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Gold/Mining/Energy : Gold and Silver Juniors, Mid-tiers and Producers -- Ignore unavailable to you. Want to Upgrade?

To: LoneClone who wrote (28124)	12/20/2006 11:51:58 AM
From: loantech	Read Replies (1) \| Respond to of 78416

I am getting whipsawed by these articles. LOL.

To: LoneClone who wrote (28124)	12/20/2006 11:52:28 AM
From: LoneClone	Respond to of 78416

Fortescue's Iron Project Attracts Heavy Hitters as Shares Soar By Ben Abelson 19 Dec 2006 at 05:21 PM EST resourceinvestor.com CHICAGO (ResourceInvestor.com) -- Amidst a general decline in base metal prices over the past year, shares of at least one development stage company have continued a rapid ascent. Fortescue Metals Group [ASX:FMG] has quickly become a darling of the “emerging China” growth set, having its way into the portfolios of some of the most highly regarded money managers in the U.S. Fortescue, which is in the process of developing its mammoth 1.1 billion tonne (reserves) Pilbara project, has seen its shares climb from below A$5 (US$3.92) to a high of A$13.78 (US$10.80) this year as investors have climbed into the stock. The shares recently changed hands at A$12.32 ($9.65). With development already solidly underway, Pilbara is set to come online in 2008 with average annual production of 45 million tonnes over a 20 year mine life. The one mine alone will launch Fortescue solidly into the realm of major iron ore supplier – along with the likes of BHP Billiton [NYSE:BHP; LSE:BLT] and Rio Tinto [NYSE:RTP; LSE:RIO]. Thanks to recent debt and equity offerings, the company’s amassed a cash hoard of A$3.2 billion (US$2.5 billion), enough to fully fund the project through to construction. Fortescue Attracts Major Interest It’s fairly rare for a development-stage project like Pilbara to attract serious interest from large, U.S.-based money managers. With Fortescue, this institutional backing is a significant symbol of how much support the project has found. From an equity perspective alone major shareholders include Harbert Management (14% of shares outstanding), Leucadia National (10% shares outstanding), and Capital Research and Management (4.1% shares outstanding). When one considers that Leucadia – a well known value-oriented investment firm – made its purchase of 26.4 million shares at an effective private placement price of A$15.20 (US$11.91), it’s obvious that some very ‘smart money’ thinks Fortescue has significant upside potential. Riding the Waves of Chinese Demand As with other projects, the Fortescue story is inextricably tied to Chinese iron ore demand. With its favourable placement within easy shipping distance to the mainland, Fortescue has positioned itself as a relatively low-cost provider of iron ore to China. Already, the company has secured long-term production contracts for 39.5 million tonnes of ore per annum, or about 90% of Pilbara’s initial planned production. Development of port and rail infrastructure is already well under way, ensuring that Fortescue’s ore will be easily transportable to steel mills throughout Southeast Asia. Valuation According to an April feasibility study, total operating costs (including cash costs, milling, shipping and equipment leasing) are set to come in at an average of US$11.28/tonne, or A$16.11/tonne. This compares quite favourably with the rest of the industry’s cost curve, and places the mine well within the low-cost producer realm. Given this, if one uses current iron ore pricing of A$46.50/tonne as the going forward price, and assumes 45 metric tonnes of annual production, Fortescue’s EBITDA would be a substantial A$1.3 billion (US$1 billion). After accounting for interest and tax, we can probably roughly estimate after-tax operating cash flows of about half that amount. At an 8% discount rate, this would give us a NPV of A$3.3 billion (US$2.6 billion), almost exactly equal to Fortescue’s current market cap. But while this base case scenario doesn’t provide much upside potential, one can assume that current holders of Fortescue stock are betting on one of several potential scenarios. While the company has an estimate 1.1 billion tonnes of reserves, for example, the total resource base is more than double this amount, and the company has openly stated its longer-term goal is to reach an annual production level of 100 million tonnes through the project’s expansion. Fortescue is also highly levered to iron prices – a recent analysis by JP Morgan found that a 5% increase in its iron pricing estimates would add about A$3/share to Fortescue’s NPV. Conclusion With the iron ore market still seeing tight fundamentals, Pilbara is set to meet China’s growing demand in the coming years. Given the stock’s run-up of late, however, and the metals market’s tendency to endure brutal, cyclical shakeouts, we’d recommend interested investors wait for the next metals melt down before aggressively acquiring shares.