Today’s Top Picks. Iron Ore Holdings Ltd (IOH.ASX, $0.73/sh, Mkt...

Today’s Top Picks.

Iron Ore Holdings Ltd (IOH.ASX, $0.73/sh, Mkt cap $118m) – Buckland’s Cape Preston Port recommended for EPA approval –BUY PT $1.90/sh

•EPA Recommend Approval of Cape Preston Port. Earlier this week the WA Govt issued a media statement outlining the Environmental Protection Authority’s (EPA) recommendation for the approval of a 20Mt multi-user iron ore port export facility at Cape Preston East, 60km south-west of Dampier (see attached media release). The port facility is part of IOH’s mine-to-port solution currently under feasibility for the Buckland Project located in the West Pilbara that is targeting production of 8Mtpa with FID due late this calendar year (2013).

•Environmentally friendly, simple construction and low capex. The announcement confirms IOH’s implementation of a port facility that does not require dredging or the construction of massive breakwaters and hence friendly to the environment, is a relatively straight forward facility to construct and does not require a billion dollars to construct with the PFS highlighting the transhipment
facility (port & stockyards) to cost $160m for 8mtpa.

•Buckland DFS on track for FID late 2013.The DFS for Buckland will be finalised in the 2HCY13 for the potential development of a 8Mtpa mine/road haul/barging operation. In conjunction with the DFS, activities continue to fund the project with management reviewing various models. The obvious models would include: a) IOH to sell down equity into a JV with an existing ASX miner or Chinese off-take partner; b) Implement a mine gate agreement similar to the Iron Valley tenement; or c) Sell down a majority (or all)
of the project and retain a simple long-term royalty.

•Confidence in a funding deal for Buckland. While the market for corporate deals in the Iron Ore sector has cooled in the past 12mths, the Buckland Project is fast becoming a realistic development opportunity in the Pilbara given it comes with a full infrastructure transport solution. We estimate robust economics for an 8Mtpa mine to port operation with, capital costs $800m (including $235m indirect and contingency) and $48/t LOM opex. Our unrisked valuation of the Buckland Project is $280m ($1.74/sh). IOH management have delivered on all of the stated objectives to monetise the Central Pilbara assets, so we remain confident they can achieve value accretive deal for shareholders on Buckland.

•Iron Valley mine gate deal with MIN to generate significant cash in 2014: IOH announced a deal February this year with MIN to develop and operate the Iron Valley mine at its own costs within 6 months of IOH receiving final mining approval, which is expected to occur in the mid-year, and buy a minimum tonnage of ore produced from IOH at the mine gate. Our conceptual model indicates that mine gate sales could conservatively generate $30m EBITDA in CY14 as production ramps up to 2Mtpma (US$115/ Fe & AUD 95c). If we were to apply BC Iron’s current EV/EBITDA of 2x to our forecast earnings from the Iron Valley mine gate deal at a rate of 2mtpa we can ascribe a valuation of the earnings at $60m ($0.37/sh). All of this upside comes without a single dollar to be spent by IOH to commence production.

•Cash balance remains $70m as at 30 June 2013. We estimate IOH will have cash of approx $70m as at 30 June 13 with all major DFS cost items completed for the Buckland DFS. This places the company on a pro-forma EV of just $48m, with three major catalysts coming 6-8months:

i. Final mine approvals for Iron Valley (mid 2013)

ii. Mine gate deal to commence at Iron Valley with MIN (early 2014); and

iii. A completed DFS and funding deal on Buckland Project (late 2013).

•We rate IOH a BUY and PT $1.90/sh. An investor with a little patience and belief in management can achieve at least 100% upside inside 6-12mths given the catalysts outlined above.

http://www.fostock.com.au/announcements/iron-ore-holdings-ltd-ioh-asx