Duluth Metals Ltd DULMF

Raymond James: Market Perform rating and $1.00 target for DM

[shakerman640]

According to Raymond James:

https://personal.crocodoc.com/fjvG7A8

Duluth Metals Limited

Market Perform 3 ↓ old: Outperform 2

C$1.00 target price ↓ old: C$1.75

Twin Metals Likely Not On Antofagasta's Priority List

Recommendation

In a move that it attributed to “prioritizing projects with the highest value and lowest risks” within its own portfolio, Antofagasta (“ANTO”), Duluth’s key partner in the Twin Metals Minnesota LLC (“TMM”), announced its intention to terminate the option to acquire an additional 25% stake in TMM, thus ridding itself of the contractual obligation to continue funding 65% of the future project spend. We see this move as a step-back from the TMM “steering wheel” by ANTO, which, along with DM’s lack of funding and challenging equity market conditions for the juniors, is equivalent to hitting the brakes on the project, at least in the near-term.

While we continue see value in the Twin Metals project, we think the permitting risk remains high and see the step-back of the major partner as a material loss for Duluth, one that is likely to push back the timeline on the project. As such, we are downgrading Duluth to Market Perform and lowering our target price to C$1.00.

Analysis

- ANTO terminated its option to acquire an additional 25% of TMM, moving any future spending on the project to the pro-rata ownership levels of the partners (Duluth – 60%, ANTO – 40%) vs. the previous 65% level by ANTO under that option.

- Duluth has a 180-day-long right to buy back ANTO’s 40% stake in TMM for US$220 mln – an unlikely outcome in our view. Instead, we anticipate Duluth will elect to repay ANTO’s US$10 mln bridge loan, along with the accrued interest, by year-end, by issuing DM shares.

- Duluth now in play, but timing of any possible take-out remains uncertain. The removal of the 25% option opens up the possibility of another mining company to step in without worrying about losing control over the project to ANTO. However, despite the upcoming PFS (end of July 2014), which should provide some clarity over the project’s technical risk and economics, permitting risk and timeline, in our view, may thwart the possibility of a near-term take-out.

- Our NAV declined by 50% to $1.29 (from $2.57), as we made several changes to our estimates, including removing any proceeds from the project stake sale, delaying the project start-up by 3 years (2023), and incorporating material equity dilution as we continue to present our NAVPS on a fully-funded basis.

Valuation

We estimate a NAVPS of $1.29 implying a current P/NAV of 0.42x, which is at a premium to the base metals developer peer average of 0.20x and a discount to the producers’ average of 0.88x. Our target is based on 0.30x our 8% minesite NAV estimate, before adjusting for other corporate items. This multiple reflects our view of the relative risk of DM’s operations, B/S, size, and liquidity.