Euroz have a further update on FMS previously valued at 0.25cps now upgraded to 0.45cps.
Flinders Mines Ltd (FMS $0.20) – BUY
Price Target: $0.45/sh
Reason For Update: revised valuation
What We Know:
· Flinders Mines Ltd released the findings of the Pilbara Iron Ore Project (PIOP) pre-feasibility study (PFS) in January 2011.
· Third party infrastructure access agreement negotiations are ongoing.
· We now publish a revised valuation of $0.45/sh, up from $0.25/sh previously.
What We Think:
Until an infrastructure access deal is concluded there is a high degree of uncertainty about the development prospects of Flinders Mines PIOP.
We believe Flinders will find an acceptable 3rd party infrastructure solution that will enable development of the PIOP and thereby monetise the value in the project. Our view is based on the:
· ongoing very strong demand for iron ore in China;
· sheer scale, technical simplicity and location of FMS’s project;
· successful precedent set by BC Iron’s JV deal with FMG to access their rail network.
We think the market is overly dismissive of FMS’s ability to achieve an outcome. This is reflected in the discount to our valuation.
The PFS provides Flinders a platform with which it can meaningfully negotiate infrastructure access with 3rd parties. Notably Flinders states that it “... is confident it will achieve rail and port access solutions that will enable development ....”.
Flinders expects to move into a DFS during June Q’11 which suggests to us that it expects to resolve a definitive infrastructure solution within that time. The possibilities can range from JV, asset sale, takeover, toll handling and mine gate sale.
The obvious prospects for a 3rd party access deal are with either RIO or FMG. The former is an existing operator nearby (19km) and the latter is in an impending nearby operator at their Solomon Project (40km).
The API JV (AQA & AMCI) is promoting the Anketell Port development in order to develop their project which is located 100km west of FMS’s PIOP. It is still possible that other parties may yet become involved in the Anketell port development which could create possibilities for Flinders that are not currently contemplated.
It is worth noting that Fortescue in referring to the BCI JV has recently stated that it “…. is also in advanced discussions with other mining companies for similar infrastructure utilization”. Flinders Mines is one of three possible other parties which it would be talking to. The others being Ferrous (ASX:FRS) and Brockman (ASX:BRM), both of whom are embroiled in a takeover by Wah Nam.
We have taken more a conservative view on future iron ore prices relative to Flinders’ PFS. Our assumed long run iron ore price received by FMS at A$73/t is some $30/t lower than that used in the PFS.
cid:image003.png@01CBDA75.7F89D7C0
We have considered three valuation scenarios: Base Case (5mtpa to 15mtpa in Yr 6), Expansion Case in Yr 1 (15mtpa), and 50% JV. The 50% JV mimics the BCI-FMG deal. We think this is relevant as it is the only precedent 3rd party access deal already concluded in the Pilbara.
Our preferred valuation is the Base Case scenario NPV of $825m or $0.45/sh. This valuation has been risk adjusted to 60%.
This valuation when grossed up with the capex to develop the project would equate to <$10/t of product. At our assumed iron ore price this would leave some $30/t of profit in the hands of an acquirer if such a scenario were to occur. We continue to believe that Flinders Mines PIOP would offer most value entirely in the hands of an existing infrastructure owner who could gain efficiency in terms of capital and operating costs moreso than Flinders.
The PFS by Worley Parsons concluded that the project is technically feasible and economically robust should it gain access to third party rail and port infrastructure. Key findings of the study include:
· Initial production rate of 5mtpa ramping up to 15mtpa after year 6;
· Mine life of 20 years producing 229mt in total;
· Initial capex of $488m, and expansion capex of $640m additional;
· Cash costs of A$35/t FOB pre-royalty;
· Two ore types - a DSO BID fines, and a beneficiated DID fines in a 1.3:1 ratio.
· Product spec average 58.6% Fe, 5.5% SiO2, 3.2% Al2O3, 0.095% P, and 6.8% LOI.
· 2.5:1 waste to ore ratio;
· NPV of $2.2b (10% disc) assuming long run price of ~US$105/t FOB and FX rate of A$1=US$0.96.
· IRR of 41% ungeared.
· Capital payback of 3.5 years from first production.
The development schedule of nearly 3 years includes 3rd party access negotiation prior to commencing a 12mth definitive feasibility study, and 18mth design, procure, construct period. Approvals should be gained during the next 21mths.
We expect the mineable resource to grow. The study did not include some 110mt of DID resource that was included in the Oct’10 resource update. In addition resource growth through exploration in the 2011 field is also expected, particularly for BID ore which has only recently been a target and where drilling access has been more difficult because
of rugged terrain. BID ore already makes up more than half of the mineable inventory.
The shallow, continuous and above water table nature of the deposits make the project very advantageous in cost reduction and ease of operation. We understand ground water issues are a growing problem in managing Pilbara iron ore operations among all existing producers.
Investment Case:
Our risk adjusted valuation of Flinders Mines Ltd is $0.45/sh.
We believe the market has been overly dismissive of FMS chances of completing a transaction to develop and monetise the project despite the positive market reaction to the PFS.
The location, scale and technical simplicity will see more corporate interest than Flinders has been historically given credit for.
Flinders’ open share register, and cashed up balance sheet (~$45m) give it a strong position to deliver value for shareholders.
