Valuation and risks We see substantial potential upside from the current AXO share price as project funding is advanced and as the project is developed. AXOs integrated feasibility study has identified a pretax NPV of A$1.5bn for Balla Balla at an 8% discount rate. In our view the NPV methodology significantly undervalues long-life projects, and would anticipate substantial upside in the valuation to an earnings multiple typical of long-life resource projects. Our target price and valuation is A$0.75/AXO share. On the basis that AXO will need to raise 50% of the anticipated equity component of A$300m, at the current share price the issued capital would quadruple to about 775m shares. Using 50% of the Phase 1 NPV of A$1.6bn would justify a share price close to A$1.00 per share. On the full two-phase project NPV of A$2.08bn (A$2.50/share) the value of 50% generates A$1.25/share.
The cash position of A$6m (December 2009) is not adequate to fund the Port Hedland Port Authority payment due in March, nor the convertible bond payment due in June. In our view, the greatest risks are largely related to achieving project financing. In a strong market for iron ore there may be significant cost pressures on development with the capital cost estimates likely to face upside risk through construction. Longer term the project will be exposed to iron ore prices and the A$/US$ exchange rate. We see only limited resource risk, and limited operational risk.
Key upside risks include expanding capacity to the 10Mtpy case in the medium term and the development of the ferrovanadium product line will depend on successful development, commissioning and operation of the Phase 1 project.
looks like RBS is valuing 50% of the project at $150m, ie they still need to raise $150m from the sale of shares. lets see what deal they can do with the chinese, i was looking for them to get around $250m from the 50% sale, which would lead to less dilution.
AXO Price at posting:
29.5¢ Sentiment: LT Buy Disclosure: Held
