sundance dfs overview

Sundance DFS analysis
April 8th, 2011 | Author: admin
http://www.thetradercentral.com/news

Sundance resources delivered their long awaited Definitive Feasibility Study for their Mbalam iron ore project earlier this week to mixed reactions from the market. The DFS shows a net present value for the project (stages one and two inclusive) of US$ 4 billion+. Capital expenditure for stages one and two is estimated at $US 6.9 billion.

Stage one of the Mbalam project forecasts annual production of 35mt of DSO at an average grade of 63.6% Fe , with a cost of $US21.2/t. The pay-back period for the project is estimated at three years with an un-geared internal rate of return at 27%. Initial JORC reserves for the project is 252 million tonnes. It is expected that a Chinese buyer will sign an off-take agreement which would finance a large percent of the project's costs.

Sundance are believed to be in discussions with several potential buyers.

CEO and Managing director had the following to say about the results of the DFS :

"These two studies have defined a high-quality iron ore project of global significance that will generate substantial financial returns and position Sundance as a key player in the international iron ore space. In a very short amount of time we have defined a premium high-quality iron ore resource and completed a Feasibility Study that validates this as a technically and economically viable project with robust margins and long mine life."

The pre-feasibility study for stage two of Mbalam project will commence in 2012, capex for stage two is forecasted at $US 3.1 billion. Stage two involves the development of a processing plant and expansion of the Mbarga mine.
Development includes the drilling of Sundance?s Itbibrite Hematite concentrate of which there is an estimated 2.32 billion tonnes with a grading average of 38% Fe. Although the grade may not be spectacular, the sheer size of the resource is impressive.

Sundance expect to fund stage two developments through the cash generated in stage one. Given the capital requirements for stage one it is likely Sundance will need to take on debt which may limit their ability to fund stage two predominantly through cash flow from stage one.

Below is a comparison to similar iron ore projects to Mbalam (Comparisons with Fortescue's Cloudbreak mine are more appropriate as these are proven figures and not forecasts):

Fortescue's Cloudbreak mine(2009)
? Production: 38mt
? Grades: 57-61%
? Cost per tonne: $US 26.6

Aquila West Pilbra iron ore project
? Production (2014): 30mt
? Grades: 56%-62%
? Cost per tonne: $US 19.48

Sundance Mbalam project
? Production(2014): 35mt
? Grades: 63.6%
? Cost per tonne: $US 21.2

The Net Present Value of the Mbalam project is calculated using iron ore prices of $US 105dmtu. The price applied to the NPV equation seems conservative, in the long term Iron ore prices are expected to increase substantially which would lead to higher a higher margin and higher cash flows assuming costs are kept the same. Sundance have investigated various opportunities to reduce capital expenditure.

There is no hiding the capex for Mbalam is large, realistically given the size and quality of the resource the project it was always going to require large capital investment, world class projects are not cheap . Once again a case study of Fortescue in its early stages may be appropriate.

Fortescue struggled to find support from Australian institutions and investors who also questioned the large capex of their Pibara operations, which are now one of the biggest on a global scale. Sundance looks set to follow in the same footsteps as Fortescue by securing investment from Asian institutions to fund development and expansion.

There is still "political risk" associated with the Mbalam given the Congo government has not yet provided approval for the project , although the likelihood of the Congo government rejecting what would be a significant boost for their economy is unlikely. The market is likely to remain cautious on Sundance until financing and government approvals has been announced. There is expected to be updates on both finance and government approvals through the rest of year.

The outlook for the project overall is still positive, the market tends to have a short term focus which provides an opportunity for long term investors.

The facts still remain:
? China are looking for iron ore suppliers outside of Australia and Brazil
? Growth in African resources
? Long term outlook for iron ore is bullish
? Substantial margin