Solid FY13 results, but risks remain
London Mining Plc, (LOND) reported robust FY13 financial results, with revenue rising 148% y-o-y to US$299m and group EBITDA coming in at US$54m (US$79m at Marampa). The company guides production of up to 5.4Mwmt in 2014, with direct cash cost falling to or below US$50/wmt. Despite existing operational risks and uncertain iron ore pricing, the stock trades at an undemanding consensus 2014e EV/EBITDA of 3.1x.
Robust FY13 financial results
London Mining reported strong FY13 financial results, which saw its revenue rising 148% y-o-y to US$299m on the back of a 186% increase in iron ore sales to 3.7Mwt (3.4Mdt). The company achieved an average FOB price of US$94/dmt in 2013 compared to US$104/dmt in 2010; the realised price has fallen 12% y-o-y to US$89/dmt (US$84/dmt in H213). Group EBITDA came in at US$54m compared to a US$14m loss in 2012, driven by a fourfold EBITDA increase at Marampa (to US$79m). Importantly, Marampa’s unit cash production cost has fallen 23% y-o-y to US$57/wmt (US$62/dmt) on the back of higher throughput. The company guides further cash cost reduction to or below US$50/wmt in 2014 as Marampa’s ramp-up to 5.4Mwmt pa continues. We would also highlight a 37% y-o-y fall in corporate overheads to US$16m (US$6.3m in H213). That said, the bottom line was eroded by US$40m in net finance costs, resulting in net loss of US$25m.
Improved cash flow generation and liquidity
Despite lower realised pricing, a production boost has significantly improved cash flow generation, with the overall net operating cash flow coming in at US$64m. FCF was negative at US$48m (OCF less capex), but given the anticipated reduction in capex, should improve as well, helping the company to service its debt. As of end 2013, LOND had net debt of US$248m, with only US$7m maturing within one year.
Valuation: Undemanding 2014e EV/EBITDA of 3.1x
While we do not have an official recommendation on the stock, based on adjusted Bloomberg consensus, LOND trades at an undemanding 2014e EV/EBITDA of 3.1x. However, some caution is justified by the operational risks as Marampa’s ramp-up is still ongoing and the uncertain iron ore outlook. The latter could be partly offset by hedges, with 1.5Mdmt of 2014 sales having already been hedged at US$119/t. Despite the current weakness, we believe the downside risks to iron ore prices are limited in light of the recently reinforced 7.5% GDP growth target in China. This suggests the government is ready to support the economy, which would have a positive impact on steel, and hence iron ore, consumption.
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