-09 financial year from lithium produced by the 1/10th scale pilot plant which is required to test the processing methodology before the full scale-up.

Assuming full ramp-up occurs on time and within budget,
which would be a rare occurrence in the midst of a boom and high materials costs, Admiralty will make lithium only within the 2009-2010 financial year. Therefore the 7.9c per share EPS given at left is for the 2009-10 financial year, and dependent on success of the pilot plant.

The NPV of Rincon Salar is A$86M, or 10c per share of
value to ADY now. Therefore, we set our price target for
ADY at its 2007-08 iron ore earnings basis plus 10c.

Santa Barbara JV Project Valuation – ADY 50%

Iron Ore Chile

Ore Reserves Contained Ore
Japonesa 41Mt @ 13.9% Fe 8.3Mt @ 63%
MariposaChile T.B.A.

Joint Venture

2007-08 2.8Mtpa
Revenue A$111 M
EBITDA A$78 M
NPAT A$54 M
After capex A$39 M

Exapansions
2008-09 7.3Mtpa
Revenue US$306M JV (ADY 50%)
EBITDA US$150M JV (ADY 50%)
NPAT A$60M (ADY share)

Shares on Issue 890M
EPS Estimate 4c 2007-08 FY
4c 2008-09 FY
12.9c 2009-10 FY

Admiralty Resources’ iron ore business is projected, in 200708 to constitute export of 2.8 million tonnes of magnetite iron ore (63% Fe, low contaminants) generated from mining of alluvial gravels with 13.9% Fe which are upgraded via magnetic separation, fine grind and magnetic concentration to the 63% Fe specification. The export rate will rise to of iron ore in 2008-09, and 2009-10.

This will generate US$115M for the joint venture in 2007-08 and on Admiralty’s 50% share, A$54M nett profit after tax, and around A$34M after capital spending on the 7.3Mtpa upgrade project, Rincon Salar pilot plant, and exploration totalling A$15M. This leaves Admiralty with 4.2c per share EPS and on a PER 8x target we would expect 34c as a reasonable price target on iron ore alone for 2007-08.

Adding in the NPV discounted value of Rincon Salar, this
gives us a 44c price target for 2007-08 and through 2008-09. By 2009-10, pending success of the ramp-up at Rincon Salar, we would then expect a full 21c EPS and a 2009-10 price target of $1.65 per share.

Clearly, Admiraly has overstepped its reasonable share price range based on current and future earnings even including a whopping 10c per share valuation attributed to Rincon Salar.

Therefore ADY is a SELL above 45c per share in 2007-08.