AGO (ASX) morningstar valuation $4.80- buy

AGO Atlas Iron Limited FPO (AGO-ASX)
Last: $3.680 7 1.9%
Sector: Materials

Latest recommendation report
Valuation: $4.80 BUY
Suitable for purchase now
Last updated:
10/02/11
Acquisition adds significant value
Investment rating

AGO is an iron ore producer and explorer based in the Pilbara, Western Australia. Two operational mines, Pardoo and Wodgina produce 6Mt of direct shipping ore a year. Production of 12Mtpa is targeted by 2012. Near term development projects include the Abydos and Mt Webber mines. Two scrip mergers have resulted in a large tenement base. Port facilities constructed at Port Headland alleviate infrastructure concerns and provide up to 15Mtpa of capacity. An excellent track record of resource growth and low capex requirements instils confidence. Single commodity exposure dependent upon Chinese demand increases risk. The shares are only suitable for risk tolerant investors.
Event

* AGO announced an impressive 2Q11 update with cash flows from operating activities increasing to $56m from a $10m loss in the prior quarter.

* Ore shipped jumped by over 350% to 1.3m tonnes, cash costs were ??around $45/t FOB...? and well below mid cap peers MMX and MGX. Strong iron ore prices of US$150/WMT are being achieved.

* AGO?s bid for GIR looks likely to succeed with the offer recommended by GIR?s directors and an independent expert.

* The all scrip offer values GIR at around $5.70 a share, 2% above the scrip/cash option. Acceptances have reached 52% with the closing date extended to 28 February.

Impact

* We consider there sufficient certainty to incorporate GIR into our valuation at this stage.

* Our production forecasts increase significantly due to the much larger resource base. Risk is reduced with increased scale, our discount rate falls from 12.5% to 10%.

* Our FY11 net profit forecast increases by 16% to $180m but the 50% increase in shares on issue reduces FY11 earnings per share by 23%. At a $3.66 share price, the FY11 PE ratio is 17x but falls to 11x in FY12 reflecting strong production growth.

Recommendation impact (last updated: 10/02/2011)

Our fair values doubles to $4.80. AGO deserves a premium for its track record of delivering on its promises. Our recommendation improves from Hold to Buy, but is contingent on the acquisition completing.
Event analysis

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