Anglesey Mining Well Positioned In Current Uncertain Market

In his July statement, Chairman John Kearney stated that Anglesey (AYM.L) is well poised to weather the storm in the resources sector. It is focusing on cash retention and is undertaking a review of all information on Parys. Meanwhile, Labrador Iron Mines (LIM), of which Anglesey owns 15.3%, is now on track to produce up to 2Mt iron ore Fe 62% for the next five years. This gives LIM time to consolidate its agreement with Tata Steel (to develop the Howse project) and to arrange funding of the Houston project.

LIM has achieved its original target
With the successful commissioning of the Silver Yards upgrade, including the expansion for the wet plant and the connection to the grid, LIM has effectively achieved its initial plan. An annual production target of between 1.75Mt and 2Mt pa of saleable iron ore Fe 62% should be achievable for the next five years without any further major capital expenditure.

LIM looks forward to a strategic relationship with Tata
Tata Steel Minerals Canada (TSMC), a company operating on land adjacent to LIM, has signed an agreement to cooperate with LIM on rail and port infrastructure and in other areas. Subject to final agreement, TSMC proposes to take an initial 51% interest in the Howse deposit for a C$30m cash injection. This money would be available to provide around 50% of the C$58m required to fund the capital expenditure on the Houston project, which, when operational, is expected to produce 2Mtpa iron ore for 15 years.

Valuation: Dependent on commodity prices
Anglesey’s 15.3% stake in LIM is now accounted for as an investment, rather than associate. At LIM’s current price (C$0.51), it is worth £6.2m (3.9p/share). In addition there is further value in its100% holding in Parys, which should be clearer when the update to the White Rock scoping study is published. However, Anglesey has postponed all discretionary spending, so publication is not imminent. Based on our forecast iron ore prices of US$131/t for FY14, US$125/t for FY15 and US$90/t long-term, LIM’s dividend discount flow (DDF) valuation is C$120m (at 10%) compared with LIM’s current market cap of C$64m, putting LIM on a discount of 47%. A 10% rise in the long-term iron ore price would give LIM a DDF of C$191m, putting LIM at its current price on a 66% discount. Significant to LIM’s strategy is financing of the plant at Houston, which should raise throughput to 4-5Mt by FY16.

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