Description

It is sometimes better to be lucky than good. Arguably, London Mining PLC (ticker LOND NO, hereafter referred to as “LOND”) is both. The company currently sits upon US$310mm cash, has virtually no liabilities, and yet only has a market cap of US$138mm. If all the projects they are pursuing pan out, they will have spent <$200mm of that cash, still leaving them with $110mm of cash on hand, or 80% of the current market cap, plus a suite of potentially very interesting coal and iron ore assets.

There are a few explanations as to why this discount exists. The first and most meaningful is the relative lack of liquidity (I would stop reading this until you check out the unpredictable daily volume – LOND does have days where it does not trade at all, a condition management is committed to fixing). Beyond that, there is some unnecessary complexity in that the company is listed in Oslo, reports in US$, is HQed in London and thus undertakes some transactions, particularly on the share capital side, in pounds sterling; and it has assets on most continents. Finally, as the name implies, LOND is an owner of mining assets, focused on iron and coal with a stated goal of serving the steel industry…and the steel industry has hit a rough patch recently with virtually all equities in the steel complex (along with all natural resources, and come to think of it, nearly all equities in the world)  down dramatically in recent months.

The company-making transaction for LOND – the lucky or good question – was the purchase and well-timed sale of its iron ore asset in Brazil. The company acquired this 268mmt asset in May 2007 for $65mm, and over the next 16 months, increased the resource to 1.1bn t, developed the sinter feed plant and negotiated off-take agreements. To maximize value, LOND opted to sell the asset and found a willing buyer in ArcelorMittal, who was willing to pay $810mm in August 2008, a truly impressive return. Mgmt rewarded shareholders with a GBP2/share dividend that was just recently paid out ($390mm in total) – a sum that was >80% of LOND’s market cap at the time. Remarkably, the discount to cash on hand still exists. Beyond the dividend and projects I will discuss in a bit, the company also used $68mm of the cash to take out the only debt on its balance sheet, leaving a very clean right side of the ledger.

• Potential funding for the conditional DMC Energy acquisition - $35mm remaining (http://hugin.info/137683/R/1241902/266823.pdf for the initial announcement on 8/8/08). DMC is LDON’s first foray into the coal industry.  
• LOI dated 8/22/08 with Wits Basin Precious Minerals, which may result in LOND becoming a JV partner for an iron ore project in China – this has since progressed to definitive terms. This transaction, for a total consideration of $45mm for 50% of the JV (+$1mm in a convertible loan to cover transaction costs for Wits), entails preferential rights with respect to return of capital and distributions of profits until LOND’s investment of $45mm is recouped. On the recent conference call, mgmt disclosed that even today, the mine is selling spot ore for $95/t with cash costs of $45/t.
• Announcement (9/15/08) regarding a $5mm purchase of 20% of International Coal Company, which has operations in Colombia. LOND has first rights to provide funding to the business and could thereby increase its interest. ICC has entered into a binding LOI to acquire an initial 75%  in a “leading mining services operator in Colombia” – this could lead to an additional $60mm of investment by LOND.  
• A project loan to the El Artillero iron ore project in Mexico, up to $5mm. LOND holds 53% of the JV. This project appears to be on the backburner, at least temporarily, as LOND just disclosed on its conference call that the ore body has impurities which are limiting extraction. They will re-evaluate the project in January but seem positive that it will be a success.

Iron Ore Projects

·         Wadi Sawawin Project

o   50/50 JV with National Mining Co (Saudi company) targeting production of up to 20mmtpa of DRI pellets to supply steel production in Saudi Arabia. Feasibility study is  underway for the first 5mmtpa pellets and is expected to be completed by year-end. Saudi Advanced Production for Iron & Steel Ltd. (“SAPIS”) has signed an MOU agreeing to purchase the entire production of the JV for the lifetime of the mining rights, with the price based on the Vale benchmark for Europe. Further, SAPIS has agreed to secure a developer to invest all capital required to bring Wadi Sawawin and Greenland (see below) projects into production. SAPIS has confirmed that it has secured a developer to fund both projects subject to feasibility studies. Lastly, “long-term low cost debt funding shall be provided and recover from sales of product to SAPIS”. SAPIS was recently formed by interests including Prince Nawaf Bin Sultan bin Abdil-Aziz and the Saudi Bin Laden Group.

o   LOND only has to supply working capital to the JV, but not construction capital – the provision of debt for this purpose, contingent on the feasibility study, and is a key feature of the deal.

o   LOND guiding to production by the end of 2011. If this project plays out, the value of the asset should be a multiple of the current market cap.

·         Isua

o   100% owned project with 961mmt Fe resource @ 34% Fe (JORC). Scoping, metallurgical, hydropower, pipeline and harbour studies have all been completed and have confirmed that the Isua project will support a sizeable open pit mining operation starting at approximately 5mtpa of +71% Fe magnetite direct reduction pellet feed.

o   Capex to be covered by SAPIS, per above.  Production will likely follow a year after the Saudi start-up as the ore is to be sent to Saudi Arabia to be integrated with the Wadi project.

 

·         Marampa

o   LOND acquired 25-year Mining Lease in September 2006. Mine in Sierra Leone has previously produced (between 1933-75 and 1982-85). Production is planned at 1.5mmtpa-3mmtpa from tailings then expansion from the open-pit production re-start. The drilling of the tailings has been completed and basic engineering is nearing completion.

o   Estimated capex of $50mm– over 2+ years. Operating cost per ton est’d of $25-30/t.

o   30% of the area of LOND’s mining lease is being disputed by African Minerals, and LOND is going to court to get redress. They claim production rate / timing start-up would not be impacted even in an adverse outcome. There are also issues with the rail infrastructure serving the mine.

o   This appears to be the company’s most challenging project in terms of likelihood of completion, given what is going on around it. At the least, the timing on Sierra Leone seems the most likely to be pushed out.

It seems the biggest barrier to the company’s valuation is liquidity and getting its story out. The company is aware of this and seems intent on fixing the latter by hiring in-house IR and doing more road-shows, and pointing to imminent announcements (e.g. Saudi results in January) to help investors better understand the opportunity. If this fails, we would not be surprised to see LOND pursue a listing in London.

Catalyst

Saudi feasibility results
Roadshows + hiring of IR
Potential AIM listing