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TNG Limited: Old Park Lane Capital lifts target price to A$0.45 per share

TNG Limited (ASX: TNG) has received an increased price taget of A0.45 per share from UK broker Old Park Lane Capital after yesterday's interim PFS on the Mount Peake Iron-Vanadium Project pointed to life of mine revenues of A$10 billion.

Below is an extract from Old Park Lane's research note.

Company data

Recommendation: BUY
Target Price: $0.45
Shares in issue: 285 million
Fully diluted shares: 306 million (428 million post ECE)
Market cap: A$26 million

TNG Limited (ASX: TNG) has released interim results from the ongoing pre-feasibility study for the development of the Mount Peake vanadium-iron-titanium project in the Northern Territory, Australia.

We believe the results substantially de-risk the project and provide more confidence in the key metrics, demonstrating the robustness of Mount Peake. As a result of changes to our valuation we are increasing our target price to A$0.45 per share, on a fully diluted basis assuming the completion of the ECE transaction.

Interim PFS results. We've been through the results with a fine-tooth comb and overall we are pleased with the progress TNG has made in dialing down the key variables. As would be expected with a move to higher level of accuracy and confidence, there are numerous changes from the previously released scoping study.

Key points. Total capex has decreased, although it is now front-loaded to a 2.5Mtpa phase 1 operation. As a result, phase 2 expansion capex for a 5Mtpa operation has decreased substantially providing TNG with more flexibility.

Operating costs have increased but the TIVAN™ process still remains 40% cheaper than the standard pyro-met process according to TNG. Processing throughput in the early years has increased and mine life has decreased. Head grades have increased, and finally, V2O5 recovery is largely unchanged.

Target price increased. We are increasing our target price for TNG to A$0.45 per fully diluted share from A$0.27 per share previously. This is due to changes in our model on the back of the new PFS results, and a reduction in our risk weighting as a result of our increased confidence in Mount Peake. This represents a 400% premium and significant upside to the current share price. Our valuation assumes the successful completion of the ECE transaction in Q1 2012 and incorporates the accompanying share dilution.

Next steps. TNG plans to deliver the final PFS report in Q1 2012 to coincide with the final results of the pilot plant test work and commercialisation of the company‟s patented TIVAN™ process. This will pave the way for the commencement of the Definitive Feasibility Study (NYSE:DFS).

The DFS will consider in detail, further commercial options including the potential to produce a value-add downstream ferro-vanadium product. TNG also plans to complete the ECE transaction and obtain all approvals by the end of 2011.

As a result of our target price increase and the interim PFS results we reiterate our buy recommendation on the stock. At current levels TNG remains cheap given the significant discount to our calculated NAV.

Positive interim PFS results drive target price increase

TNG Limited has released interim pre-feasibility (NYSE:PFS) results for its flagship Mount Peake iron-vanadium-titanium project in the Northern Territory, Australia.

As a result of updates to our model and a reduction in our risk-weighting, we are increasing our target price for TNG to A$0.45 per fully diluted share from A$0.27 per share. This represents a 400% premium and significant upside to the current share price.

As a result we reiterate our buy recommendation on the stock and maintain our view that at current levels TNG remains cheap given the apparent discount to our calculated NAV.

Target price increased to A$0.45 per share

Our net asset valuation (NYSE:NAV) for the Mount Peake project on an unrisked basis has increased to A$391m from A$357m previously, an increase of 9.5% as a result of changes to our model and valuation due to the release of new interim PFS results.

However, we base our target price on a risk weighted valuation of TNG‟s projects. As a result of our increased confidence in Mount Peake following the PFS release, we have decreased our risk weighting for the project to 55% from 80% previously.

This results in our risked NAV for Mount Peake increasing to A$176m from A$71m previously. We believe that a 55% risk weighting is appropriate to reflect the remaining project hurdles and risks, in particular the remaining approvals for the ECE transaction and the commercialisation of the company‟s proprietary TIVAN™ process.

As a consequence of these changes and other updates to our model, our NAV estimate for TNG has increased to A$189m, from which we derive our target price of A$0.45 per share. We maintain a firm buy recommendation on the stock.

We note that even our updated risk weighting of 55% is conservative given the move to a PFS level of accuracy of +/- 25% from a scoping study level of accuracy of +/- 50%. We remain conservative but note that on an unrisked basis, our NAV for TNG would be approximately A$1.00 per share.

Our updated valuation for TNG assumes the successful completion of the ECE transaction which TNG anticipates closing by the end of 2011. As such our valuation is based on fully diluted share capital of 428m to include the 122m share dilution from the proposed ECE transaction.

We maintain our arbitrary expenditure based valuation for the Manbarrum project and our conservative stance to ascribe no value to TNG's other exploration projects, preferring to view these as a free “exploration option” providing blue sky upside.

PFS results – mixed changes but net positive to our NAV

Overall, TNG has released strong interim results from the Mount Peake PFS. The publication of the PFS substantially de-risks the project in our view and provides a strong base for the company to commence the Definitive Feasibility Study (DFS) in 2012.

The PFS is now at an advanced stage with these interim results representing the first glimpse of the full PFS which is due for publication in Q1 2012.

This will coincide with the commercialisation of the company‟s TIVAN™ process – a breakthrough in hydrometallurgical processing which TNG believes will extract commercial grades of vanadium, iron and titanium with high recovery and a lower operating and capital cost compared to conventional pyrometallurgical processing.

In our previous notes we outlined that this is both a major competitive advantage and also a key risk for the company. Further optimisation is ongoing, leading up to the pilot plant phase in Q1 2012, paving the way for the full DFS which will fully consider other commercial options including downstream processing.

Ringing the changes – Impact analysis

The interim PFS results are, in places, substantially different from the results of the previous scoping study from February 2011. 

The variance shows the changes between key values whilst our “impact bar charts” and colours represent our view on whether a change is positive or negative. Clearly, each parameter should not be viewed on its own due to the complex interrelationship of technical variables within a PFS.

Our intention is purely to compare the new PFS with the scoping study on a face-value basis. For example, a decreased life of mine may be viewed as negative on a standalone basis, but in actual fact, as in Mount Peake‟s case it is as a result of an increased production rate and mining of higher grade material in early years.