The following is an extract from a report produced by Patersons and released today, Thursday 17 February 2011.
Company: Reed Resources
Current price: $0.65
Target price: $1.02
Reed Resources (ASX: RDR) is a small diversified mining company with lithium, gold, vanadium and base metals projects in Western Australia.
Reed has a very experienced Board and management team and it has been very canny in acquiring assets that add value to the company.
The first project is the Mount Marion Lithium mine which will be in production in the September quarter of this year producing Spodumene (6% Lithium) at a rate of 220ktpa.
The second project is the Meekatharra Gold project which we expect to enter into production in the March quarter of 2013.
It was recently acquired for less than $30m but besides 2.4Moz of gold resources, it has an established 200 man camp, 3Mtpa mill and other facilities which have a replacement cost of $100m.
Our DCF valuation, which includes a 3-year mine life from published reserves, is over $100m.
We expect increased value to be released as more resources are indentified and the mine life is extended.
The third project is the Barrambie Vanadium project. With a new, lower, fixed-price contract expected before the end of the FY11 we believe that the economics of Barrambie will improve markedly.
There is a very interesting commercial synergy between the lithium and vanadium projects.
Future battery technology will use Lithium and Vanadium together because of higher energy density and Reed is in an uncommonly attractive position for any battery manufacturers seeking secure metal supply for two key components.
The near term catalysts for the stock include project development completion for Mount Marion over the next 9 months, gold resource increases and upgrades over the course of 2011 at Meekatharra as well as the completion of studies on the re-start of gold mining.
A lower construction cost at Barrambie could see a major re-evaluation.
The management team have assembled, cheaply, a group of assets with a potent mix of commodities.
There are few companies with these kinds of assets and this kind of management team and it is trading at a big discount to our valuation, based on conservative
assumptions.
Accordingly, we initiate coverage with a price target of $1.02 per share and a BUY recommendation.