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 MARKET REPORTS |
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Analyst report - shares
Wise-owl.com "Stock of the week": Indo Mines Limited
July 20, 2007
Tim Morris, Wise Owl analyst
Stock: Indo Mines Limited
Code: IDO
Recommendation: Speculative Buy
The iron ore sector is running hot, buoyed by a seemingly insatiable Chinese appetite for the metal. The share prices of up and coming iron ore producers have kept pushing the vertical limit, barely raising a sweat. Indo Mines is further down the development track than a lot of other producer hopefuls, with first production targeted in 2009.
Indo Mines is unique because its iron resource is embedded within the sand of a 22km long, 1.8km wide section of beach located in Java, Indonesia. This Yogyakarta iron sands project is the company’s main game, containing 65Mt of iron metal, which could support 30 years of mining. Although the grading of the sand is quite low at 10-15%, processing and concentration aim to increase the iron content to 60% using the same technologies that have been employed by Bluescope Steel for the last 30 years in their New Zealand iron sands project. The end product that Indo Mines aims to produce from Yogyakarta is known as ‘Pig Iron’, which is mainly used for steel sheets, tubes, wire, and stainless steel.
Indo Mines should fill a nice hole in the Indonesian supply chain, as that nation currently imports 100% of their ferrous needs. Demand for the metal is obviously present, as Indo has already struck a 15 year, 100,000t p.a off-take agreement with Indonesia’s largest steel producer Krakatau Steel. Although this agreement is non-binding, it is expected to be settled within the next 12 months.
A recent scoping study has shown that the Yogyakarta iron sands project is worth between US$418m to US$658m in present value terms. Indo currently has a 30% stake in the project, however this should increase to 70% upon completion of a Bankable Feasibility Study (BFS) in mid 2008. The market is currently valuing the company at around AUD$120m, however it is debt free and options account for less than 15% of securities on issue. More capital will be needed to fund the project’s development, however we expect positive results from the BFS to boost the share price as the market factors in the company’s increased stake in the project and begins to appreciate its value.
The main risks to the share price are associated with the company’s ability to stick to timelines, as well as pig iron prices, which currently sit around US$350 per tonne. These prices can be volatile, and the scoping study assumed prices of between US$300-350 per tonne. Since the project is on a beach, a natural disaster such as a tsunami also poses a threat.
Despite these concerns, and the stock being at the speculative end of the market, the upside potential is solid and warrants consideration from investors with the right risk appetite.
For the full report and further wise-owl.com recommendations and strategies, please click here for your free wise-owl.com trial.
Wise-owl.com is one of Australia's leading independent stockmarket research houses. It empowers all levels of investors and traders with education, advice, actionable strategies and risk management techniques. Its investment philosophy is based on a combination of quantitative, fundamental and technical analysis that has been proven over the years to produce very consistent and powerful returns.
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