Cazaly, The ‘Forgotten’ Iron Ore Junior

This story features CAZALY RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: CAZ

By Chris Shaw

Much of the media attention junior iron ore play Cazaly Resources ((CAZ)) has received over the past year or so has been in relation to attempts to gain control of large iron ore deposits from the likes of Rio Tinto ((RIO)), but as broker DJ Carmichael points out, this has meant little attention overall has been paid to the company’s Parker Range project in southern Western Australia.

Parker Range is at Marvel Loch, near the Southern Cross project and 100% owned by Cazaly. The company has just released details of a feasibility study into the project that DJ Carmichael suggests stacks up quite well. The expected net present value of the project is $216 million, which DJC notes represents a pre-tax internal rate of return of 78% based on independent price forecasts rather than current spot prices.

Cazaly has indicated upfront capital expenditure costs of around $78 million based on a contractor operated basis, while there would also be a deferred capex payment of $26 million in the third year. Such expenditure would see the project producing four million tonnes per year of ultra-low phosphorous content ore at a projected operating cost of $45 per tonne of shipped product, with an initial mine life of 5.5 years and first shipments expected in the third quarter of 2011.

Payback is estimated at nine months and the upside comes from better than expected prices, DJ Carmichael anticipating a fines price this year of around US116c/dmtu, which is 41% higher than the long-term price Cazaly has assumed in its model. Other positives for the project in the stockbroker’s view is there is access to water, grid power and a rail head are relatively close by, there is a road through the project and port facilities at Kwinana are already in place.

This means Cazaly doesn’t have to worry about third party access talks or give away part of the project to gain access to port and rail handling facilities, giving the company a major advantage over other small projects. Value is also apparent as on DJ Carmichael’s numbers the current market capitaliisation of around $29 million represents an enterprice value to resource tonne of $0.63, which is at the lower end of the range for smaller iron ore plays in Australia.

As DJ Carmicahel points out, this doesn’t include any value for any of Cazaly’s other projects. The stockbroker is thus comfortable setting its price target at $0.63 per share. It attaches a Speculative Buy rating to reflect this, suggesting this is justified given upside potential from further drilling of the project and from the potential of a joint venture partner being found to assist in funding the project.

GIven Cazaly’s modest market capitalisation, the stock receives little coverage in the broader market, the FNArena database showing none of the major brokers research the company. The stock has traded in a range of 13.5c to 41.5c over the past year and today as at 12.40pm is up 1c at 37c.

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