🕐20.06.14 - 10:54 Uhr

INVESTEC: LONDON MINING : SPOT PRICE ILLUSTRATES LONDON MINING’S (DOWNSIDE) LEVERAGE




London Mining (Price: 26.8p | Target: 57.0p | Rec: Buy) Iron ore pricing is currently going through a tumultuous period with the spot price down 34% since the start of the year to c.$90/t.

We recently reviewed our price assumptions, lowering our near-to-medium term iron ore price forecasts by a modest $10/t, but resulting in a significant reduction in our earnings forecasts and valuation.

The severe impact of the change in pricing reflects the company’s high cost base and is a clear indication of the high risk now inherent in an investment in London Mining. * Our forward price assumptions are still above the current spot price, which we believe is oversold and will recover as Chinese domestic production is curtailed.

Industry data suggests that less than 25% of Chinese domestic iron ore production is currently cash generative. * Our lower prices result in a $163m drop in total revenue during FY14E-16E, flowing through to a 46% drop in cash flow from operations over the period (from $278m to $152m), which is now barely enough to offset planned capital expenditure, leaving little to apply towards reducing the debt position. * We retain a NPV-based, rather than earnings-based, target price.

London Mining remains in active discussions with potential strategic partners and we believe longer-term value, and not short-term earnings, will be the basis for an investment consideration.

On the reduced iron ore price outlook, our NPV for London Mining is down from 113p to 57p per share.

At flat spot prices, our earnings forecast and NPV would be negative, all else being the same.

We can, however, derive a spot NPV equivalent to the current share price by assuming Marampa ramps up to c.6mtpa and then operates at that level until the end of 2019, without committing any further capital than necessary to get to this rate.
To access the full note please click here Analyst: Hunter Hillcoat +44 (0)20 7597 5182
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