In a recent Mining Sector Report by Investec’s Global Natural Resources team, a apparent disparity in West African iron ore company values is observed. There are a range of methods that can be applied to value the companies, such as the risked NPV model, however, according to Investec, looking at current market valuations, it appears that a more simplistic Enterprise Value per tonne (EV/t) method is being used and when examined, these multiples show that there is a “value abyss” between the undeveloped companies and the developed ones.

The aspiring producers Affero Mining, Bellzone and Zanaga are equally valued by the market at $0.04/t whilst current producers are valued 30-40 times higher, with African Minerals at $1.59/t and London Mining $1.26/t. The ASX-listed companies sit between the two AIM-listed groups, at $0.72/t. The majority of the resources underpinning AFF, BZM and ZIOC are derived from relatively low grade, magnetite ore bodies. Comparing this to the magnetite-specific resources within AMI and LOND which are valued between $3.23 – $7.31/t (average $5.27/t) and includes AMI’s Tonkolili DSO and saprolite ore and all of LOND’s Marampa ore. The ASX-listed companies that are neither producers of magnetite dominant sit between the magnetite plays and LOND-AMI, at $1.71-2.61/t (average$2.16/t). This offers the aspirants the potential for quantum upgrades in valuation should they succeed in achieving even moderate components of their planned production.

If the value of all ore that is not reliant on a subsequent phase of funding at the previously mentioned average of $0.04/t, then the remaining material trades in a range of $17.74-28.25/t which approximates the planned operating margins at current iron ore prices, after taking into account product grades.

Previous research by Investec on the West African iron ore sector (Valuing what the market doesn’t want to value, 10 July 2012) indicated that the market was reluctant to fully value the initial phases of iron ore production, as well as the subsequent more substantial phases of development and the longer-date, unfinanced and undeveloped assets. Circumstances since have done little to justify why this shouldn’t be the case with significant volatility in iron ore prices due to a weaker outlook for Chinese steel demand growth and the threat of oversupply from the majors. There has also been disappointing levels of progress made by all of the AIM-listed development plays relative to earlier expectations. This questions whether risked NPV-based valuations are still an appropriate means of deriving target prices. Attributing any project value is dependent on the respective company’s ability to secure significant amounts of capital, in a market where access to this capital is no longer assured.

There is a possibility that value can still be delivered through asset sale or strategic investments, particularly given that negligible value is currently being attributed by the market. In contrast there is also a risk that those who are able to access capital do not realise any value and as there is no means of determining which projects will eventually attract strategic investor interest, Investec intend to maintain a risked NPV weighting methodology.

Investec’s report concludes: “The market appears to be valuing the West African iron ore companies with a simple EV/t basis. Materials that feed a fully-financed production base are currently being valued at an average $23/t of attributable, recovered Fe units, while those that are unfinanced and show limited DSO potential are being valued more conservatively at $0.04/t. This therefore offers the potential for quantum upgrades in all company valuations, should the respective companies be successful in bringing components of their planned production into fruition.”