29-Apr-2011
FERRO METAL, GR ENGINEERING
Riding Vale's coat-tails
ASX Code SFZ, GNG
South American Ferro Metals' management must be doing something right. But so far, the only beneficiaries are themselves.

The Australian minnow producing iron ore in Brazil emerged on the ASX (code SFZ) in November out of the shell of a gold miner known as Rivera Resources.

At 34 cents, its shares are trading at a discount to the 36 cent price at which it raised $15 million from issuing 41.7 million shares to purchase the mineral rights and property at Ponto Verde, located in southern Brazil, whose owners included current management.


Yet less than six months after the raising, managing director Stephen Fabian, chairman Terence Willsteed, and non-executive director Stephen Turner, are on track to receive a solid chunk of the 252 million or so of “performance” shares, worth more than $85 million, which are being issued this year in the wake of certain hurdles being met.

Stephen Turner admits the performance hurdles placed in front of management were “never supposed to be very stiff”.

These shares are in addition to the 157 million on issue following the capital raising and increase the three directors' stake to almost 27 per cent.

But Turner points out that the asset the company is sitting on is impressive.

The asset in question is about 150 million tonnes of iron ore, which is an extension of the 1.5 billion tonne reported resource of Brazil based mining giant Vale – the largest iron ore producer in the world with a market cap of $US172.5 billion ($158 billion).

SAFM is currently producing 0.9 million tonnes a year which is sold for a discount to the domestic market, but this is forecast to rise to 3 million tonnes of export grade iron ore in late 2013 should everything go to plan. It is due to complete a feasibility study by the end of this year.

Based on an iron ore price of $US160 a tonne which falls to $US80 from 2015 (compared with the current price of $US180) and a mine life of 25 years, broker Veritas Securities values SAFM at $588 million, or $1.16 a share.

This is a big premium to its current share price of 34 cents, delivering a market capitalisation, including the performance shares, of $178 million.

The broker's analyst Piers Reynolds says that his 64-cent price target takes into account the considerable project risk. There is also the significant possibility of a capital raising down the track. But maybe the X-factor is also these directors. Their “performance” shares will come out of escrow over the next two years and can then be sold on market. It remains to be seen how interested they are in achieving returns for minority shareholders.

Contracting for wealth

Another bloke who's doing well is GR Engineering's managing director Joe Ricciardo, but this time so are the minority shareholders. At $1.86, his company's shares have spiked 86 per cent since debuting on the ASX on 19 April, having raised $30 million at $1 a share.

At the current share price Ricciardo's 8 per cent stake is worth about $22.1 million.

GR Engineering (ASX: GNG) is definitely in the sweet spot of the resources boom. The West Australian company mainly services small mining companies in designing and operating gold and nickel processing plants.

The herd mentality in investing was capitalised on by the company. It offered only 30 million shares to the public. This tally represents 20 per cent of the 150 million on issue.

No doubt people were buoyed by the recent growth in the mining contractor. In fiscal 2010, net profit was $17.8 million, which grew 15 per cent on revenue growth of 62 per cent.

But what is more noteworthy is that revenues are forecast by the company to increase by only 11 per cent in the current financial year, producing a 5 per cent increase in net profit to $18.8 million.

Another stroke of genius was to price the company cheaply. At $1 GR Engineering was priced at 4 times its operating earnings (or earnings before interest and tax), compared to other companies in the sector that trade on 8 times and more.

Lastly, the fact that Ricciardo is an old hand in the contracting game went down well. In 2001 he sold his company JR Engineering to Downer EDI for $30 million. Investors no doubt believe that he will be wise in spending the $45 million or so of cash on the company's balance sheet.

After all, the share price spike means that if he isn't careful, it will quickly go the other way.

SOURCE: FAIRFAX

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