(NAUR)
Hannukainen coming to play, we increase target from 20 to 50
The last drilling results confirms continued IOCG mineralisation westwards, substantiating a
resource of ~100m tons and >15 years minelife. Must now include Hannukainen in estimates.
• The Hannukainen drilling results announced yesterday confirms Rating STRONG BUY
a large IOCG (IronoxideCopperGold) deposit, as all drill holes (rating unchanged) High Risk
from the 2006 drilling program now have shown IOCG
mineralization. The latest drilling update delivers good grades.
17
• The Hannukainen deposit must now be recognized (although
not being a 43-101 compliant resource) as a major ICOG 15
deposit, its size should now have reached 100 million tonnes, 13
substantiating more than 15 years minelife. The economics will
be phenomenal. Even in a super bearish scenario this project 11
Op.rev. EBITDA EBITA EPS P/E EV/EBITA EV/EBITDA P/B Yield ROE
USDm USDm USDm USD % %
2007E - (25) (26) (0.3) - - - 13.4 - (84.9)
2008E - (15) (20) (0.7) - - - (6.0) - 523.2
2009E 151 74 40 0.0 68.3 28.9 15.8 (6.5) - (9.1)
2010E 460 252 194 0.9 3.2 5.6 4.3 6.2 - 8 416.1
2011E 735 421 351 2.3 1.2 2.6 2.1 1.0 - 144.1
2012E 1 238 726 652 5.2 0.5 0.7 0.7 0.4 35.4 105.9
Following yesterdays drilling results, the probability of Hannukainen coming into operation is high, probably above 90%.
We increase our probability to 75% but will up that to 90% when a 43-101 resource statement is published. The
Hannukainen mine has previously been operating (open pit first by Rautaruukki and later by Outokumpu), historically
delivering high quality iron ore and significantly higher grades of copper and gold than we assume. Almost all required
infrastructure (except processing plant) is in place. In our view the risk is on execution, how quick the project can be
advanced and at what cost. We believe our cost estimates are conservative. The progress will depend on issues like
environmental permitting, this is in our view is only a matter of time. The management in this company is highly
experienced, having taken many mines into production in their previous jobs. Sweden and Finland are politically stable and
mining friendly countries, probably this is the best mining region in the world.
Concluding the risked valuation, subtracting existing cash allocated for project development and assuming the Barsele gold
project is sold during 2008 to fund the equity portion of a processing plant, we arrive at NOK 44 per share. A 90%
probability on Stora Sahavaara and Hannukainen will up that value to NOK 53. We expect to do so over the next 6 months.
The risked value thereby allocates a large discount to completion risk and time value of money. We expect to see the share
price reach NOK 50 over the next 12 months.
Assume Barsele and cash pays for required equity, risked valuation 44.1
As will be seen in the valuation table on page 4, the potential valuation of this company exceeds NOK 250 per share. We
arrive at this figure by taking a P/E 8x on 2012E EPS of NOK 28 and adding another NOK 25+ per share in potential from
other exploration activities.
By 2010 these other projects should be quite mature and potentially have a value exceeding Northland’s current valuation.
Northland control a big belt of promising iron ore and IOCG deposits in northern Sweden and Finland, these are the last
significant undeveloped iron ore deposits in Europe. Hannukainen and Stora Sahavaara are the first two to come in
production, but we expect iron ore output to increase by 50%-100% from 2012 to 2015. Northland Resources looks set to
become a 15-20m tonne producer by 2015, approximately half the size of LKAB in Sweden, which is Europe’s only
significant iron ore producer today supplying Europe with approximately 13% of its demand. Europe’s remaining iron ore
demands are mainly met by supplies from Brazil and Australia.
Key figures. Going live from 2010. Massive cash flow thereafter
The economics are summarised in the below tables. We have applied current commodity prices. A sensitivity table on
EBITDA based on 3 scenarios is found below.
