merrill lynch valuation at 9.80

The West Australian Buy Recommendation

BUY

Merill Lynch sees plenty of upside in Murchison Metals (MMX) after its agreement with Mitsubishi over Murchison's Mid-West iron ore project.

The Japanese group has agreed to buy 50 per cent of the proposed Jack Hills mine and associated infrastructure for 150 million by September, followed by a second deferred payment once bankable feasibility studies into a 25 million-tonnes-a year mine, Oakajee port and 500km railway are complete in the first half of next year. Merrill Lynch put a valuation target of $9.80 a share on Murchison and a 12 month price target of $6.

The valuation could be even higher if iron ore prices are above expectations.

Murchison shares slid 13 cents to 5.72.

Okay guys I predicted this would hit the papers and further buy recommendations would come out over the weekend. See once again below how they get to their valuation.

Below is a rundown of their current market cap

Issued shares - 334 million
Listed options (20c) - 27.4 million
Unlisted options (20c) - 24.5 million
Unlisted options (50c) - 5.0 million
Unlisted options ($1) - 5.0 million

Total shares = 395.9 million shares

Fully diluted market cap currently at 5.85 is just under 2.32 billion

The latest deal with Mitsubishi is potentially worth a total investment of approximately 3 billion. IMO market cap could easily surpass this level. This would bring the share price to around $8. I think this is very possible working purely off the value that the deal brings. To have a company willing to invest that much money is a big deal.

Future upgrades to their deposits I think will definitely occur. No way would Mitsubishi dedicate 3 billion for the current size of the resource. They are investing in this for the future of their own company and are expecting the Jack Hill deposit to be increased and further resources to be discovered.

So I got a valuation of $8 purely based off the deal. Let’s work out how much money will come in. If you go to their September 2006 investor presentation which was made in Hong Kong they give us all the figures we need. On the 26th slide they post the Project Economics. I have attached this slide below. Now at 25mtpa they predict EBITDA of 700 Million. NPAT would be around 490 million. Now don’t forget they worked these projected economics off operating costs from the pre-feasibility and 2006 dollars. The Aussie dollar is now currently above 84 cents and Iron ore prices are predicted to rise. How good is this looking for Murchison. My Final Valuation comes to around 9 dollars a share when working off 2006 dollars which has risen considerable and off lower iron ore prices. Looks awesome. Don’t forget I haven’t even factored in the potential sizes of Weld range and Jack hills. This valuation is purely off earnings and the deal made with Mitsubishi.