Edison Investment Research issued an upbeat note on Baobab Resources (LON:BAO) in light of its latest drilling results, highlighting that the stock is trading at a substantial discount to the value of its mineral resources.
The equity research specialist refined its in-house resource estimate for the Massamba Group trend, at the Tete iron-vanadium project in Mozambique, to 339.7 million tonnes at 27.1 percent iron, following the latest batch of drilling results - released on 20 October 2010.
“Baobab’s shares are currently trading at a level that gives the company an enterprise value equivalent to US$2.00 per JORC-compliant resource tonne of iron based solely on its current resource of 47.7Mt at 25.3%,” Edison analyst Charles Gibson said.
The analyst emphasised that this is a substantial discount to an industry average of US$3.53 per tonne.
“Simply being rated at the industry average valuation would imply a 66% increase in Baobab’s share price to 18.24p.”
Furthermore Gibson took this a step further stating that the valuation would rise again should the official resource grow to Edison’s estimate.
It would be 72.54p based on the current US$2.00 per tonne resource valuation, and it would reach 127.79p with a re-rating to the industry average.
“Even taking into account likely dilution as a result of future equity issues, this reduces to no less than 55.62p per share at current prices.”
Baobab shares currently trade at around 10.5 pence.