I have been accumulating a position in Strike, as I think its...

I have been accumulating a position in Strike, as I think its the single most undervalued stock in Australia, and possibly the cheapest Iron Ore play globally.

Looking at volumes recently in Strike there are two things worth noting it seems that a number of small holders have exited the register, and also volumes have been way below the long-term average. Remember the shareholder base is very tight with 65% of the stock held by the top 20: Metalloinvest (the investment vehicle for Russian Steel oligarch Alisher Usmanov - 19.5%), Farooq Kahn + Associcates (Founder and non-executive director c. 19%), Eye Investments (Melbourne based specialist mining investment company c. 8%), me (3.2%), Delaware (2%), management (2%). So >50% held by 5 parties, 65% top 20. I have been buying recently, not reflected in the last register published by the company.

I have been accumulating a holding with mixed success for some time, in fact the average in-price is in the mid 60s. I have also been getting increasingly frustrated with the managements inability to introduce new investors, and promote the story, as I think this is potentially one of the cheapest stocks in the small cap global mining sector.

Remember Strike has a net cash balance of A$50m, and very little cash burn. It has 2 major assets: the Apurimac and Cuzco Iron Ore projects in Peru, and the Berau Thermal Coal asset in East Kalimantan, Indonesia. It also owns 100% of Paulsens East Iron Ore Project in West Pilbara, WA.

Recent increases to spot and contract prices have led to some spectacular moves in the quoted stocks. In the coal sector stocks like BCI, CEY, MCC and GCL have been on fire, returning an average of 32% over the last 6 months (mid Oct to date). In the Iron Ore sector check out FMG, MGX and BRM - again giving an average return of 63% over the last 6 months. Over the last 6 months Strike is DOWN 37.4% in share price terms. Most of the major shareholders are significantly under-water.

A couple of points on valuation:

The company has A$50m of net cash. The Berau coal project has c. 35m JORC tones, valued at A$1 per tonne, so another A$35m. The cash plus Berau is therefore currently equal to the market cap. Comparable transactions indicate US$1 per tonne as base case valuation. This project has an off take agreement in place and full mine study completed. Demand for greenfield projects remains strong with Indian power groups being especially aggressive in purchasing coal assets in Indonesia.
The real value is in Peru however, and this is why the Russians own it. The Iron Ore peer group in Australia is valued at roughly A$1-1.5/tonne for in-situ resource. Assuming a 50% conversion ratio of resource to reserve this equates to c. 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 body. The most recent mineral estimate for Aprurimac (on only 2 concessions) indicated a resource of 269.4 million tones (11th February ASX release). We prudently assume a proven resource across both projects in Peru of 500 Mt proven reserve, which would therefore value the project at A$1-1.5bn when drilling is completed and resources updated. For companies that are in production, valuations of c. A$4-5/tonne are implied in current prices. Given the quality, scale and projected low production costs it would be reasonable to assume A$3/tonne in our numbers we think, confirming that valuation range.
All of the companies currently trading at a significant premium to Strike are very likely to have higher operating costs per tonne, and will experience significant difficulty producing Iron ore within current sales specifications.
Another interesting point is 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

Finally I would call on the management to address some of the following points:

1. Update the market on plans to spin-off or sell the Berau coal project into a very hot market for coal assets, both from an M&A and price perspective
2. Update us on the corporate issues in Peru we would like to see SRK take up its option to go to 64% of D&C asap, perhaps with the help of a partner (Metalloinvest et al?)
3. Immediately appoint a corporate broker to bridge the knowledge gap between the small group of shareholders who see the value in it, and the rest of the market
4. Undertake a roadshow to see new domestic and international investors



On a happier note this situation reminds me of the one that persisted for a long time with Brockman Resources, another WA Iron Ore name. It traded at a small premium to the cash on its balance sheet (equivalent to c. A$1 per share) for a long time before the market properly discovered and re-rated it. The capex required and resource size of BRM and SRKs projects are similar, but BRM now has a market cap of over AUD 500 million compared to SRK at around AUD 90 million! Lets hope the same thing happens with Strike.

Best,


HIGHGRADEORE