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Profits look simple with Strategic Minerals

We've found another 'plain vanilla' miner in the footsteps of our top mining share tip of 2012, Central Asia Metals, which gained 77 per cent last year.
January 31, 2013

Strategic Minerals (SML) has an iron ore project that's just what a miner needs for these troubled times - a 'plain vanilla' operation that will quickly generate revenues and won't be greedy for hard-to-find capital. And share price performance could soon be kick-started by the recent rebound of the iron ore market.

IC TIP: Buy at 5.25p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Simple mining operation
  • Strong revenue generation
  • Iron ore market recovering
  • Large discount to NAV
Bear points
  • Short mine life
  • No certainty of replacement projects

That was the reason we tipped shares in emerging copper miner Central Asia Metals (CAML) in June 2012, which soared 77 per cent last year, although the gains have since moderated to 60 per cent. While Central Asia's boat has already sailed, we think Strategic is a company to follow in its wake.

Strategic's plan is similar to Central Asia's in that it is mining waste rock - rock previously deemed uneconomic to sell or process because of lower commodity prices. In Strategic's case, the company has secured exclusive rights to a stockpile of high-grade, fully processed magnetite iron ore accumulated as a byproduct of copper mining at Freeport-McMoRan's Cobre mine in New Mexico. The iron ore stockpile comes with an internationally compliant resource statement - 1.57m tonnes grading 62 per cent iron - and is "delivery-ready", meaning all Strategic has to do is transport the ore into shipping containers and bring it to port. To that end, the company finished refurbishing a short rail link in the summer and has signed up commodity trader Glencore (GLEN) as an 'offtake' partner.

Strategic successfully made its first export shipment of 47,000 tonnes in November and expects to deliver roughly 50,000 tonnes of iron ore per month this year. That would generate roughly $7.4m (£4.6m) in revenues a month at current iron ore prices of $148 a tonne, or $89m a year. True, there's always the risk with new producers that the ramp-up in operations won't go as planned. But that's why Strategic's shares trade at a significant discount to their more established producing peers.

STRATEGIC MINERALS (SML)

ORD PRICE:5.25pMARKET VALUE:£24m
TOUCH:5.0-5.25p12-MONTH HIGH:12pLOW: 3.4p
DIVIDEND YIELD:nilPE RATIO:3.5
NET ASSET VALUE:2.9p*NET DEBT:4%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2011nil-3.22-1.16nil
2012**6.7-0.5-0.1nil
2013**45.66.81.5nil
% change+581---

Normal market size: 10,000

Market makers: 8

Beta: -0.05

*Includes intangible assets of £9.6m, or 2.1p a share

**Daniel Stewart forecasts

The company's share price is languishing after a heavy sell-off last summer when the market for iron ore entered meltdown mode. But iron ore prices have since rebounded to 12-month highs while shares of Strategic continue to wallow - despite the company recently entering production - suggesting plenty of scope for recovery and growth.

Strategic's shares currently trade at a 56 per cent discount to house broker Daniel Stewart's 12p estimate of fair value, which is based on a discounted cash flow model. That said, the discount is partially warranted given how the Cobre stockpile is only expected to last about three years. But with management on the hunt for similar acquisitions, and the market much more focused on near-term results, we don't see this as a significant problem. Besides, we're only recommending this as a short-term buy - as little as three to 12 months. We expect the discount to NAV to shrink as iron ore producers rebound and cash from the Cobre operation really starts to flood in.