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Havilah Resources retains speculative buy recommendation from State One Stockbroking

Strong demand from Chinese steelmakers and supply disruptions have boosted iron ore prices to a five-year high.
project area
State One has valued Havilah’s shares at 30 cents each

Havilah Resources Ltd (ASX:HAV) has signed a transformational capital injection deal of up to $100 million with SIMEC Mining, a member of the GFG Alliance.

This share subscription agreement with SIMEC will fully fund Havilah’s work programs for its iron ore assets and copper prospects in the Mutooroo Copper-Cobalt District in South Australia.

State One Stockbroking has retained its speculative buy (higher risk) recommendation for Havilah with a target price of 30 cents.

Following is an extract from State One’s research report:

Iron ore could be the new “gold”

Event

Strong demand from Chinese steelmakers, allied to supply disruptions from Brazil and Australia have boosted iron ore prices to a five-year high.

While the commodity price hike has, not unexpectedly, supported significant share price gains in the large cap miners – BHP, Rio Tinto, Fortescue - the favourable supply/demand balance has also generated renewed interest in the small cap iron ore space.

Havilah Resources, historically positioned as a copper/gold/cobalt exploration and development play, now finds that its long-sidelined iron ore projects (Maldorky and Grants/ Grants Iron Ore Basin (GIOB)), are firmly front and centre on investors’ radar screens.

State One comment: end-April could see a deal with SIMEC

In May 2018, SIMEC Mining (part of the Gupta Family Group (GFG)) commenced due diligence - including metallurgical testing and RC drilling - on HAV’s iron ore projects.

Note: the Maldorky and Grants/GIOB Projects are favourably located in relation to GFG’s existing steelmaking and iron ore export operations at Whyalla.

In December 2018, the exclusivity period to complete the due diligence was extended from the end of 2018 to the end of January 2019, and then on payment of A$1m was extended further to 31 March 2019. Subsequently, a 30-day extension was granted (to the end of April 2019).

Importantly, HAV stated that the extension was to allow for both parties to “continue negotiations on the terms of a deal structure and commercial arrangement”.

While there is no certainty that a deal will be announced by the end of April, or indeed at all, we suggest that the payment of A$1m by SIMEC to allow due diligence extensions was a positive sign.

SOTP Valuation: 30 cps

HAV’s current combined iron ore Resource is estimated at 451Mt @ 26% Fe for 117Mt of contained Fe.

At an assumed Resource value of US$0.15 per t of contained metal (based on peer average Resource valuations), we calculate HAV’s iron ore Resource could be worth ~A$24m (equivalent to A$0.10 per diluted share).

Importantly, HAV disclosed on 3 April 2019 an exploration target for the GIOB of at least 3.5Bt @ 24% for 840Mt of contained Fe.

Converting this to a Resource, could increase the iron ore valuation by multiples.

Allied to our (risk-adjusted) valuation of A$38m for Kalkaroo, we calculate HAV’s SOTP valuation at A$71m (A$0.30ps).

Recommendation: Speculative Buy (Higher Risk).

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