I'll just lead off by saying that I'm still jittery about the long term price of Iron ore. But for those that aren't ...
Rather than doing a price target using an ebit, eps etc, I've instead choosen to do the unoriginal thing and compared BC Iron (BCI) to Atlas Iron (AGO) using Market Capitalisation.
AGO's current Market Cap is $3,125,000,000 BCI's current Market Cap is $231,000,000
AGO has made some major acquistions lately. Including AXO and GIR. AXO was mainly for AXO's port space and to a lesser degree AXO's Magnetite deposit. GIR was purely for the ore. AGO on it's own didn't have enough IO reserves for the long term. AGO had to take over GIR to enable AGO to remain a long term producer. AGO is bullish about the long term price of iron ore. It's hoping to ramp up production to 12Mtpa by mid 2012. This is on the proviso that AGO can source the funds needed for expansion. It's unclear weather AGO can do this through it's own revenues.
My personal opinion is AGO will move away from FMG and become totally self sufficent. At the moment AGO is relient on FMG's port space at Anderson. it'll be easy for AGO to become self sufficient for port considering the port space soon available at the NWIOA's Utah point loading facility at Port Hedland.
Transport is another thing. AGO has relied on 80t payload trucks to move it's ore to Port Hedland via public roads. This kind of trucking is limited to 6Mtpa. AGO moved to a strategy of building a private haul road from it's most northern mine to Port Hedland to enable AGO to increase production to 12Mtpa. AGO's most northern mine is less than 100Km from port Hedland. The problem for AGO is that the mine has quite limited reserves. AGO to continue to be a long term player will need rail. David Flanagan of AGO said, "He would give his right arm to get a rail deal with FMG". Unfortunately for David a right arm probably won't be enough. AGO as no option in my opinion but to build it's own rail line.
The amount of money that AGO will be looking at will be in the Billions. AGO is also looking at getting it's Ridley Magnetite project up and running. AGO is hoping to eventually produce 15Mtpa from Ridley alone. But the capex required to get Ridley to 15Mtpa is currently said to be $2.7B. That's B for Billion. The annual amount of IO exported by AGO could exceed over 30Mtpa by 2014???????. An amazing effort if it's acheived. Especially considering that FMG, the third largest IO miner in Australia is trying to exceed 60Mtpa.
So what's my point ..... well I'm about to be incredibly generous to AGO. I'm going to assume that AGO will be able to ramp up production to 30Mtpa though organic growth. So no more M&A's diluting shares, and no more Capital raising/s required to raise the estimated $6Billion (guess) needed to reach a 30Mtpa target. As for the year 30Mtpa could be acheived? At the earliest 2014.
Now onto BCI. Something that has been missed by many here was a remark made by an analyst working for BBY. The analyst said that the NJV was "unoffically" going to be producing 7Mtpa. A year wasn't stated by the analyst but it seemed to correspond to when FMG had updated it's Anderson port facility. According to FMG, that update was to be completed by the end of 2012. Since I believe contracts for the update have already been agreed to and FMG has the funds. The upgrade looks a certainty. As of now the NJV is to be ramping up production to 5Mtpa by mid 2012. A recent company update suggests even this timeline maybe changed for the better with BCI announcing an output of 2.5Mt by December 2011.
I'm predicting with some certainty that the NJV will eventually be exporting 7Mtpa, maybe as early as the end of 2012. Just to give this a little further meat. Originally, BCI was wanting to start production at 8Mtpa. When the GFC occurred, BCI prudently curbed start up to 3Mtpa. And over time, raise production through revenues. The original mine design was 8Mtpa. When the feasability study came out in the middle of the GFC. The mine design wasn't changed. The mine is being constucted presently to meet 8Mtpa. My point is why continue to implement infrustructure to meet 8Mtpa, if you were never intenting to utilize 8Mtpa infrustructure?
Onto comparing quality. AGO is exporting it's ore at 56.5% Fe. The critical element for any producer of fines is that they reach a target of 62%Fe after sintering. The Loss on Ignition (LOI) figure is critical. Chinese mills won't at present use any ore with a Iron content less than 62% Fe. This is why BCI or AGO must export fines and not lump. Those who do export lump will also have a Fe content above 62%. Fines producers cheat by placing their product through the sintering process. This process burns off the CO2, H2O and Carbon contained in the ore. The end result is a material that has a higher Fe content. The product also turns into globs (resembles gravel) suitable for the furnace. BCI's LOI figure is 12.1%. AGO's LOI figure is 9.1%. If AGO exports it's fines at 56.5% Fe. It only marginally creeps up above the 62% CaFe threshold.
AGO 1000 - 91 = 909 565/ 909 = 62.16% CaFe.
BCI 1000-121 = 879 570/ 879 = 64.85% CaFe
Lonsec research said that BCI has set it Fe content too high. That if BCI was to take advantage of it's extra ordinary LOI figure. Most of BCI's CID could be exported. AGO can't decrease it's 56.5%. It would mean that AGO would go under the 62% CaFe mark. However BCI could drop it's export figure to 54.5% Fe. And it would still come out at the end of the sintering table with a higher CaFe content then AGO's.
There's also the record low Phos content of BCI at 0.016%. A world record for any Hematite mine in the world. BCI will be paid a premium for it's Bonnie fines that aren't already spoken for. However AGO will receive penities for it's ore due to high Phorphorous, Alumina and Silica. To be fair to AGO, I haven't taken into account AGO's GIR ore quality. And also AGO is being compared to some of the best quality fines in the world --- Bonnie fines (BCI). But I must make this comparison to see whether BCI is undervalued.
As for Reserves. AGO as a massive resource since buying GIR. But it will need to be eventually somewhere in the order of 1082Mt (That's Reserves, not DSO) to compare to BCI. BCI's reserves will easily surpass 80Mt once further drilling is completed.
BCI still has around $30M in the bank. AGO has alot more. But once again that figure would need to be around $405M currently to compare to BCI's market cap.
To get to my point. If we were to do a quick comparison at 30Mt for AGO compared to 3.5Mt for BCI on future outputs. The current market Cap for BCI should presently be $365M. Divide that by 95M shares. That means that BCI's SP should be $3.84. And as I pointed out. That is based on both companies being level. As I pointed out above, I think that BCI is a superior stock in every way. Because,
There will be more chance of BCI reaching 3.5Mtpa then AGO reaching 30Mtpa. And that BCI will probably meet 3.5Mtpa by no later then the beginning of 2013. At present AGO is trying to export at a rate of 6Mtpa. BCI by the end of this month will be exporting at a rate of 1.5Mtpa (NJV 3Mtpa). AGO will be struggling to reach 30Mtpa by 2014. BCI won't need to Capital raise to meet 3.5Mt. BCI can easily do this through organic growth. I very much doubt that AGO will raise the $6B (guess) needed to acheive 30Mtpa through organic growth. BCI has a superior quality ore to AGO. Infact I can't find a figure where AGO or GIR's IO is superior to BCI's. BCI has more cash then AGO when comparing market caps.
Well underrated.
BCI Price at posting:
$2.45 Sentiment: Buy Disclosure: Held