Russell Fryer of Baobab Asset presentation produced by sumzero and Institutional Investor on the long case for African Minerals Limited (LON:AMI) (OTCMKTS:AMLZF).

African Minerals

African Minerals Limited (LON:AMI) (OTCMKTS:AMLZF) is a producing iron ore company which its main deposit is located in Sierra Leone and is called Tonkolili. The Tonkolili deposit has over 12 billion tonnes of iron ore next to a rail line. The rail transports the iron ore 200 kilometers to the Pepel port, where ships receive the material for delivery to Europe and Asia. Phase 1 production is fully funded, underway, and selling Direct Shipping Ore (DSO) from the open pit mine that will produce 20 million tonnes per annum of ore for five years.The Phase 2 production plan at Tonkolili sees production move from 20 million tonnes to 35 million tonnes per annum at a capex cost of about $2 billion.

African Minerals Limited Long Thesis

– Tonkolili started production in Q4 2011 so pre-start up & start up issues have been derisked.

– Tonkolili iron ore has a lower level of impurities (low Si) versus iron ore from Brazil, India and China.

– The deposit has a long life and is able to produce ore for 60 years.

– Cash costs decrease from $40/tonne to $30/tonne in 12 months.

– Production is moving from 12m tonnes to 20m tonnes per annum in the next three months.

– Production profile ramp up from 12m tonnes to 35m tonnes over five years.

– AMI owns and operates the Pepel port but donated to the Government a 10% free carry interest.

– Very strong cash flow generation and earnings.

– Compelling valuation of 400 pence versus current price of 190 pence.

Initial Investor Validation of Undervalued Investment Thesis

In August 2012, Shandong Iron & Steel Group (SISG) invested $1.5 billion into African Minerals Limited (LON:AMI) (OTCMKTS:AMLZF) for 25% of the Tonkolili project. This valued the property at $6 billion. In exchange, SISG has the ability to purchase iron ore at a sliding scale discount of 0% to 12.5% depending on the spot iron ore price.

Second Investor Validation of Undervalued Investment Thesis

On October 26 2013, Tianjin Materials and Equipment Corporation of China (Tewoo) also valued the Tonkolili deposit at $6 billion. Tewoo announced that it would purchase 10% of Tonkolili for $600 million and subscribe to $390 million worth of listed African Minerals Limited (LON:AMI) (OTCMKTS:AMLZF) shares at 660 pence versus the current price of 190 pence. In exchange, Tewoo receives a 20 year off-take agreement of 10 million tonnes of iron ore per annum at an iron ore discounted price to be agreed. Due to the Tewoo valuation, there is no shareholder dilution. The due diligence process should be completed in Q1 2014. As of now, the market has given zero value to this transaction, providing an price underpin if and when the transaction is concluded in Q1 2014.

H/T Curry Goat

Russell Fryer of Baobab Asset: Long African Minerals