Northland made simple, rough figures 2007E 2008E 2009E 2010E 2011E 2012E 2013E
Project parameters
Production
Iron Ore S.S. mT 1.6 5.0 5.0 5.0 5.0
Copper S:S 000 tons 1 463 4 455 4 455 4 455 4 455
Iron Ore Hannukainen mT - - 2.0 5.7 5.7
Gold HK Oz. - 45 882 130 000 130 000
Copper HK 000 tons - 12 353 35 000 35 000
Prices (applying current prices)
Iron ore pellets USD/ton 88 88 88 88 88
Gold USD/Oz 650 650 650 650 650
Copper USD/ton 5 500 5 500 5 500 5 500 5 500
Profit and loss, mUSD 2007E 2008E 2009E 2010E 2011E 2012E 2013E
Revenues
Iron Ore S.S. 143 436 436 436 436
Copper S:S 8 25 25 25 25
Iron Ore Hannukainen - - 177 501 501
Gold HK - - 30 85 85
Copper HK - - 68 193 193
Total 151 460 735 1 238 1 238
Cash cost iron USD/ton 30 32 33 35 36
Transport costs iron USD/ton 6 6 7 7 7
Total cash cost iron USD/ton 36 38 40 42 44
Cash cost copper and gold mUSD 15 15 30 60 63
Cash cost iron mUSD 49 156 230 370 388
Transport costs mUSD 10 31 46 74 78
Gross margin 78 258 429 735 709
Overhead costs (1) (3) (4) (6) (8) (8) (9)
EBITDA (1) (3) 74 252 421 726 701
Depreciation (1) (5) (33) (58) (69) (74) (79)
EBIT (2) (8) 40 194 351 652 621
Net finance 1 (28) (37) (93) (86) (67) (25)
PTP (1) (36) 3 101 265 585 597
Tax (28) (74) (164) (167)
Net profit (1) (36) 3 72 191 421 430
Cash flow, mUSD 2007E 2008E 2009E 2010E 2011E 2012E 2013E
Operating cash flow - (31) 37 159 335 659 676
Plant investment (10) (250) (500) (250) (50) (50) (50)
Project development (12) (12) (12) (6) (5) (5) (5)
Sale of Barsele 75
Debt financing 300 500 50 -150 -500 -200
Dividends -25 -100 -100 -450
Net cash flow -22 82 25 -72 30 4 -29
Cash IB 40 18 100 125 53 83 87
Cash UB 18 100 125 53 83 87 58
Capitalisation 2007E 2008E 2009E 2010E 2011E 2012E 2013E
Interest bearing debt 0 300 800 850 700 200 0
Net interest bearing debt -18 200 675 797 617 113 -58
Market capitalisation 231 231 231 231 231 231 231
EV 213 431 906 1 028 849 344 173
The below table shows the valuation multiples, assuming all equity can be funded through a sale of the Barsele deposit and
further assuming remaining capex funded by debt. We expect around 1bnUSD in plant and related investments (this should
allow for solid price increases). With bankable feasibility studies completed and off-take agreements with leading steel
producers in place, banks will be eager to fund that cash. Both assumptions are in our view highly realistic. Europe today
imports 85% of its iron ore consumption, mainly from Brazil and Australia, and Northland will supply a hungry clientele.
Scenarios
Even applying almost historically low commodity prices we arrive at solid economics. This owes to the copper and gold
credits in Hannukainen. This provides a phenomenal cushion in bad times and superb cash flow in better times. Even a
moderate 6x EBITDA multiple on the medium scenario supports share price in excess of NOK 100 when assuming a trade
sale of Barsele at around USD 75m and the remaining capex funded by debt. This is our view a valid assumption.
We expect further drilling updates from Hannukainen and Barsele this spring, we expect resource upgrades at Barsele and a
43-101 resource statement at Hannukainen over the next 6 months. This should open international investor eyes big time.
Conclusion
Its massive iron ore deposits will generate revenues of around 1200mUSD at current commodity prices. The almost unique
Hannukainen IOCG deposit has hardly been discovered by a broader set of investors.
The share price still has >10-fold potential, we aim for NOK 50 over the next 12 months. Strong Buy
PROFIT & LOSS USDm 2013E 2012E 2011E 2010E 2009E 2008E 2007E 2006E
Operating revenues " 1 238 1 238 735 460 151 - - 0
Operating costs " (538) (512) (314) (208) (78) (15) (25) (10)
Depreciation & amortisation " (79) (74) (69) (58) (33) (5) (1) (0)
Operating profit " 621 652 351 194 40 (20) (26) (10)
Associated companies " - - - - - - - -
Net interest " (25) (67) (86) (93) (37) (36) - -
Other financial items " - - - - - - - -
Profit before taxes " 597 585 265 101 3 (56) (26) (10)
Minority interest " - - - - - - - -
Taxes " (167) (164) (74) (28) - - - -
Net profit " 430 421 191 72 3 (56) (26) (10)
BALANCE SHEET USDm 2013E 2012E 2011E 2010E 2009E 2008E 2007E 2006E
Cash & int. bearing assets " 101 203 232 141 68 132 8 43
Other current assets " 0 0 0 0 0 0 0 0
Other assets " 896 896 896 896 896 330 10 0
Total assets " 998 1 100 1 128 1 037 965 461 17 43
Interest bearing debt " - 450 900 1 000 1 000 500 - -
Non interest bearing debt " 164 82 0 0 0 0 0 0
Shareholders' equity (incl. min. int.) " 834 568 228 37 (35) (39) 17 43
