BC Iron Limited (ASX:BCI) is an iron ore development and mining company with key assets in the Pilbara region of Western Australia. The Company's core focus is the Nullagine Iron Ore Project, a 50/50 joint venture (JV) with Fortescue Metals Group Limited. The JV exports five million tons of iron ore per annum and utilizes Fortescue's infrastructure at Christmas Creek, 50 km south of the mine, to rail its ore to Port Hedland from where it is be shipped directly to customers overseas. Mining commenced in November 2010 and first ore on ship occurred in February 2011.
In November 2009, BC Iron secured an agreement with Henghou Industries, a Hong Kong-based industrial and trading company. The agreement is for the supply of 20 million tons of iron ore to be supplied over about an eight year period. Interestingly, Henghou is the company's third largest shareholder as of June 2012 and hold about 10% of BC Iron's shares.
The mine life at Nullagine is confirmed for eight and a half years. The mine life is anticipated to be extended for another four years or so through further exploration activities.
Does this business have a sustainable competitive advantage?
1. One of BC Iron's competitive advantage comes from the joint venture with Fortescue Metals Group. The JV has given BC Iron the ability to be profitable very quickly without massive capital expenditure. While BC Iron gave up half of their iron ore to Fortescue, it meant that what they received in return was five Mtpa of space on Fortescue's already existing rail and port infrastructure.
The JV created a win/win situation for both companies. It meant that BC Iron very quickly became a viable iron ore producer and that Fortescue gained additional revenue and profit by partnering in the project. Without Fortescue's infrastructure, I doubt that this project would have been feasible for BC Iron due to the high cost of building rail and port infrastructure independently for just five Mtpa of iron ore sales per annum.
BC Iron is the operator and manager of the project with the distribution of profits and costs split 50/50 with Fortescue.
2. A second competitive advantage is the low cost of operation. BC Iron operate a 'surface mining' operation to dig their ore. In essence, the process works like a combine harvester grazing the surface of the mine one step at a time. It is a simpler process and creates a lower risk than the traditional deep open cut operations of most mines.
3. A third competitive advantage is the unique selling point created by BC Iron cleverly branding their iron ore which is known as "Bonnie Fines". Essentially, the Bonnie Fines iron ore coming out of the Nullagine mine is of a high quality which improves productivity when processed at their customers steel mill.
What are the risks facing this business?
The biggest risk to BC Iron's business is the market price of their sole product being iron ore. Essentially their degree of profitability is determined by the fluctuating iron ore price. And, the company like all miners has no control on the price fluctuation of their product.
A second risk is one of sovereign risk with the company's plans to enter into JV's in Brazil for future mining operations.
Is it run by able and trustworthy management?
The company's Managing Director, Mike Young is an impressive individual. BC Iron listed on the ASX in December 2006 with Mike as the only employee. As a trained geologist, he has done an amazing job developing this organisation from scratch to where it is today. I also like the family orientated and personal approach presented by Mike at the company's presentations I have seen and heard to date.
The company as of June 2012 had a net cash position of $76 million and had very good cash flow in the 2012 financial year.
Is it trading at a bargain price?
In estimating a value for this business in the 2013 and 2014 financial years, I have made the following conservative assumptions.
1. The true cost of BC Iron shipping a tons of iron ore is $70 a tons when all costs considered.
2. I have assumed a currently conservative iron ore price of $100 a tons (currently around $118/ton).
3. BC Iron's share of the JV means they account for 2.5 million tons of sales.
4. The company has tabled $25 million of one-off capital expenditure in the 2013 financial year and I have also guesstimated $10 million of 'two-off' capital expenditure in 2014 financial year.
|Rank||2012 Actual Valuation||Today's Share Price||Margin of Safety||2013 Forecast Valuation||2014 Forecast Valuation|
*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.
Here is a chart of the company's share price showing over the past six months.
In summary, BC Iron is now a profitable business born out of a clever joint venture. The company has great management, a strong balance sheet and they have been cash flow positive in the past year. The company's profitability is hamstrung by the volatility in the iron ore price. The share price is trading at very good value presently, however I suspect that shares will become even cheaper over the next month or two.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.