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Alderon Iron's Kami project "simply won't work" at current prices, says Dundee Capital

Last updated: 02:54 11 Dec 2014 AEDT, First published: 03:54 11 Dec 2014 AEDT

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Alderon Iron Ore (TSE:ADV) was downgraded by Dundee Capital Markets late yesterday to a neutral rating from a previous buy recommendation, with the capital markets firm citing the recent development of a financing delay and added dilution.

The analysts also decreased their 12-month price target on the iron ore company to 30 cents from $3.90 per share, as "we push production back four years to 2020 and lower our DCF multiple to 0.6x from 0.8x, assuming cash costs and tax breaks are maintained, and the doubling of production to 16 million tonnes per year is no longer an option," Dundee said.

Shares of Alderon fell 5.6 percent to 25.5 Canadian cents, stretching this year's losses to nearly 85 percent.

"We aren't walking away from the Kami Iron Ore Project in Labrador, and are in fact pleased that development hadn't progressed any further or liabilities could have created enormous problems for Alderon," said Dundee analyst David A. Talbot in a report released late Tuesday.

"For the time being, commodity prices being what they are, Alderon has the option to defer development and its cash burn, saving Kami for another day. With our long term iron ore prices maintained at US$88/t, in line with consensus, we believe that Kami could ultimately get built later in the decade should prices rebound - but raising $1 B debt and $600 MM equity may be a challenge and provide only a modest $33 MM NPV."

Alderon on Tuesday implemented a cash preservation program to help sustain the company through 2017 without additional capital, including cutting staff, deferring vendor payments, and pushing off two interest payments for its $22 million in convertible debt. Despite an off-take agreement with Glencore, a strengthened board, full permits and both the port built and power line ready for installation, rapidly falling iron ore prices have removed "any hope for near term financing", Dundee said.

The capital markets firm noted that it was only a matter of time before management publicly tapered financing expectations.

"With iron ore down largely since the summer, and off 49% YoY to US$71/t, Kami simply won’t work. A correction towards US$100/t might be required before serious discussions resume to secure the needed $1.5 B," Dundee's Talbot continued.

The analyst said that the $1.5 billion in capital necessary, already a challenge due to its magnitude, comes amid dried up Canadian capital markets. Talbot pointed to recent warning signs such as Rio Tinto failing to sell its stake in IOC, and Cliff's announcement last month to place Boom Lake on care and maintenance.

"We still believe Kami is a high quality project in the right jurisdiction, but costs are not first quartile, and without substantially higher iron ore prices it simply won't work," Dundee concluded.

As at September 30, Alderon had $32 million in cash and $22 million in debt.

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