Baobab Resources: Iron Ore Set To Be Upgraded, Increasing Capital

Baobab Resources PLC (BAO.L) has announced the preliminary results of the beneficiation test works and mass balance modelling for the Tenge material. Both studies indicate that the project’s iron ore can be sufficiently upgraded to concentrate via coarse cobbing and then smelted to produce high-quality, ISO compliant pig iron.

The proposed coarse cobbing route points to a visible reduction in the upfront capital spend (c 13% on the scoping study estimate). We have updated our valuation switching from the resource-based approach to the in-depth NPV methodology. Our ungeared un-risked NPV10 yields USD 630m in attributable value. While we acknowledge the risks attached to the project, we believe the current market valuation is overly conservative as it does not discount the project’s strong economics and high chance of success.

Strong met test results; visible capex reduction
While the completed beneficiation tests confirmed that the optimal smelter spec concentrate grading 57% Fe is achieved at a standard 150 micron grind size, it also determined that the project’s ore could be sufficiently upgraded through the coarse cobbing process to yield a smelter feed concentrate grading 52% at an impressive mass recovery of 63%.

The coarse cobbing route will simplify the beneficiation process reducing the upfront capital spend requirement by as much as USD 90m (c 13% of the original scoping study estimate). In addition, based on the mass balance modelling for the coarse cobbing concentrate, the company has provided preliminary product specifications, which suggest the project’s saleable pig iron is expected to contain low impurities and low trace elements essentially conforming to international standards (eg ISO and GOST) for steel-making pig iron.

Valuation: Un-risked NPV points to large upside
As the project is being rapidly advanced to the feasibility study stage increasing visibility on its parameters and economics, we have chosen to abandon the resource-based valuation approach switching to a more in-depth NPV method. Our un-risked and un-geared NPV10 of the project is US$761m, which, being adjusted for the 15% IFC participation, translates into a USD 630m value attributable to Baobab. This takes into account c US$600m in required financing, which will have to be raised through equity/debt and/or a strategic partnership.

Based on our estimate, the market is currently pricing in the project’s implied discount rate of c 25%. While we would not completely ignore the risks attached to the project (ie its early-stage nature, potential exposure to the volatile Asian steel market and lack of funding to bring it to the production stage currently), we believe the market could be overly conservative in discounting the project’s strong economics and fairly high chance of success.