rated speculative buy

http://www.theaustralian.news.com.au/story/0,25197,
24182025-23634,00.html


Cape Lambert Iron Ore (CFE) 51.5c

FROM Criterion's bargain-basement file we highlight the odd lowly market valuation ascribed to this Pilbara junior, which is bulging with cash after selling its eponymous magnetite project to China Metallurgical Construction Group (CMC) for $400 million. One reader is puzzled why Cape Lambert is trading on a market cap of $230 million (including in-the-money options) when it's sitting on cash (including $160 million yet to be received from CMC) of $430 million.

A likely reason for the valuation gap is the intent of Evraz, the Russian group which has a 19 per cent holding in Cape Lambert. Instead of blocking the sale and making a takeover tilt as expected, Evraz shocked everyone -- Cape Lambert management included -- by doing a deal with CMC to take a 75 per cent stake in the project.

With the share price tanking from around 80c after news of the back-room deal, Cape Lambert now feels vulnerable to a low-ball offer from Evraz. But such an outcome is not inevitable.

The other uncertainty is what Cape Lambert does with the dough. The company has proposed a capital return of 26c a share to distribute $100 million or so, but that still sees plenty left over.

Cape Lambert is not officially a cash box in that it retained tenements at the prospective southern end of the project and expects to spend $5-8 million on drilling a few holes. If proven up, any resource would have enhanced value given its proximity to the 1.5 billion tonne main resource.

As for the rest of the stash, management has been entertaining all manner of proposals from other WA juniors; and has looked as far afield as West Africa. Such a foray might not exactly thrill Pilbara-centric investors, but iron ore explorers have to go where the iron ore is.

Cynics might argue there's nothing more dangerous than a cashed-up miner searching for a reason for being. Unless we've missed an extenuating factor -- which is always possible -- we agree that Cape Lambert rates as a speculative buy.

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