BCI Minerals (ASX:BCI)

July 07, 2013 | Price: $3.49

Natural Resources

Overview: BC Iron Limited (“BC Iron, the Company”) is an iron ore mining company with assets in the Pilbara region of Western Australia. The Company’s core focus is a 75 percent interest in the Nullagine Iron Joint Venture with Fortescue Metals Group Limited (ASX: FMG). We’ve maintained coverage for its profitability and financial strength. Following a stop level breach, our last advice was to ‘sell’ at $3.25 in March. However, with the stock holding firm amid challenging market conditions, we reconsider its outlook?

Catalysts: Whilst iron ore prices contracted 10 percent during the June qtr, BC Iron continues to generate strong cash flow. It is rapidly extinguishing borrowings used to opportunistically increase its stake in the Nullagine JV. Operational performance at Nullagine is impressive, achieving nameplate production of 6mtpa and asserting cash costs below $50/t. We expect mine life extensions, ongoing cash flow strength, and recent liquidity initiatives for the share register to drive value growth.

Hurdles: Current mine life of the Nullagine JV is limited to 2020, and increased waste stripping could elevate costs in coming years. Enhanced shareholder liquidity has coincided with the exit of Regent Pacific, which used an existing cornerstone stake as a platform for a takeover bid that failed during 2011.

Investment View: With reserve replacement during 2012 exceeding production to date, we are optimistic for possible mine life extensions. Recent margin resilience has also been impressive amid weakening spot markets. The Company is ideally positioned to consolidate under-funded juniors in the region, and its valuation appears undemanding relative to cash flow. We are upgrading our view to ‘buy’.

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