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May 06, 2010

The Grass May Not Be Greener, But The Iron Ore Sure Is Cheaper On Giralia's Side Of The Fence At Mt Webber.

By Our Man in Oz / www.minesite.com

The grass might not be greener on the other side of one particular fence in Australia, but the iron ore is certainly more valuable. For proof of this somewhat convoluted metaphor, just take a look at how the stock market is treating two corporate neighbours with assets atop Mt Webber in Australia's Pilbara iron ore province. Atlas Iron and Giralia Resources have their feet on different halves of the same flat-topped hill, but that's about where equality ends, because a recent stockbroker valuation of Atlas's half was A$317.6 million, which is not much less than the A$342 million you might pay for all of Giralia, which comes complete with a long list of other very promising iron ore assets. From an investment perspective this is an astonishing valuation gap which either means the stockbroker's estimate of the Atlas half of Mt Webber is hopelessly over-valued, or that Giralia is hopelessly under-valued.

Finding the truth in that little conundrum has been made somewhat harder by the start of Australia's great tax adventure, also-known-as "how to kill a world class industry with the flick of a politicians pen". The proposal to whack a 40 per cent tax on all mining profits above the six per cent long-term government bond rate, which the government has the audacity to call that a tax on super profits, has stopped Australian investment and deal-making in its tracks, at least for now. But, as the wheels of commerce grind back into action there will be a few smart investors who are able to recognise that the principal of the Mt Webber value gap is a constant, given that the underlying value of the iron ore hasn't changed, and that neither has the ratio of values between Atlas and Giralia, since both have fallen thanks to the tax uncertainty.

Giralia chief executive Mike Joyce chose Mt Webber as an example of how his company's iron ore business is being significantly undervalued by the market. There are other examples too, such as the companys nearby McPhee project. The Western Creek resource, not far from BHP Billitons 40 year-old flagship mine, Mt Newman. The Anthiby Well resource, close to the coastal port of Onslow. And the potentially very large Yerecoin magnetite project which sits immediately adjacent to a railway line in the well-serviced wheat-belt in the southern half of Western Australia.

The next six-to-12 months will be the most exciting in Giralia's history, Mike told Minesites Man in Oz when he popped in for a chat. We have a number of projects in advanced stages of feasibility study, with the aim of being in production from early next year. Mt Webber, McPhee Creek, Yerecoin and Anthiby Well are the projects were confident of getting into production over 2011 and into 2012.

For an outsider one of the challenges in understanding Giralia can be the number of projects it has on its books, and the way in which the companys management tries to market all of its projects in one rather indigestible lump. The first page of the company's standard investment presentation offers an attractive snapshot. Giralia is a company with A$60 million in the bank, plus another A$11 million in investments, 184 million tonnes of iron ore resource drilled to JORC-code standards, which is worth about A$20 billion at current prices, and four near-term development projects with "potential infrastructure solutions" - code for we know how to get the ore to port, the stumbling block for most small Aussie iron ore stocks.

The problem for Giralia comes when you turn the page and get hit by an avalanche of detail, an astonishingly busy map, and a timetable which has Giralia moving ahead with seven projects. Far better, thinks Minesite's Man in Oz, if Mike and his team could concentrate on two or three projects because that's really all that is needed to make for a compelling sales pitch, leaving four or five in the "future upside surprise" category.

Take Mt Webber alone, which Giralia calls its Daltons project, and in which it has a 75 per cent interest. Here you have a resource containing an initial 40 million tonnes of high-grade, low-impurity, ore ready for direct shipping, and there will be more to come. The start-up plan is to mine and export at a rate of two million tonnes a year, sending the ore to Port Hedland by truck. Now, while two million tonnes of ore might not sound a lot, it is sufficient to generate annual revenue of around A$200 million, given the current high-price for iron ore. Assuming 50 per cent of the revenue sticks as profit, and here we enter the world of the unknown, thanks to the threat of a new tax regime, then a small starter mine for Giralia could leave up to A$75 million a year in the company's bank account, given that Haoma Mining will be peeling off its 25 per cent stake in the project.

After Daltons/Mt Webber, comes Giralia's 100 per cent owned McPhee's Creek project with its 52.1 million tonne resource, its 52.4 million tonne Western Creek project, the 37.5 million tonne Anthiby Well project, and the 200 million tonne-plus Yerecoin project. Each one of those has the potential to spin off large amounts of cash for Giralia, and change the market's perception of the company.

Back up at the top of this story we mentioned the numbers A$317.6 million and A$342 million, the first being an estimate by the stockbroking firm Hartley's off what Atlas Iron's slice of Mt Webber is worth, the second being Giralia's market capitalisation. All that Mike really has to do to market his company is point to that value difference and then point to the next three projects. That makes a compelling case for asking whether this is another fine example of the stock market misunderstanding and mispricing a situation, in a rather amusing reverse example of how the same people misunderstood and mispriced all Australian mining shares when there was early warning (on Minesite if nowhere else) that a big new tax was heading their way.

Minesite's Man in Oz has never had the courage to say the market is wrong, but neither did he expect to get two examples which that point that way in the same week. It was wrong to miss the downside implications of the new tax, and its still wrong to be missing the upside in Giralia which Hartley's have niftily exposed, albeit in a report on a rival miner.