MENU

Why you should bet on Sundance Resources Limited

In just over a decade Andrew “Twiggy” Forrest, the Chairman of Fortescue Metals Group Limited (ASX: FMG) has built the iron ore miner into a $15 billion powerhouse and in the process made himself one of Australia’s richest people.

Those who have followed the Fortescue story will no doubt remember the scepticism heaped upon Twiggy’s dream both in the formative years and during the global financial crisis (GFC), when many though the combination of falling iron ore prices and a heavily indebted balance sheet would bring Fortescue to its knees. However as Forrest’s wealth proves, when a large project such as this is successful, the returns are astronomical.

The Fortescue story is important to remember for investors taking a look at the investment merits of Sundance Resources Limited (ASX: SDL). Sundance is an iron ore explorer that is developing the massive Mbalam-Nabeba Iron Ore Project in the Republic of Cameroon and the Republic of Congo.

The Mbalam-Nabeba resource comprises 436 million tonnes of probable ore reserves at 62.6% Fe, while the total resource is indicated at 4 billion tonnes (Bt) at a grade of 36.6% Fe. Although this is indeed significantly smaller than Fortescue’s 15.6 billion tonne resource, it is still very large. (Note that Sundance suggests there is in fact an exploration target of 9 Bt to 13 Bt of total potential resource). The similarity I am alluding to however isn’t so much about resource size, but rather the scale of what is required to bring the project to fruition.

The capital cost to develop this project is a major hurdle and like Fortescue’s early sceptics, getting Sundance’s project off the ground is a sticking point for many investors. Management’s plan is to construct a 510 km rail line across Cameroon from the mine site to a proposed port. The feasibility study suggests this Stage One (pre-production) rail and port construction will cost US$4.7 billion, while the Stage Two plant and production costs are estimated at a further US$3.1 billion.

As Forrest discovered at Fortescue, securing the funding required to undertake massive capital expenditure projects on untouched ore bodies is certainly no walk in the park. The risks of dilution for early stage equity investors when financing is yet to be secured are large, however Sundance’s project funding plan does provide a level of comfort for shareholders.

Firstly, an off-take agreement with leading global commodities trader Noble Resources to purchase up to 100% of the production from the project for 10 years provides certainty of revenue.

Secondly, management is aiming to secure funding at the asset level to limit equity dilution. While it is too early to say how this financing structure will ultimately unfold, the structures being considered look to be focussed on creating a good outcome for shareholders.

Given the high quality ore of the body, initial ore extraction is expected to have a very low strip ratio. In fact the initial stage of production is expected to be immediately ready for direct shipping, with the resource – which is close to the surface – being described as ‘shovel ready’. All told, the ore quality and ease of extraction makes forecasts for the per tonne capital cost of the iron ore look very appealing indeed. Ultimately, the attractive economics of this project boosts the chances that Sundance can successful execute its plan and create shareholder value.

An even better bet than iron ore

The iron ore price is struggling and there's really no telling if or when it will bounce back. It's a different scenario for oil. Limited oil supply and growing demand mean oil prices are likely to rise over time. Position yourself to profit from this trend now, with The Motley Fool's brand-new FREE research report, "3 Oil Stocks to Send Your Portfolio Gushing Higher".

Motley Fool contributor Tim McArthur owns shares in Sundance Resources Ltd.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.