Valuation post IOH Takeover, page-12

IOH's goal for the past year has been to find a development partner for Bucklands given they clearly didnt have the financial clout to go it alone or didnt want to take 100% of the financial risk as per the IOH business model.

The IOH CEO was quoted in the Wall Street Journal yesterday as saying that IOH would have struggled to fund Bucklands by itself.

So from an IOH perspective a key driver for the deal here in a scrip bid is that BCI have the greater financial resources to drive Bucklands forward.

The great unknown is how this is to be achieved.

IOH were looking to sell down equity in the project to reduce development risk. As noted in my first post, AQA are right next door at Bucklands, so a joint venture agreement for say 50% with them or another player (eg MinRes) would drive any BCI share of development down. Further, Bungaroo is rated at 8mtpa whereas Port Preston has approvals for 20mtpa. So not only does this give room for a JV partner to share in the capital cost for capacity, but also for other juniors looking to pay a usage charge for potential port access. This could make the project more bankable, and debt funding could be limited through project financing to the project itself and project income. We also know infrastructure type players interested in a port operation were also in talks.

Another option is to just develop Bungaroo the mine, and use the potential AQA solution as the transport option which was also muted by IOH. This then avoids any capex for the port and road solution. We know talks have already taken place with Baosteel. And that given Aurizon are involved third party access to rail looks to be done and dusted. However we also know first shipment from Port Hedland is going to be many years away under this solution. Aurizon will also be charging to extract their return, and Bucklands being relatively low capex and opex intensive with no dredging involved may make Cape Preston a more attractive option.

Ultimately I don't deny capex is going to be required. However I dont think its fair to say that next years, or the years after, dividends are going to be slashed as BCI binges on funding $744m in capex by itself (I doubt it could do this anyway) and particularly with Iron Valley producing at 5mtpa in 2015. But clearly BCI will need to develop a mine to keep having income producing assets beyond Iron Valley in the medium term.

And if IOH are receiving $10m a year only from Iron Valley then BCI will have bigger problems because they implies a sharp fall indeed in the IO price based on what IOH have published about the MIN mine gate terms.