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Anglesey Mining Offers Something for Nothing as Labrador Iron Mines Closes in on Production

Anglesey Mining Offers Something For Nothing As Labrador Iron Mines Closes In On Production

Modern portfolio theory says equity markets are perfectly efficient and that all the information that is relevant to a company is already incorporated into its share price. It follows from this theory that it is impossible to beat the market because the market already knows everything. That’s the theory. The practice is somewhat different and Anglesey Mining is an excellent example. Anglesey has a market capitalisation of £7.5 million, supported by two assets: 100 per cent of the Parys Mountain base metal deposit in Wales, and a 50 per cent stake in TSX-listed Labrador Iron Mines, a company which currently boasts a valuation of C$55 million.
That means the stake that Anglesey owns is worth £14 million, or twice the value of the whole parent company. Put another way it implies that the UK property has a negative value of £6.5 million. Bill Hooley, chief executive of Anglesey, says this discount has been there ever since the Canadian subsidiary was listed, although it is larger now. Why this discrepancy still exists is a mystery to him as one would have thought there would be some broker out there who would seek to exploit the arbitrage opportunity.

In any event Bill thinks the implied valuation for Parys Mountain is a bit harsh, because the project has full planning permission for production and, at 7.5 million tonnes the deposit is not insignificant. The grades aren’t bad either, at 2% copper, 2.4% lead and 4.9% zinc. However, in the current economic climate it is not likely to generate a profit and that was the main reason Western Metals pulled out of its proposed purchase of the property a few weeks ago. A contributing factor was the plummeting Aussie dollar that was making the estimated capital cost of between £12 million and £15 million an even bigger hurdle to contemplate. The mine plan was based on exploiting the White Rock zone and following the copper rich mineralisation down to 300 metres. Those plans are now back on ice and, like most of the rest of the zinc industry, waiting for a recovery in the metal price.

The story in Canada is quite different and a whole lot more positive. Labrador Iron Ore Mines’ haematite iron ore body could be in production next year at the rate of 500,000 tonnes. This direct shipping ore would compete directly with iron ore shipped from Brazil to Europe by Vale and would have a 1,500 kilometre freight advantage. In practice Bill acknowledges that he will have to concede that advantage as a discount in the pricing. There is no way this operation will be a price setter. Quite how much that discount will be will become clearer after Bill has trotted around European steel mills in the next month or so to secure offtake contracts. The truth is that he has a lot of fat to play with.

He reckons he can deliver the ore into a tanker at Sept Isle for C$35 a tonne. The world price is currently about three times that. Moreover, it will be a premium product that is 20 per cent lumpy, and has low silica and phosphorus. That should generate a price premium of about 25 per cent that he can also use in his negotiations. Mining will be done by contractors as will the washing plant that will upgrade the 58% ore to the mid sixties range. Using this approach will keep capital costs to a minimum, at about C$30 million, and the company has in any case C$45 million in the bank right now. All necessary infrastructure is in place, left over from when IOCC operated the mine until 1982, including a town and a railroad. The company also knows exactly where to start mining after a 5,000 metre drill programme confirmed historic data.

Even with Parys Mountain in hibernation until prices recover, the price of Anglesey relative to its Canadian subsidiary is an aberration. How long will it be before someone realises that?

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http://www.cnmining.org/news/?id=251

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