Canada’s rich iron ore deposits have become much adored by global steel producers hungry for more raw material, offering a bounty of speculative opportunities for investors. The latest deal, announced Monday, has the steel division of India’s Tata agreeing to jointly develop deposits in Labrador and Quebec with New Millennium Capital Corp.(4.12-0.03-0.72%).
New Millennium stock is trading well off its record high of $4.96 reached on Friday, two days before the deal was announced, suggesting investors aren’t terribly pleased with the transaction.
One possibility is that some were thinking Tata, which already owns 27.2 per cent of New Millennium’s shares, would simply buy the TSX Venture-listed company, instead of striking the rather complicated funding deal.
But CIBC World Markets Inc. analyst Ian Parkinson suggests investors may be underestimating the potential upside in New Millennium.
“The agreement struck with Tata is better than we expected,” Mr. Parkinson said in a note today. “We do not feel that this is reflected in the market price.”
Under the deal, which centres on two iron ore deposits, Tata will fund 64 per cent of a $50-million feasibility study that’s expected to take about 20 months. Once it decides whether to develop one or both of the deposits, it and New Millennium will form a joint venture. Initially, Tata will have an 80 per cent stake in the project, and New Millennium will have a carry-free equity interest for the remaining 20 per cent. However, New Millennium will be able to expand its holding to 36 per cent within 60 days of Tata's official go-ahead. The company is expecting to exercise that right.
“While it will take some time to get the final decision, we see more potential upside in the stock now,” said Mr. Parkinson.
Tata has set a maximum investment in the project of $4.8-billion, which Mr. Parkinson predicts will be sufficient to build one of the deposits, known as KeMag. At that point, internally generated cash flows should be sufficient to build the second project, known as LabMag.
Upside: Mr. Parkinson upgraded New Millennium to “sector outperformer” from “sector performer” and hiked his price target by $2.20 to $7.20, based on the assumption that Tata makes a positive construction decision in 2012.