patersons intiates buy on aki

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Exposure to an emerging iron ore province
Investment Highlights
African Iron Ltd (AKI) is a spin-off from Cape Lambert Resources Ltd (CFE). CFE recently vended the Republic of Congo �Congo Brazzaville� iron ore assets into Stirling Minerals Ltd (SMZ) for $47m cash, a 25% interest in SMZ and a US$1/t production royalty. The transaction was finalised in December 2010. AKI has a 33Mt DSO resource with strong exploration upside which will be tested in coming months. Following a $96m equity raising in December 2010 AKI has $49m cash on re-listing and is targeting DSO production from the Mayoko iron ore project in 2013. Further out, the company has an exploration target of 1Bt itabarite. We anticipate strong exploration momentum at Mayoko in Q1 CY11, believe West Africa is gaining recognition as an iron ore province and initiate coverage with a BUY recommendation and a price target of $0.71/share (20% discount to NAV).
Cheap on relative valuation. AKI has an EV of A$152m, which appears cheap against its peer Equatorial Resources ltd, which has adjoining tenements and an EV of approximately $262m with a similar endowment of iron ore mineralisation. AKI is someway ahead in terms of development with EQX yet to publish a DSO resource.
Near-term production. AKI is targeting DSO hematite production at Mayoko in 2013, sourcing ore from the Mt Lekoumou (target of 100Mt at 55-60% Fe DSO) and Mt Mipoundi prospects (target of 100-200Mt at 40-50% Fe bDSO and 600-900Mt at 32-36% Fe magnetite BIF). An initial 10 year mine life is based on a 50Mt DSO hematite reserve target at 5Mtpa production. This could extend to +20 years with bDSO.
Access to Infrastructure. The railway from Mayoko connects to the deep water port at Pointe Noire (300km to the north east) and is located within 2.2km of the Lekoumou prospect. AKI currently has access to the rail line during the exploration phase of the project and is confident of achieving access to transport up to 10Mtpa of ore by rail to the coast, once in production. A rail access agreement is set to be finalised in 2011.
Low capital intensity. With substantial existing infrastructure in place, AKI will have a lower capital intensity than its peer iron ore developers. On our estimates the company can bring the Mayoko project to production for US$250m or US$50/t of annual production.
Regional potential. There is significant exploration upside at the Mayoko project, which comprises a 1000km2 tenement package. AKI has generated several targets for drilling which may provide additional iron ore discoveries in 2011. We expect regional targets to contain >200-300Mt at 32-50% Fe hematite/magnetite. Around 22% of the Mayoko licence has had aeromagnetic surveys completed with other know iron occurrences to be followed up.
Catalysts: (1) MD appointment - 1 month, (2) Results of Phase 1 drilling programme - ongoing to Q3 2011, (3) Scoping study � due Q4 2011.