Investing

Cape Lambert Iron Ore (CFE CFE.AX AU:CFE) owns a number of natural resource related projects either outright or through ownership of shares in other listed or unlisted companies. CFE are not miners but instead trade natural resource projects. They often develop a project to the point where it could be mined and then sell it. They buy or take a share in individual projects or small companies, develop the projects and then sell them on to larger companies.

Cape Lambert has quite a history;

• In 2003 the precursor company to Cape Lambert (CFE), International Goldfields (IGL) merged with Hamill Resources. At that time they were focused on gold projects and were having some reasonable success with their enormous Mt Ida tenements and the Evanston project which came from Hamill.
• In 2004 Mt Ida mining continued. The Baldock load is mentioned and should have be producing by 2005.
• In 2005 exploration continued on Mt Ida, Evanstone and a copper-gold opportunity called Sacu in Romania. Mt Ida mining was put on care and maintenance to rework the mine plan in light of new resource discoveries including the Baldock load. IGL partnered with Cogema Group (a French mining company), they had the opportunity to earn in 51% of the project by spending 7.5M over the next 5 years. Evanstone exploration continued. The Sacu project continued exploration and IGL bought approximately 16% of NFX Gold in Canada.
• In 2006 the company acquired the Cape Lambert Iron Ore mine through the purchase of Mt Ankatell with the expectation of a 12-18 month feasibility study. IGL issued about $33M in shares to fund the acquisition and for other exploration. The Cape Lambert Acquisition cost $20M. The company changed its name to Cape Lambert Iron Ore (CFE). CFE announced that the gold assets would be spun off into International Goldfields (IGC) and was IPO'd for proceeds of around $5M. CFE spun out the remaining shares but retains a royalty interest in IGC's assets. CFE also sold its interests in NFX and listed itself on the London AIM.
• In 2007 extensive drilling of the Cape Lambert mine lead the company to expect a bankable feasibility study by Q3 2008. They produced interim mineral estimates for the mine indicating a 10-15Mtpa magnetite concentrate mine over 20 years. Some Chinese interest was explored but failed and CFE continued to pursue the prospects on their own. CFE also acquired additional acreage adjacent to the Cape Lambert tenement. The company agreed to sell 70% of the Cape Lambert project to a Mr Ding for US192M. Shareholders agreed and the deal was awaiting foreign investment board approval.
• In 2008 the sale to Mr Ding did not proceed. However the project was sold for $400M (with 80M yet to be received based on receipt of licenses) to China Metallurgical Group (MCC). CFE kept their interests in the southern extension of the project. CFE then returned 100M to shareholders and acquired 30% of the Marampa Iron Ore project in Sierra Leone from African Minerals for about US45M. . CFE spun out various interests in other iron ore projects to CFE shareholders via Global Iron Ore.

Apparently there was some board reluctance to sell Cape Lambert at the time. The board wanted to spend another 10-15M to improve the resource. Apparently Tony Sage pushed hard to get the sale through as he believed they had reached the optimum cost benefit for further drilling. With hindsight it was a brilliant decision.

Since the 2008 annual report the company;

• Cancelled their listing on AIM
• Explored their Cape Lambert South tenement
• Provided convertible loans to some small ASX exploration companies
• Worked with MCC to secure licenses and in turn their $80M payment.
• Acquired all the assets of CopperCo as the result of a liquidation of CopperCo due to default.

CopperCo was acquired by total payments of 129.7M made up of:

• The secured debt for 72.7M (with 15M of that deferred until July 2009) from Macquarie Bank and LinQ Capital.
• A $30M working capital facility during the administration.
• $27M on completion of the sale.

Fortunately I was never a shareholder of CopperCo because their assets were sold at the absolute market bottom for a small fraction of their fair value based on normalized (not peak) commodity prices. The managers of CopperCo did the owners a great disservice by taking on a level of debt that put immense value at refinancing risk. All this is great news for holders of CFE (which incidentally doesn’t have any debt).

The material assets of CFE are shown in the table below. There are multiple sources for the value of the CopperCo assets. These valuations are generally not peak valuations and have been adjusted for my long term commodity price assumptions. I have validated some of these valuations where underlying data was available. For example CopperCo published cashflow expectations for the Lady Annie Project and if anything they support a higher value than other sources.

CFE recently did a road show around Australia and released a presentation on the ASX. They disclosed that they are reviewing a potential trade sale of Lady Annie for around $150M . Hopefully they won’t proceed with such a sale. They revealed in their quarterly report that they have commenced a 2 year exploration program to expand the resource. CFE have a good (yet short) track record of adding value prior to sales and of selling once an appropriate (but not exhaustive) amount of value has been added. There is no reason that they can’t secure $200M for Lady Annie. My “Estimate” case assumes $150M for Lady Annie.

An article in Australia’s Paydirt has Tony Sage, the Executive Chairman stating that the company is going to try to sell their interest in Marampa for $400M US. I have no basis to value Marampa so I’ve assigned it the carrying value of $25M in my “Estimate” case (I’ve assigned $150M per the road show slides in the High case).

As mentioned above, there is 80M yet to be received from the sale of their name sake mine to MCC. I have assumed they will not meet the criteria to receive that payment in my “Estimate” case. The High case assumes they will receive the payment.

Finally there are some small equity investments that based on the road show disclosures I've valued at $7M.

Tony Sage, the Executive Director, has quite a storied history. Western Australian Police investigated Sage in relation to a vehicle that was later used in a crime, no charges were ever filed. He was supposed to have attended a soccer game with a criminal figure, though the newspaper that published the report later retracted it. Sage owns a Perth Soccer Club, night clubs and Fashion magazine Kurv. Sage has dealt extensively with Frank Timis, who hired Sage to work on Gabriel Resources many years ago. Timis is a controversial Romanian-Australian businessman who was arrested for Heroin dealing in his younger days. Sage is of the view that Frank needed to support his family. They have been friends for over 16 years. Ultimately Timis has made money for Sage and in turn for Sage’s shareholders. Timis was the seller of Marampa, through African Minerals. Sage has been criticized for the deal but time will tell how it works out. Most of Sage’s wealth is his equity in CFE so his interests appear to be well aligned with other share holders. Sage has developed a reasonable track record for proving the pundits wrong.

I don’t like the Marampa deal because the political risk in Sierra Leone (and in turn the increased discount rate for investment there) adds a factor that I don’t think CFE have sufficient experience dealing with. There have already been legal issues with the Marampa project. They may well get lucky and sell the deal to another company that will need to deal with the political risk; Chinese companies seem quite comfortable in Africa and Sage has been able to sell his projects on to Chinese companies. There were so many opportuities in natural resources earlier in the year that I am disappointed they didn’t forgo Africa and focus on more politically secure areas of the world. However, maybe that is what is causing such a dramatic under valuation in CFE shares.

Based on the sum of the parts valuation CFE is worth around 94c. Remeber this estimate assumes no residual from the MCC deal and no value to Marampa. Worst case it seems extremely unlikely that CFE is worth less than 39c. An article in the Mining Journal has Sage assert that CFE is worth at least 150% of its current market value of $150M. I would agree.

My average cost is about 32c. I am trying to buy more but I haven’t been willing to pay up after the recent rise. The combination of the recently completed road show, the resurgent broad market and a better appreciation of the Copper Co assets appear to be causing a revaluation of Cape Lambert. CFE most recently closed at 35.5c on the ASX for appreciation of nearly 175%. With no debt it is easy to make the case that Cape Lambert Iron Ore should hold a large sized position in your portfolio.

posted by Neil  # 4:30 AM