recap - undervalued asx iron ore explorer

oldie but something to keep in mind

http://www.scribd.com/doc/51674144/Southern-Cross


Cabral Resources

(CBS); Focussed around infrastructure in theemerging province of Bahia.

Cabral Resources, (CBS), is a very early stage iron ore explorer thatprovides entry level exposure to the development of a new iron oreprovince in Bahia that is being opened up by government fundedinfrastructure. At the current price of 16cps, CBS has a market cap of $39m, no debt and $17.2m in cash, (post the acquisition of the Braziliantenements). In addition the company has an interesting uranium tenementarea in Western Australia adjacent to BHP’s Yeelirrie project and a uniquejoint venture with China Railway Materials Commercial Corporation,(China Railway). It is early days for Cabral with the aero-mag due to be flown in the nextquarter which will be followed by an aggressive drilling program,however, if they are successful with their stated goal of proving up 350mtto 600mt of iron ore from the existing leases and then extending this to inexcess of 1bt via possible acquisitions, then

Cabral is a stock that hasthe potential to be multiples of the current price given a market cap of $39m and enterprise value of just $22m

.The 9 iron ore tenements being acquired in Bahia Brazil are within closeproximity to proposed rail and port infrastructure under construction andto be funded by the Brazilian government. With exploration and regionalacquisitions, some of which have already been identified, the overall planis to become 4 to 10mtpa iron ore concentrate producer by 2015. Inaddition the company has identified the

potential for DSO hematiteore

which will be pursued concurrently and if successful will provide theopportunity for early production and cashflow.


















The strategy of the company is simple and involves consolidating themaximum ground position possible in close proximity to the East/West raillink currently under construction, (see map below). The construction of this rail which is planned to intersect the North/South rail is an excellentexample of the proactive nature of the Brazilian government in committingto new infrastructure programs.The key mover and shaker in the region is the £12bn, UK listed,

EurasianNatural Resources, (ENRC).

This is a fascinating, growth oriented,mining company backed by Russian money and listed in London. One of our operatives met with them in London recently to learn more of their strategy in Bahia and what it may mean for Cabral Resources. One of thekey projects for Eurasian is the BML project which is similar to that whichCabral is proposing at Morro Do Gergelum. It is located near Caetiteapproximately 10km from the East-West Railway currently being built bythe government. The bankable feasibility study on this project wascompleted in July 2010. It is tabled as being 19.5mtpa of concentratecapacity and capex is estimated at US$2.1bn with production due tocommence in 2013. The JORC-compliant resource is 1.8bnt grading 32%measured and 932mt indicated grading 35% Fe. The project is 523km tothe port terminal at Ilheus which they plan to construct privately.Construction is pending port environmental licence and installation licenceand commencement of the rail link. To me this is the key comp for CBS.

ENRC payed $976m to acquire theproject

and what was interesting to note was that they said that they haveone eye over their shoulder on what Vale are up to as they are currentlyabsent from the region. Obviously, key in ENRC's thought process is thefact that infrastructure is being government funded. ENRC were very keento hear what CBS were up to and it just makes me think that this companymay have landed on quite an interesting strategic position in a new regionthat is opening up. Cabral has a joint venture with the Chinese state owned enterprise, ChinaRailways, which has the potential to assist with project funding andinfrastructure solutions to successfully develop Cabral’s tenements. The immediate work program is for:
























·

Aeromag surveys to identify a more accurate explorationtarget at Morro Do Gergelim and other tenements

·

Follow on acquisitions of both magnetite and potential DSOore tenements to add further critical mass to Cabral, (target 1bt plusoverall of potential)

·

Results of exploration drilling towards the de?nition of aJORC compliant resource at Morro Do Gergelim and othertenements

·

Announcements in relation to the development of theBrazilian East-West railway line and port infrastructure

In our view Cabral is a simple story.

Cabral have identified between331mt to 644mt of targeted exploration tonnages and clearly at an EVof $32m the EV/resource tonne at the low end of the target (331mt)is sub 10c per resource tonne, and if they find 644mt it is sub 5c perresource tonne, if the strategy is successful

. The other comparison that we feel is useful is

Centaurus

(CTM,11c),which we also like and recommend buying with a price target of 20cps.They currently have a 126mt of JORC compliant resource spread acrossmultiple tenements in the iron quadrangle (south of CBS) at a grade is30.5%. CTM’s strategy is to sell their ore internally, at approximately 60%of China prices, to the local steel mills. CTM’s current market cap is$82m. Compare that to CBS at $39m who have a port and rail solution,access to funding partners and targeted minimum tonnages of a minimum350mt with expected grade of ~32-36% and you can see the potentialupside if management are able to execute successfully. Critical is management and we are pleased to see Chris Robinsonconfirmed as a director. Chris is an industry veteran with



37 yearsinvolvement in the Australian and international iron ore industry, includingsenior technical, operating, management and customer liaison roles. Post the recent raising, well known resource investor, Passport Capital haslodged with 9.64% which we see as a sound endorsement of thecompany.