Market cap. " 231 231 231 231 231 231 231 231
Net interest bearing debt " (101) 247 668 859 932 368 (8) (43)
Enterprise value " 130 478 899 1 090 1 163 599 223 188
PER SHARE DATA (NOK) 2013E 2012E 2011E 2010E 2009E 2008E 2007E 2006E
Average no. of shares 1 000 81 730 81 730 81 730 81 730 81 730 81 730 81 730 55 427
Share price USD 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
EPS (reported) " 5.3 5.2 2.3 0.9 0.0 (0.7) (0.3) (0.2)
EPS " 5.3 5.2 2.3 0.9 0.0 (0.7) (0.3) (0.2)
CFPS " 6.2 6.1 3.2 1.6 0.4 (0.6) (0.3) (0.2)
Book value " 10.2 6.9 2.8 0.5 (0.4) (0.5) 0.2 0.5
Dividend " 2.0 1.0 - - - - - -
PRICING MULTIPLES
P/E (reported) 0.5 0.5 1.2 3.2 68.3 - - -
P/E 0.5 0.5 1.2 3.2 68.3 - - -
P/CF 0.5 0.5 0.9 1.8 6.3 - - -
EV/EBITA 0.2 0.7 2.6 5.6 28.9 - - -
EV/EBITDA 0.2 0.7 2.1 4.3 15.8 - - -
EV/Sales 0.1 0.4 1.2 2.4 7.7 - - -
P/B 0.3 0.4 1.0 6.2 (6.5) (6.0) 13.4 5.4
Yield % 70.7 35.4 - - - - - -
KEY FIGURES
Revenue growth % - 68.5 59.7 204.6 - - - -
EBITA-margin % 50.2 52.7 47.8 42.1 26.6 - - (2 450.0)
ROE % 61.3 105.9 144.1 8 416.1 (9.1) 523.2 - -
SEGMENTS & ASSUMPTIONS 2013E 2012E 2011E 2010E 2009E 2008E 2007E 2006E
Pareto credit analysts provide credit ratings which is a framework for comparing the credit quality of rated debt securities.
The ratings are based on the same rating scale as international rating agencies and represent the opinion of Pareto as to
the relative creditworthiness of securities. A credit rating on a stand alone basis should not be used as a basis for
investment operations. Pareto Securities may also provide credit research with more specific price targets. These price
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Statistics on Recommendations
Please see Appendix C for quarterly statistics on the overall ratio of “Strong Buy”, “Buy”, “Hold” and “Reduce” in Pareto’s
Recommendations in financial instruments, including a split with respect to issuers where Pareto have provided investment
banking services the previous 12 months.
Nordic Partners and/or Pareto may have material conflicts of interest related to the production or distribution of this
research report which are disclosed on the following Appendix A and Appendix B.
Disclaimer
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to investments caused by or motivated by Recommendations from Pareto. Any person receiving a Recommendation from
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Appendix A
Pareto Securities ASA does not alone or together with related companies or persons – hold a
portion of the shares exceeding 5 % of the total share capital – in any companies where a
recommendation has been produced or distributed by Pareto Securities ASA.
Pareto Securities ASA may hold financial instruments in companies where a recommendation
has been produced or distributed by Pareto Securities ASA in connection with rendering
investment services, including Market Making.
Please find below an overview of material interests in financial instruments held by employees
in Pareto Securities ASA, in companies where a recommendation has been produced or
distributed by Pareto Securities ASA.
Appendix B
Overview over issuers of financial instruments where Pareto Securities ASA have prepared or
distributed investment recommendation, where Pareto Securities ASA or related companies
have been lead manager/co-lead manager or have rendered publicly known not immaterial
investment banking services over the previous 12 months:
Overview over issuers of financial instruments where Pareto Securities ASA have prepared or
distributed investment recommendation, where Pareto Securities ASA or related companies are
market makers or liquidity providers:
This overview is updated monthly (this overview is for the period 01.01.2006 – 31.12.2006).
Appendix C
Column I shows the overall ratio of “Strong Buy”, “Buy”, “Hold” and “Reduce” in Pareto’s
Recommendations in financial instruments.
Column II shows the ratio of “Strong Buy”, “Buy”, “Hold” and “Reduce” in Pareto’s
Recommendations in financial instruments, where Pareto have provided investment banking
services to the issuer the previous 12 months.
Column I Column II
Strong Buy 2,9 % 4,8 %
Buy 60,5 % 88,1 %
Hold 30,2 % 7,1 %
Reduce 6,4 % 0,0 %
Pareto Securities ASA (“Pareto”) is responsible for the production and dissemination of this recommendation. For further disclosures on relevant definitions,
methods, risks, potential conflicts of interests etc. and disclaimers please see www.pareto.no. All investment Recommendation should be reviewed in
conjunction with the information therein.
28 februar 2007 10(10)