This analyst declares that he has a beneficial interest in Flinders Mines Ltd.
cid:image005.png@01CBDA75.7F89D7C0
Flinders Mines Ltd (FMS $0.20) – BUY
Price Target: $0.45/sh
Reason For Update: revised valuation
What We Know:
· Flinders Mines Ltd released the findings of the Pilbara Iron Ore Project (PIOP) pre-feasibility study (PFS) in January 2011.
· Third party infrastructure access agreement negotiations are ongoing.
· We now publish a revised valuation of $0.45/sh, up from $0.25/sh previously.
What We Think:
Until an infrastructure access deal is concluded there is a high degree of uncertainty about the development prospects of Flinders Mines PIOP.
We believe Flinders will find an acceptable 3rd party infrastructure solution that will enable development of the PIOP and thereby monetise the value in the project. Our view is based on the:
· ongoing very strong demand for iron ore in China;
· sheer scale, technical simplicity and location of FMS’s project;
· successful precedent set by BC Iron’s JV deal with FMG to access their rail network.
We think the market is overly dismissive of FMS’s ability to achieve an outcome. This is reflected in the discount to our valuation.
The PFS provides Flinders a platform with which it can meaningfully negotiate infrastructure access with 3rd parties. Notably Flinders states that it “... is confident it will achieve rail and port access solutions that will enable development ....”.
Flinders expects to move into a DFS during June Q’11 which suggests to us that it expects to resolve a definitive infrastructure solution within that time. The possibilities can range from JV, asset sale, takeover, toll handling and mine gate sale.
The obvious prospects for a 3rd party access deal are with either RIO or FMG. The former is an existing operator nearby (19km) and the latter is in an impending nearby operator at their Solomon Project (40km).
The API JV (AQA & AMCI) is promoting the Anketell Port development in order to develop their project which is located 100km west of FMS’s PIOP. It is still possible that other parties may yet become involved in the Anketell port development which could create possibilities for Flinders that are not currently contemplated.
It is worth noting that Fortescue in referring to the BCI JV has recently stated that it “…. is also in advanced discussions with other mining companies for similar infrastructure utilization”. Flinders Mines is one of three possible other parties which it would be talking to. The others being Ferrous (ASX:FRS) and Brockman (ASX:BRM), both of whom are embroiled in a takeover by Wah Nam.
We have taken more a conservative view on future iron ore prices relative to Flinders’ PFS. Our assumed long run iron ore price received by FMS at A$73/t is some $30/t lower than that used in the PFS.
cid:image003.png@01CBDA75.7F89D7C0
We have considered three valuation scenarios: Base Case (5mtpa to 15mtpa in Yr 6), Expansion Case in Yr 1 (15mtpa), and 50% JV. The 50% JV mimics the BCI-FMG deal. We think this is relevant as it is the only precedent 3rd party access deal already concluded in the Pilbara.
Our preferred valuation is the Base Case scenario NPV of $825m or $0.45/sh. This valuation has been risk adjusted to 60%.
This valuation when grossed up with the capex to develop the project would equate to <$10/t of product. At our assumed iron ore price this would leave some $30/t of profit in the hands of an acquirer if such a scenario were to occur. We continue to believe that Flinders Mines PIOP would offer most value entirely in the hands of an existing infrastructure owner who could gain efficiency in terms of capital and operating costs moreso than Flinders.
The PFS by Worley Parsons concluded that the project is technically feasible and economically robust should it gain access to third party rail and port infrastructure. Key findings of the study include:
· Initial production rate of 5mtpa ramping up to 15mtpa after year 6;
· Mine life of 20 years producing 229mt in total;
· Initial capex of $488m, and expansion capex of $640m additional;
· Cash costs of A$35/t FOB pre-royalty;
· Two ore types - a DSO BID fines, and a beneficiated DID fines in a 1.3:1 ratio.
· Product spec average 58.6% Fe, 5.5% SiO2, 3.2% Al2O3, 0.095% P, and 6.8% LOI.
· 2.5:1 waste to ore ratio;
· NPV of $2.2b (10% disc) assuming long run price of ~US$105/t FOB and FX rate of A$1=US$0.96.
· IRR of 41% ungeared.
· Capital payback of 3.5 years from first production.
The development schedule of nearly 3 years includes 3rd party access negotiation prior to commencing a 12mth definitive feasibility study, and 18mth design, procure, construct period. Approvals should be gained during the next 21mths.
We expect the mineable resource to grow. The study did not include some 110mt of DID resource that was included in the Oct’10 resource update. In addition resource growth through exploration in the 2011 field is also expected, particularly for BID ore which has only recently been a target and where drilling access has been more difficult because
of rugged terrain. BID ore already makes up more than half of the mineable inventory.
The shallow, continuous and above water table nature of the deposits make the project very advantageous in cost reduction and ease of operation. We understand ground water issues are a growing problem in managing Pilbara iron ore operations among all existing producers.
Investment Case:
Our risk adjusted valuation of Flinders Mines Ltd is $0.45/sh.
We believe the market has been overly dismissive of FMS chances of completing a transaction to develop and monetise the project despite the positive market reaction to the PFS.
The location, scale and technical simplicity will see more corporate interest than Flinders has been historically given credit for.
Flinders’ open share register, and cashed up balance sheet (~$45m) give it a strong position to deliver value for shareholders.
This analyst declares that he has a beneficial interest in Flinders Mines Ltd.
cid:image005.png@01CBDA75.7F89D7C0
