re: Ann: Change of Directors Interest Notice ... someone sent...

re: Ann: Change of Directors Interest Notice ... someone sent this summary of the investment case to me, very compelling.

STRIKE (SRK AU) CHEAP HIGH QUALITY WORLD CLASS ASSET
 Strike has a market cap A$120m
 The company has $46m in cash
 2 primary projects: Apurimac Iron Ore Project in Peru & Berau Coal Project in Indonesia
 Berau has 28mt of thermal coal. This project has completed a full mine study. There are off take agreements in place with India, Chinese and Taiwanese buyers. However, production phase has been stalled by changes to Indonesian mining laws.
 Comparable coal transactions indicate US$1 per tonne as base case valuation for coal producers. Therefore the asset is conservatively valued at A$33m
 However, the jewel in the crown is the Apurimac Iron ore project in Peru which is a high grade ore deposit with low production costs. The project is in the pre-feasibility study stage.
 Essentially the market values this project at A$41m vastly under rating it to its peers (see pages 25-26 of presentation) given the size and quality of the ore body
 The most recent mineral estimate for Apurimac (on only 2 concessions) indicated a resource of 269.4 million tones (11th February ASX release) and this is being continually upgraded. The company has a target mineralization in 2010 of 350-400mt of high grade ore. Longer term, the company expects this project to have resource potential of over 1b tonnes
 Subsequently it and their Peruvian partners (SRK own 44% with the right to increase to 100%) are conducting project development (pre a bankable feasibility study) for a 20mt (potential to go to 40mt) per annum production facility which will include either a rail or pipeline construction along with a port facility for estimated cost of $2.5b. Report expected 2H 2010.
 This is being conducted in parallel with a continued drilling program which should yield further resource upgrades in 3 to 4months time.
 It is expected to be a highly margin project with costs expected at around $15-$18 (see page 15-16 presentation) vs. current spot prices of $90 plus.
The Investment Case
 Indonesian coal assets are in high demand from Chinese and Indian firms they could spin this off or sell a stake - an option they flagged in Sept 2009. The company will make an announcement in the next 3-4 months regarding the coal strategy. A spin off may be still very likely. However, If they do retain the asset its production profile it could fund the Iron ore project feasibility study costs over the next 2yrs. Financing for the coal asset is expected to be relatively low ie sub A$20m.
 Demand for greenfield‟ projects remains strong with Indian power groups being especially aggressive in purchasing coal assets in Indonesia.
 In terms of the Peruvian iron ore asset, Apurimac, the market has assigned a current value to a project of US$37m where as the company based on US$60/tonne (currently approx US$90/tonne) believes its NPV is worth US$1.1b (see page 16 presentation).
 BHP, Teck Cominco are amongst several large multinationals and numerous Chinese resource firms active with large scale projects in Peru ~ I believe a project of this size and quality will attract interested parties
 I have garnered that companies that are in production are valued at c. A$4/tonne at current prices. Given the quality, scale and projected low production costs it would be reasonable to assume A$3/tonne giving the company a valuation multiple at least 3 times the current price.
 The Iron Ore peer group in Australia is valued at roughly A$1-1.5/tonne for resources, and A$2-3 per tonne of eventual proven reserve. Strike should eventually have a higher conversion due to the apparent width and quality of the ore. If I use a mid point on their projected mineralization for 2010 a (i.e. 375mt) and assume no further upgrades thereafter and use that as their final proven resource across their projects in Peru it would value the project at A$0.75b-$1.13b when drilling is completed and resources updated. For companies that are in production, valuations of c.A$4/tonne are implied in current prices. Given the quality, scale and projected low production costs it would be reasonable to assume A$3/tonne or the above mentioned valuation range of A$0.75b-$1.13b (or some 6-9 times PV).
 So far I have neglected to discuss the Cuzco project in Peru simply because it is far less advanced than Apurimac. Given the company expects mineraliastion of 500mt it does deserve a mention
 There seems to be no broker coverage of this name after Bell Potter (Aust subsidiary of UBS) dropped coverage last year following the delay to the Apurimac project (which has since been resumed)
 It seems the top 5 shareholders own 50% of the stock so it‟s extremely tight. Management from what I can tell account for 40% of that. Shareholder Delaware Mgt (who own 2%) the US long only fund seem to be the only significant institutional shareholder.
 Given the tightly held registry, the potential upside from the coal asset, and abundant cash reserves to fund the iron ore prefeasibility study, then I don‟t expect any need to come to market for capital for at least 3 to 4 months
 The directors consist of ex RIO Hamersley Iron Ore Veterans of over 30 years plus executives from Russian firm Metalloinvest. The appointment of Ken Hellsten who has extensive project management experience at BHP will assist in bringing the Berau and Apurimac projects online.
 The presence of Russian metallurgical group (Metalloinvest hold 19%) is not a first in an Australian sense and I believe this confirms the companys appeal to international buyers. Its worth noting that any joint venture of the Peru project or takeover of SRK would not require FIRB approval unlike projects in Australia, making the process of acquiring the Peruvian asset, or the entire company much easier
Technical Analysis Overlay
 As a qualified technician there must be a compelling reason to like this company from a charting perspective
 Firstly a brief backdrop to its share price performance;
The life of this company really began in 2005 just before it acquired the Peruvian iron ore interests. In the commodity rally that ensued the stock traded from $0.06 in 2005 to $2.90 in 2007 before reaching its penultimate high of $3.10 in 2008. However, the financial crisis brought this stock down to a rock bottom valuation with the low in 2008 of $0.25 which was half its cash backing at the time. However the stock then rallied as the litigation over the Peruvian assets were positively resolved. The removal of this negative overhang fuelled 170% rally in July-Sept from $0.50 to $1.24 before drifting back and basing out at $0.65.
 Recently the share price has stopped basing out, and started moving up, holding above the 50,100,& 200day moving averages (MA). Since March, volume has gradually been grinding higher as it has rallied to the mid $.90 level. The company presentation on the 19th March designed to draw attention to the investment story and address the perceived valuation disconnect, saw it rally from $0.73 and then gap up from $0.84 to $0.87 on the 26th March.
 The compression of the 50,100,200dma evident on the chart is a classic consolidation formation. Now all three have started to simultaneously move higher and this is usually a precursor to another
breakout move (see daily chart below). We only need to look at a similar moving average pattern in July 09 before the sharp 170% rally. The only concern this time is that volumes are appreciably lower. This could see a more moderate rally rather than a parabolic breakout and this ultimately is more appealing in attracting stable long term investors
 If you look at the recent price action following the gap up in late March it looks similar in nature. As long as we don‟t fill in that gap then I believe it will be a breakaway gap. If this is correct then current levels are providing an attractive entry point.
 I always employ a stop loss no matter how compelling the technical or fundamental outlook seems. So design a level appropriate for your risk tolerance but view the current level as an excellent opportunity to buy cheap quality bulk commodity assets with excellent optionality.
 The technical pattern completes what looks like an compelling investment case which I would strongly encourage you look at for short and long term gains despite market volatility.