According to Credit Suisse:
Requires US$145-150/t iron ore to make sense
- This report illustrates why we believe that LIM.TO needs to see US$145-150/t iron ore in order to generate an acceptable return for shareholders. A lower price environment implies that either 1) LIM.TO shareholders are effectively sponsoring China’s steel industry with iron ore donations, or that 2) shareholders might be better served by shutting this operation down.
- Management’s persistence and numerous achievements to date are admirable, but unfortunately the iron ore price reality is unavoidable. Our analysis suggests that 1) a US$128/t iron ore price environment (62% IODEX basis) would see LIM.TO operationally break-even in 2013, 2) based on a capital intensity of around $125/t, LIM.TO needs US$147/t iron ore in order to generate a 15% return on investment, and 3) the salvage value of this operation is around $1.00/sh; however, the longer this company continues to produce at a loss, the lower this salvage value will become.
- The 2012 operating season will conclude within coming weeks. We would want to see 1) iron ore above $150/t and 2) iron ore hedging or presales agreements in place before we would be comfortable with LIM.TO resuming production in 2013 and continuing with its expansion aspirations.
- We see US$150/t as an optimistic iron ore price scenario, and set our C$1.00/sh (from $1.10/sh) target price based on a ‘salvage value’ approach applied to the current balance sheet. NML.TO and perhaps ADV.TO would be logical buyers of some of LIM.TO’s assets.