The quality and size of Equatorial Resources’ (ASX:EQX) Mayoko-Moussondji project, coupled with existing infrastructure, a quality management team and a cash balance of more than US$50mln, will see the iron ore project developed.
That’s the view of Australian broker Blackswan Equities, which has a ‘buy’ rating and a target price of A$2.20 (current price: A$0.70).
“Whilst we highlight the timing risk of operating in the Congo, we expect to see the project in production by 2016,” said Blackswan.
That view was also shared by Morgan Stanley, which has confirmed its ‘overweight’ recommendation on Equatorial’s shares following the recent publication of the company’s scoping study for a 2Mtpa operation with an initial mine life of 23 years.
Morgan Stanley welcomed a more achievable funding target for the 100%-owned project than it had been expecting; the heavyweight US broker had previously modelled a higher capex requirement of around US$500mln.
The project’s development is expected to set Equatorial back just US$231mln and this reduced initial capital expenditure (capex) lowers the funding hurdle and places Mayoko-Moussondji among the least capital-intensive iron projects in Africa thanks to its access to existing rail and port infrastructure.
Morgan Stanley has a base case valuation of US$255mln for the project, with an expected internal rate of return (IRR) of 33%. This compares very favourably with Equatorial’s current market capitalisation of only $85mln especially considering the company’s strong cash balance – a fact not missed by brokers.
Morgan Stanley’s Stefan Hansen pointed out that despite the reduced capital spend, funding remains a key risk in the current environment.
“EQX is exploring a number of options, including bringing on a strategic partner and/or off-take/prepayment arrangements with potential customers,” Hansen said.
“The project’s early-stage nature makes it a ‘high-risk, high-reward’ proposition, in our view,” he added.
Both brokers also pointed out the potential synergies with Equatorial’s neighbour Exxaro and contemplated the potential for the projects to be consolidated.
Exxaro is due to begin production later this year after acquiring the neighbouring project for US$350 million in 2012. Ore containers, locomotives and rolling stock are ready to go and this was identified as a strong positive for Equatorial.
Blackswan added that Equatorial could make substantial savings off its US$82m rolling stock budget by either leasing or purchasing second-hand rolling stock.
GMP Securities joined the list of brokers impressed with Equatorial’s scoping study. It has issued an updated A$2 target price, highlighting the “extremely favourable” capital intensity of US$115 per tonne.
It said: “We re-iterate our BUY rating since we believe that Equatorial is one of the best positioned iron ore development stocks globally.”
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