Fosters "reiterate the stock as a TRADING BUY and upgrade our PT...

Fosters "reiterate the stock as a TRADING BUY and upgrade our PT from $1.00/sh to $1.10/sh".....

Western Desert Resources Ltd (WDR.ASX; $0.72/sh; Mkt Cap $320m) – On the cusp of becoming an iron ore miner. M&A target.

TRADING BUY, PT $1.10/sh
•Over the last few months WDR has made significant progress with respect to the company’s flagship Roper Bar Iron Ore Project in the Northern Territory.

•Material announcements include:

•An off-take agreement with Noble Resources International Pte Ltd, whereby Noble will purchase the entire product produced for up to five years at prevailing Platts spot price at the time;

•An equity raising totalling ~$50m at $0.65/sh (consisting of a placement and SPP); and

•A debt facility with Macquarie Bank, totalling $85m which, together with the equity raising, ensures completion of the project development. ?The presentation by management at last week’s AGM highlighted that first shipments are expected early December. This in our view should lead to a valuation re-rating as WDR becomes the next ASX-listed iron ore producer. Whilst the key terms of the debt facility with Macquarie have not been disclosed, we understand the repayment schedule to be conservative with hedging (fully hedged 2/3 of first years’ production) and coupon levels reasonable.

?Roper Bar will be a simple DSO operation consisting of drill/blast, truck/shovel, haul ~170kms via private sealed road, crush/screen and then shipping out of Bing Bong Port via Panamax vessels. Production will ramp up to 3mtpa by early 2014 at estimated costs of $60-$70/t. 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.

?The share price has underperformed relative to the rest of the iron ore sector in recent weeks, most likely due to the fact that the recent $30m placement stock was subject to shareholder approval (which has now been received) and will be allotted this coming Monday 25 November. We consider the stock to be very good value capped at ~$300m for a fully financed iron ore project that is about to pull the trigger on shipments. The stock is differentiated by many Fe peers by low capital intensity ($60/t), simple haul/crush/screen operations and expectant strong operating margins based on $60-$70/t costs. Simplistically at 3mtpa and based on the current ~A$140/t Fe price, WDR will be delivering ~$200m annualised EBITDA which will be used to pay down debt and for growth initiatives/dividends.

?WDR’s DSO mining inventory is also low phos, at just 0.02%, making it ideal for blending.

?We consider the stock a M&A target now that Roper Bar has been fully developed/de-risked. We note the offtake agreement with Noble Resources ‘may be terminated on a change of control event at either WDR’s or Noble’s discretion’, which effectively means a bid could be made for the stock (by another company wanting access to the product) conditional upon the offtake agreement with Noble being terminated.

?We reiterate the stock as a TRADING BUY and upgrade our PT from $1.00/sh to $1.10/sh based on our target 3x EV/annualised EBITDA multiple (which we regard as most appropriate for a producer).

http://www.fostock.com.au/announcements/western-desert-resources-ltd-wdr-asx