Passport were the early backer of Riversdale (RIV) andmade a complete killing

.





















Given that sovereign risk is back on the agenda after recent events inAfrica it is worth considering how Brazil fits into this as it is here thatCabral is firmly focused. Brazil is the fastest growing economy in SouthAmerica, it has a vast population base of 200m people and is blessed withan abundance of natural resources. Importantly it is stable and has a welldeveloped mining code and a mining industry that is older than ours inAustralia. The government is pro growth and is investing US$830bninfrastructure to open up industry and opportunity. In 2010, the economymaintained a steady growth rate of 7.5%, the highest annual rate since1986 and is forecast to grow at 7% in 2011. The country is stable andincreasing is being recognised as a great place to do business.

In 2014Brazil is hosting the FIFA World Cup and in 2016 the OlympicGames, those 2 events basically guarantee a commitment to stability,growth and investment over the immediate future

. Brazil currently exports more than 300mt of iron ore, is the world’s largestproducer of Merchant Pig Iron and is a top 10 global steel producer in itsown right. Cabral is emerging, however it has tremendous leverage to theBrazilian growth story which we believe will deliver excellent shareholder returns. For risk tolerant small cap investors

we see CBS as a speculative buy upto the recent high of 24c


and dont forget this in the pipeline, which could be happening behind the scenes as we are currently in 2H2012-

A strong uranium anomaly was identified in the NW portion of the Canabrava area and aligned NS along with a less-pronounced thorium anomaly. However, under Brazilian law, only the Brazilian government is authorised to mine and exploit uranium. That said, Cabral intends to dispose of these tenements in H212.

http://cabralresources.com.au/static/files/assets/f4cd9c45/Edison_Investment_Research_Equity_Research_Report.pdf

Valuation: Base case of A$0.09/share
We have used a conservative comparable EV/resource multiple approach to calculate an implied value per Cabral share of $0.09. This is derived using the midpoint of Cabral’s stated exploration target of 331Mt to 644Mt of magnetite iron ore of 487.5Mt @32% Fe, for an estimate for Fe contained of 156Mt, to which we apply a peer group EV/tonnes of Fe contained multiple of 0.15x.


Although Cabral doesnt get a specific mention, very interesting article posted a week or so ago -





Minefield: The boys to Brazil

Tim Treadgold15 October 2012
Print



PORTFOLIO POINT: A growing list of Australian mining companies are heading to Brazil. Good geology, easier regulation and lower costs are proving very attractive.


Brazil has never been a significant investment destination for Australian companies, until now. What started as a trickle has become a rush as an increasing number of small miners make the move, lured by easier government regulation and attractive geology.

Gold and iron ore are the primary focus for ASX-listed stocks, but nickel, copper and phosphate are also on the menu.

First clue that something interesting was happening in Brazil came last year when Beadell Resources (BDR) featured in a report here (Twin turbo mining, February 7, 2011).

Lacking even a modest profile at home, Beadell struck it rich in Brazil through the discovery of a unique orebody that yielded both gold and iron ore. Back then, the Tucano prospect was a novelty, but heading towards development, lifting Beadell’s shares from 25c to 76c in just six months, with the last price valuing the stock at $475 million.

Today, Beadell is trading at 97c, a price which values the company (after an increase in the number of issued shares) at $702 million, on its way for a place in the ASX top 200 but still without many Australian investors aware of its success.

Mirabela Nickel (MBN) is another Australian company making its name in Brazil, though it has not had such a smooth ride, burdened by a low nickel price and difficulties in achieving production targets at its Santa Rica nickel mine.

However, over the past few weeks the rising nickel price, falling costs and higher output, has lifted Mirabela from 25c in early September to 44c – a 76% rise in little more than a month.

A combination of factors are conspiring to lift the profile of Brazil in the Australian mining community, including:
•Substantially lower tax and royalty rates compared with Australia.
•Mining-friendly state and federal governments.
•Labour costs that are 50% lower than in Australia, plus cheaper power and water.
•A strong domestic economy growing at about the same pace as Australia, 3% a year.
•Much bigger population (191 million) and ranking Brazil as the world’s fifth-biggest economy.
•A lower-risk profile compared with many African countries that have been the traditional destination for many small Australian miners.
•Easier access to railway and port services as well as domestic steel mills for iron ore.
•Direct access to North American and European capital markets.

