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Intersuisse Broker Buy Recommendation on Aztec Resources Limited
15 January 2004
RESOURCES
Aztec Resources (AZR)
Situation Update
Maintain Speculative Buy $0.13
AZR share price continues to firm
Since we initiated coverage of AZR in July 2003, its share price has firmed from just 4.0c, as market appreciation of its unique Koolan Island iron ore production opportunity has grown.
The announcement yesterday of an almost 19% increase in iron ore fines contract prices by CVRD, BHP and RIO with Japanese buyers for 2004 will surely focus investor attention on the iron ore sector, where the demand-supply outlook is very strong for at least the next two years. AZR represents an outstanding, highly leveraged opportunity for exposure to the iron ore sector.
Impact
To reiterate, AZR owns the former BHP-owned Koolan Island iron ore mine, situated offshore the Kimberley coast of WA. Geologically, it represents effectively an extension of the same iron ore resource at PMMs Cockatoo Island deposit, a little further offshore to the northwest. BHP abandoned mining operations at Koolan Island in 1985. The mine was closed in 1985 not because of operational difficulties but because it was of too small a scale to be of ongoing interest to BHP, and continued operation would have required additional capital investment.
AZR has developed significant momentum now that it has provided the market with a JORC-standard resource, initially estimated at 25m tonnes @ 66.96% iron. The bulk of this resource represents the old pit mined by BHP, which is now filled with seawater. Rather than drain the pit, AZR will conduct drilling along the previously untested 6km strike extensions of the pit, as well as four untested satellite deposits previously identified by BHP.
It is hoped that this work will provide AZR with a mineable reserve and allow a Bankable Feasibility Study to commence in 2004, with mining to commence in 2005 - still in plenty of time to take advantage of strong iron ore prices.
Debt finacing will be used to fund capital development. By iron ore standards this funding should be relatively modest, given that there is no necessity for huge capital items such as railway construction. Koolan Island possesses significant cost advantages over other iron ore operations, as there is no requirement to transport ore by rail to port. In fact, we estimate these transport benefits are worth between $10 - $15/tonne to AZR.
Major shareholder Société Générale increased its stake in H2 2003 from 4% to 6%, through a $1.8m capital raising, while major Chinese iron ore player CITIC also came on board as a 2.7% shareholder and has since increased its equity to 5.0%. CITIC is a subsidiary of one of Chinas largest state-owned enterprises, holding assets of over US$60bn. Its presence on the board provides additional credibility for the Koolan iron one story. CITIC also has the option to subscribe for a further 2.21m shares @ 20c by January 2005.
We believe ore quality is beyond question at Koolan Island, being exceptionally high in iron content and low in impurities. The ore will therefore be in high demand by both Japanese and Chinese steel mills.
From an executive point of view, Ian Burston represents probably the most experienced iron ore industry executive in Australia, having held senior positions at Hamersley Iron and Portman, as well as MD of Aurora Gold.
At the lower end of the scale, a planned operation producing 2m tonnes of ore annually (BHPs former output level) will generate estimated EBIT of $20m, while a possible 4m tpa operation will generate EBIT of $40m. This compares with AZRs current market cap of $36m.
We maintain our SPEC BUY recommendaton. Unlike other emerging iron ore plays, AZR has a defined resource with a known high quality product that will be relatively easy to market. Furthermore, the company will have significant cost advantages over its rivals. It also has a quality management team with significant iron ore industry experience.
AZR
aztec resources limited
