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Flinders Mines offer surprises investors
Richard Hemming
November 25, 2011 - 4:13PM
The announcement that Flinders Mines today recommended the 30 cents a share offer from a Russian steel producer might be a surprise to those shareholders who bothered to listen to the company's comments at its AGM only last Tuesday where the miner said the shares were worth as much as $1.73.

In case you missed it, Magnitogorsk Iron and Steel offered to buy all issued shares in Flinders Mines for 30 cents a share in cash, which is worth $554 million. This is almost double the 16.5 cents that Flinders' shares traded at prior to their trading halt on Wednesday.

One day prior to the trading halt, the company held its annual general meeting (AGM). At this meeting, Flinders' managing director, Gary Sutherland, talked through a slide that brokers valued the stock between 20 cents and 53 cents. But the company's “de-risked value range” based on its internal modelling was between 49 cents and $1.73.

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On another slide the company states that the base case valuation for the company's Pilbara Iron Ore Project is $3.1 billion. Production is slated to for early 2015.

The “de-risked” element refers to the assumption that there will not be any project risk, such as the not being able to use an important railway line. And you also have to keep in mind that it's a project valuation and not a cash offer.

But one analyst that covers the stock values it at 47 cents, based mainly on the Pilbara project. Says Mark Cotton of Petra Capital:

“If you look at the announcements the company has been making it indicates the resource is getting bigger, but what drives the valuation is how much you can sell and over what time frame.”

Obviously the Flinders Mines board is aware of the global uncertainty, contrasted with the absolute certainty of cash. But one wonders what they were thinking when they made the comments at the AGM.

Richard Hemming ([email protected]) is an independent analyst who edits a fortnightly newsletter: www.undertheradarreport.com.au. He has written columns on small caps for the Financial Times and for the Australian Financial Review.



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