First Securities' view on NAUBelow are selected extracts from First Securities' initial analysis coverage on NAU (March 7, 2011):
Premium iron ore projects at a discount
What: We initiate coverage of Swedish/ Finnish iron ore venture Northland Resources with Strong Buy, target price NOK 27.
Why: Northland Resources is a developer of iron ore projects in Northern Sweden and Finland. The company's main projects, Kaunisvaara and Hannukainen, offer high grade (69%) iron ore with favourable product characteristics. The realization of the Kaunisvaara project seems highly probable, with financing structure in place and secured off-take. While the Hannukainen project is still pending a Definitive Feasibility Study, the findings in the PEA are promising. Northland's operating costs will be high, particularly driven by complex logistics, but this is offset by anticipations of solid product pricing. We have a positive view on the iron ore market outlook, as we anticipate continued solid demand from China, strong growth in consumption from other large emerging economies and stable demand from advanced economies. This happens at the same time as Chinese production is falling and India is restricting its exports. In the longer-term, the market balance is likely to become less tight, driven by large upcoming projects, particularly in Australia and Brazil.
Investment case: Our main valuation approach is based on DCF scenarios, with 100% probability for realization of Kaunisvaara and 60% probability for Hannukainen. Our base case, applying CRU Analysis' price assumptions as a basis, implies a probability weighted fair value of around NOK 30. Should the price curve for iron ore follow the forward curve of other raw materials, the fair value increases to above NOK 50. There is further upside in new discoveries and de-risking of Hannukainen. However, risks are also significant, both in terms of market development and project execution.
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Investment case
We believe Northland Resources offers an attractive opportunity to invest in projects with high quality iron ore, strong market drivers and significant valuation upside.
Buy because
1. Strong market drivers; China likely to continue to drive market demand and other emerging economies ready to further tighten market balance.
2. Significant size compared to Nordic peers. High quality product with potential to achieve price premiums.
3. Main project financing structure in place, with off-take secured.
4. Cheap valuation on EV/GAV of 0.58
Primary risk factors
1. Oversupply from new projects coming on stream, particularly in Australia and Brazil
2. Overheating of Chinese economy, falling Chinese infrastructure investments.
3. Large investments in green-field project; risk of cost overruns and failure to reach planned production and forecast cost level.
Triggers and timeline
Kaunisvaara: Coming up is the construction of the Kaunisvaara mill and start of production from the Tapuli mine. The final permit for Sahavaara is also expected in 1Q12.
Hannukainen: Northland is currently maturing the Hannukainen project to DFS level and this should provide a much more accurate picture of the development plan going forward. We expect first concentrate shipped from Hannukainen in early 2016.
Exploration: The company holds several acres of prospects around the two main projects which could be further explored and add to current reserves and Life of Mine for both Kaunisvaara and Hannukainen.