London Mining (Price: 75.0p | Target: 129.0p | Rec: Buy) Recent FY13A results were broadly in line with expectations, with the financials enhanced by several positives (Cargill offtake agreement, awarding of extra 28km2 of licence area).

The positives have, however, been lost in the recent sharp fall in the iron ore price, with London Mining faring poorly given its high leverage to the commodity price and its highly geared balance sheet.

We do assume a recovery in iron ore pricing with London Mining’s share price expected to recover accordingly. * For FY13A, London Mining reported EBITDA of $54.1m (Investec: $56.3m) versus the FY12A loss of $14.2m, ending FY13A with net debt of $247.7m (Investec: $256.2m).

While FY14 production guidance (4.9 5.4mt at a cash cost of c.$50/t) was in line with our estimate (5.0mt at $51/t), we have made modest adjustments to forward earnings, largely at the revenue line, reflecting higher assumed marketing charges.

As a result, we reduce our EPS estimates from 29.5cps to 20.9cps for FY14E and from 55.5cps to 47.5cps for FY15E. * Such changes are irrelevant in the face of a spot iron ore price that has come down from around $140/t (62% fines, CFR China) at the end of FY13A to $107/t currently.

London Mining is the most leveraged iron ore producer in our coverage universe and is thus most exposed to variations in the price.

While we believe the company offers good value at current levels, the accompanying charts overleaf highlight the broad range of potential financial outcomes under differing pricing scenarios, using the full consensus iron ore price range.

While operating cash flows (net of interest) remain positive throughout, the company is likely to struggle to reduce debt in a low price scenario. * After updating the FY13A financials, our NPV-based target price has come down from 135p to 129p.

The key risk is the iron ore price, which is reliant upon Chinese demand growth and displacement of high cost domestic production.
To access the full note please click here Analyst: Hunter Hillcoat +44 (0)20 7597 5182
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