Afferro's Nkout project has a significant iron ore resource base waiting to be tapped, and is now attracting strategic interest.
It is well positioned to get to the next stage of feasibility, the broker reckons.
"The key to creating value will be the formalisation of infrastructure plans where the company could have an active role once a strategic partner is secured," SP Angel believes.
Afferro revealed on December 6 that it is in negotiations with multiple parties that could lead to a strategic investment or takeover.
That sent the shares surging but at around 78p today they are still some way below the floor value of 120p set by SP Angel.
"Our floor value is based on existing and deferred cash of US$94mln and exploration spend of US$36mln for the Nkout project," the broker explained.
Its upside case of 225p a share is based on net present values (NYSE:NPV) for the Nkout project based on the preliminary economic assessment.
"We have taken the NPV valuation for a 35 mtpa [million tonnes per annum] production using a 12% discount rate, a higher expectation on operating costs (20% higher) and capex (10% higher) based on a shared solution on infrastructure," the broker continued.
The broker's calculations use Afferro's "conservative" central case on prices for end iron ore products ranging from US$75 to US$80 a tonne.
SP Angel assumes a probability of 60% for the Nkout project to get to development using a base case NPV for the project of US$2.5bn. It discounts this to a present value of £1,049bn assuming four years to start of production at a discount rate of 10%.
It also assumed the company can capture 40% of this value which gives an upside case of £2.25 per share.
"There are hurdles to overcome but the company has the money and a good base to take this project to feasibility - through this process we expect to hear more about the prospects of including a strategic partner - this will be crucial in terms of providing the project with capital and credibility in terms of implementation," SP Angel asserts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.