Stockbrokers Like Gindalbie's Upside12/07/2010 1:15:02 PMBy...

Stockbrokers Like Gindalbie's Upside
12/07/2010 1:15:02 PM
By Chris Shaw

Given China's ongoing need for steel the outlook remains bright for Australian iron ore producers, as iron ore is a key ingredient in the steel making process.

Among emerging producers Gindalbie Metals (GBG.AX


GINDALBIE METALS12 July,201012/07/2010 13:41 Sydney, Australia.
Price Change % Change
1.010 +0.030 +3.060%

Company overview
Real-time quote
GBG.AX , 1.010, +0.030, +3.060%) has caught the eye of Credit Suisse, the broker initiating coverage on the shares with an Outperform rating.

Gindalbie is a pure iron ore play, the company at present developing the Karara magnetite project in Western Australia. Karara has capacity for at least a 60-year mine life at an initial output of eight million tonnes annually, with scope for production to be expanded to more than 30 million tonnes per year for more than 30 years.

Construction is underway at Karara, Credit Suisse noting commissioning of the hematite project is expected in the middle of 2011 and for the magnetite portion of the project in the second half of 2011. Along with Karara, Gindalbie has around 1,900 square kilometres of exploration tenements, which contains the Shine and Gap Prospects of which the company holds a 60% stake.

The key for the Karara project according to Credit Suisse is developing an infrastructure solution for the project, with the most likely being the Oakajee Port and Rail development. This is estimated to be a project of around $4.37 billion.

While commissioning and construction of the project presents some risk, Credit Suisse sees this as reduced to some extent by the fact the Karara project is a 50:50 joint venture between Gindalbie and AnSteel, one of the largest steel producers in China. This backing of the project gives Gindalbie some additional development options in the broker's view.

What the Karara project also gives Gindalbie is leverage to the iron ore price, as on Credit Suisse's estimates every US$10 per tonne change to its long-term price assumption adds about $0.82 to its net present value.

Credit Suisse values Gindalbie at $1.28 per share and set its price target for the stock at $1.30. This is conservative when compared to UBS, which has set a target of $1.60. UBS is the only other broker in the FNArena database to cover Gindalbie and also rates the stock as a Buy.

As with Credit Suisse, the attraction for UBS is twofold, being the leverage to iron ore prices and the current value on offer given Gindalbie's share price remains well below the valuation-based price targets of both brokers.

Shares in Gindalbie today are slightly higher and as at 10.30am the stock was up 0.5c at $0.985. This compares to a trading range over the past year of $0.71 to $1.45 and implies upside to the $1.45 average price target according to the FNArena database of better than 46% (though admittedly, the average price target is only based on two brokers' input).

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