In February, Iron Ore Holdings (ASX:IOH) agreed with Mineral Resources (ASX:MIN) to combine their forces at IOH’s Iron Valley Project, which contains 260 million tonnes at an average grade of 58%Fe.
The agreement stipulates that Mineral Resources will construct and operate the mine on its own, and will pay Iron Ore Holdings a certain amount per tonne, based on the then prevailing iron ore price. Internal estimates at IOH expect an annual EBITDA between A$20 -75M based on an iron ore price of A$90-110/tonne (current price is approximately A$125/tonne).
We think this is an excellent agreement as Iron Ore Holdings doesn’t have to find financing for the capex and thus diminishes the operational risks. As both companies expect to start exporting the iron ore from 2014 on, this solution offers exposure to near-term cash flow. It wouldn’t surprise us if IOH would be able to strike the same deal on their Bungaroo South project in the near future.
As Iron Ore Holdings currently has approximately A$0.53 per share in cash and they no longer need to find financing for Iron Valley, we hope the company will award its shareholders and pays a special dividend in 2013, and regular dividends from 2015 on. If we use a base case scenario of A$50M cash flow per year from sales at Iron Valley we think an after-tax net profit of A$30M or A$0.185 per share is very reasonable. If the company decides to distribute 1/3rd of the net profit, we would expect a franked dividend of A$0.06/share, or a yield of approximately 6%.
Disclosure: The author holds a long position in Iron Ore Holdings. Please see our disclaimer for current positions.