Some of these points also apply to other South American countries, which have proved attractive to Australian miners – especially those along the spine of the intensely-mineralised Andes mountains which are home to the world’s biggest copper mines.

Chile, Peru, and southern Argentina have been the focus of Australians working in South America, with Brazil largely overlooked.

The elevation of Brazil to the ranking of a prime investment destination has been best explained by one man who has directed a portion of his company’s spare capital into a Brazilian iron ore joint venture.

Mike Young, chief executive of BC Iron (BCI), one of the small iron ore miners in WA’s Pilbara region, has paid $6 million for an initial 5% stake in another ASX-listed company, Cleveland Mining (CDG), which has a small Brazilian gold mine nearing production and a bigger iron ore prospect.

Until BC made the investment in Cleveland it had been focused solely on Australia, particularly on a 50:50 joint venture it has with Fortescue Metals Group, a deal that provided all-important access to rail and port services.

Late last week, Young explained why he had decided to invest in Brazil, telling a newspaper that: “Once you step outside of the joint venture with Fortescue, I personally don’t see a lot of opportunity in Australia for iron ore.

“It’s very hard to get infrastructure and the future infrastructure which is being planned is going to be difficult and it’s going to be expensive.

“The way they are currently mining in Brazil, particularly small operations ... is very similar to the way we used to mine here in Australia in the 1980s.”

Because it is virgin territory for most Australian investors, Brazil-focused mining companies should be approached with care. But as an introduction here is a selection of stocks with diverse interests, which should be interesting to watch.

There are no specific investment recommendations, just an observation that a trend appears to be developing which is attracting Australian miners to Brazil. A trend, if spotted early, can be an investor’s best friend.
•Beadell (BDR). It has successfully sold the iron ore in the Tucano mine to a domestic Brazilian steel mill and this month starts processing gold ore with news of the first “bar” expected in a matter of days. Over the past 12 months the stock has traded between 52c and $1.02, with that peak reached last Friday. At its latest price of 97c the stock is valued at $702 million.
•Mirabela Nickel (MBN). It has survived a difficult start with management forecasting annual production of between 19,000 and 21,000 tonnes of nickel at a cash cost of less than US$6 a pound, a reasonably comfortable level now that the nickel price has climbed back over US$8/lb. Over the past 12 months, Mirabela has traded between 21.5c and $1.64 with the latest price of 44c valuing the stock at $381 million.
•Crusader Resources (CAS). It plans to start its life in Brazil as a small iron ore producer from its Posse project, which will deliver material into the domestic market. This will be followed by its flagship Borborema gold project, which is planned to produce around 180,000 ounces of gold a year over an initial nine years at a cost of US$558 an ounce. Over the past 12 months, Crusader shares have traded between 35c and $1.32 with most recent trades at 52.5c, valuing the company at $66 million.
•Centaurus (CTM). It is another ASX-listed stock with a Brazilian iron ore project and new-found support from an existing Australian iron ore miner. The primary focus of Centaurus is the Jambreiro project, which is planned to start producing at a rate of 2 million tonnes of iron ore a year, sold to local steel mills, and followed by an export phase. Backing Centaurus is Atlas Iron, which outlaid $18.7 million for a 20% stake in the Brazilian as part of a policy to diversify away from Australia. Over the past 12 months, Centaurus has traded between 25c and 75c, with recent trades at 26c, close the low point and valuing the stock at $50 million.
•Avanco (AVB). It has acquired the Pedra Branca copper and gold project in Brazil from the mining major, Xstrata. The company already has a substantial resource of both metal, 550,000 tonnes of copper and 445,000 ounces of gold, close to the targets it has set to proceed with development. Over the past 12 months, Avanco shares have traded between 4.8c and 12.5c with latest trades at 9c, valuing the stock at $100 million.

Other interesting Australian companies calling Brazil home include: South American Ferro Metals (SFZ), which has a small iron ore mine in production. Aguia (AGR) which is exploring for potash and phosphate, and Strickland Resources (STK), which recently acquired a gold-project developer Orinoco (OGX), which is also ASX-listed.


Read more at EurekaReport: http://www.eurekareport.com.au/article/2012/10/11/mining-stocks/minefield-boys-brazil#ixzz29oPqFpvh