Western Desert Resources Ltd (WDR.ASX; $0.68/sh; Mkt Cap $226m)
Offtake/debt financing imminent with M&A appeal.
TRADING BUY. PT $1.00/sh.
•WDR yesterday completed a placement of ~$17m in equity to be deployed towards the ongoing development of the flagship Roper Bar Project in Northern Territory. The proceeds of the issue will ensure the Company can maintain development at the current rate prior to the signing of an offtake agreement and debt financing, expected in the near term.
•Roper Bar is envisaged to be a simple DSO operation consisting of drill/blast, truck/shovel, haul ~160kms via private sealed road, crush/screen and then shipping out of Bing Bong Port via Panamax vessels. First production is expected by late 2013 and will ramp up to 3mtpa by early 2014 at estimated costs of ~$60/t.
•A US$115m debt facility from CBA is expected to be finalised in the near term (which would also repay the existing ~$30m interim debt facility from Macquarie). We believe completion of an offtake deal will lead to finalisation of the debt facility. Both are expected by the end of Q3 CY13.
•Apart from the closing of the debt facility and offtake agreement, all key permits and contracts are already in place (port access, native title, mining leases, EIS approval, haul road access, stockyard/port leases).
•Offtake is yet to be put in place but is imminent. WDR have stated that they have “reached in-principle agreement on key commercial terms with a Tier 1 offtake partner, subject to final negotiation and execution of formal documentation expected in the very near future”. Importantly the proposed terms also include the provision of a revolving credit facility for working capital. We highlight Noble Group’s existing presence in the region (previously acquired ASX-listed Territory Resources).
•In addition to the DSO material which will be exploited as part of the initial phase of operations, WDR has 600mt @ 40% Fe of ore which can be beneficiated via flotation to produce a saleable product. An exploration target of 2.0-2.5bt @ 40-60% Fe exists at Roper Bar. The existing DSO resource currently stands at ~50Mt @ 57% Fe.
•Besides the two imminent catalysts expected in the near term (debt funding and offtake), we believe the stock provides investors with iron ore exposure to a quality ASX-listed company differentiated from peers by low capital intensity (~$60/t), simple haul/crush/screen operations and expectant strong operating margins based on sub $60/t costs. Simplistically at 3mtpa and assuming $100/t Fe, WDR will be delivering ~$120m annualised EBITDA... At 3-4x EV/EBITDA, the company should be worth $400m-$500m based solely on the 3mtpa operation alone (i.e excluding any upside). WDR’s DSO mining inventory is also low phos, at just 0.005%, making it ideal for blending. We also think the stock will have corporate appeal once production commences, and the Company have indicated numerous approaches have been made from interested parties. However not firm proposal is yet to be received. We note an article yesterday released by Dow Jones speculating that Noble Group is weighing a bid for WDR.
•We rate the stock a BUY with a PT of $1.00/sh. We highlight the near term catalysts (offtake plus debt financing) which should further de-risk the Roper Bar development.
