ord minnett buy recommendation

18/11/11 By Ord Minnett

Flinders Mines Limited
Resource Increase Rolls FMS towards BFS. Flinders Mines Limited (Flinders) continues to advance its Pilbara Iron Ore Project (PIOP) in Western Australia. The PIOP is a large, long life, advanced and potentially low-cost hematite iron ore project. In the past week Flinders has made three strategic announcements. All three were positive, with announcements on:
- Flinders purchasing the existing net profit royalty over the iron ore project from a third party,
- Resource increase to more than 900Mt, included a Measured Resource for the first time. The resource upgrade included a 63% increase in Measured and Indicated Resources, and
- Flinders entering into a non-binding agreement with an independent rail provider to consider building a mulit-user rail line from the PIOP to a nearby port, likely Anketell.

Flinders has reached agreement with Prenti Exploration Pty Ltd (Prenti) to terminate the Joint Venture agreement between them. This is a fundamental valuation shift for the PIOP as Prenti, as part of the JV held a 5% net profit royalty over the iron ore from the project. The effective extinguishment of the net profit royalty has added approximately A$39 million to our valuation. Ord Minnett contends that this has possibly even more intangible value as the removal of the net profit royalty over the project now leaves the ownership and economic interest in the project 100% with Flinders. This is strategically important, clearing the path for any potential project partner of suitor.

Flinders has entered into a heads of agreement to investigate rail development options in the Pilbara for the PIOP. The unnamed "independent rail provider who has significant experience in large bulk commodity transport in Australia" is highly likely to be QR National (QRN, Hold). QRN has recently established a stand alone iron ore focussed business in Western Australia. The possible tie up with QRN is a catalyst for both parties to become a more meaningful player in the proposed development of Anketell Point in Western Australia's Pilbara region. We view Flinders as an overlooked Pilbara iron ore player that will come to the fore over the next 12 months. These developments over the past week are all material steps, highlighting the quality and underlying value of the asset. Our base case valuation has increased to $0.19 cents per share with an upside case valuation of $0.29 per share. We maintain our buy recommendation with an increased price target of $0.24 per share (previously $0.21).