Equatorial Resources Ltd (EQX.ASX; $0.70/sh; Mkt Cap $85m; Cash ~$50m).
Mayoko-Moussondji Scoping Study outlines robust economics and competitive capital intensity.
TRADING BUY. PT $1.25/sh. •EQX have released a detailed Scoping Study for their flagship Mayoko-Moussondji iron ore project in Congo-Brazzaville. The study was completed by independent consultants WorleyParsons.
•Mayoko-Moussondji consists of a 1,000km2 tenement area with >46km of magnetic strike across 5 target prospects. The existing resource inventory stands at 767Mt @ 31.9% Fe and includes 102Mt @ 40.6% Fe. The company has previously outlined an exploration target of 2.3-3.9Bt at 30%-65% Fe. The geological model consists of DSO, pDSO and magnetite. Met test work has demonstrated near surface hematite to deliver a premium fines product of 64% Fe. Significant infrastructure advantages are present with operational railway running 500m from the main prospect and leading directly to Port at Pointe-Noire.
•Key outcomes of the study include:
- LOM 23 years;
- Production profile initially 0.5Mtpa and ramping up to steady state 2Mtpa;
- Capex to initial production US$114m and LOM US$231m (~35% of which is rolling stock);
- Capital intensity US$116/t compared with industry average >US$200/t;
- LOM average FOB Pointe Noire of US$41/t;
- Product will be a 64% Fe premium fines product; and
- First production will be 15 months from FID. •The study in our view is very positive and in particular the capex and opex extremely competitive. This appears largely due to the significant infrastructure advantages, low strip ratio and DSO nature of the ore to be mined which will be processed via simple crush/screen/gravity sep. There is also the potential for the capex to reduce further should the rolling stock be leased rather than purchased outright.
•Notwithstanding the relatively small-scale operation of 2Mtpa, at ~US$40/t FOB costs and assuming say long term US$80/t Fe price received, the project will be generating ~US$80m EBITDA p.a., which should equate to a +$300m project/business once in operation and de-risked (at target 4x EV/EBITDA).
•We highlight that South African major Exxaro paid ~US$350m for a neighbouring project (which was pre-development) in early 2012 (ASX-listed African Iron Ltd), targeting to commence production at 2Mtpa in near term.
•We have completed a preliminary DCF of Mayoko-Moussondji with the Scoping Study parameters outlined above and assume production commencing in 2015. We derive a NPV10% of ~$200m. We have risked this by 50% to account for development/financing/timing to derive a risked valuation of $100m.
•The share price has rallied strongly (~60%) in recent weeks however with a cash backing of more than $0.40/sh and an implied project valuation of less than $40m for both Mayoko and Badondo, we believe the stock represents compelling value with the potential for a near-term catalyst should a financing partner invest directly into the project and provide a read-thru value for EQX’s share of the Project.
•The strong cash position of the company is also a differentiating factor compared with the many other junior resources stories which have limited cash holdings and are finding it difficult to tap the equity markets. EQX could also look to leverage off this cash position with an opportunistic transaction given it is a ‘buyer’s market’.
•TRADING BUY, PT $1.25/sh. Our sum of the parts valuation is $1.25/sh which consists of $100m for Mayoko-Moussondji and $50m in cash. We attribute no value at this stage to Badondo given the stranded nature of the deposit.
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