Desjardins - Adriana Resources Inc.

Transcription

Desjardins
MARCH 22, 2012
Capital Markets
Research
Iron ore
Labrador Trough—Canada’s iron rush:
Initiating coverage of five Canadian iron ore companies
and transferring coverage of Alderon
 We are initiating coverage of five Canadian iron ore companies with operations or assets located in the
Labrador Trough and transferring coverage of Alderon
 We believe the iron ore market will remain tight in the near term as urbanization and infrastructure growth
in developing economies continue to be strong; however, we see a risk of long-term oversupply as
anticipated new iron ore supply could outpace demand growth
 Our Top Pick is Labrador Iron Mines Holdings Limited
Highlights. We are initiating coverage of five Canadian pure-play iron ore equities: Adriana Resources Inc., Champion
Minerals Inc., Labrador Iron Ore Royalty Corporation, Labrador Iron Mines Holdings Limited and New Millennium Iron
Corp. We are also transferring coverage of Alderon Iron Ore Corp.
Valuation. Our recommendations and target prices are primarily based on our net asset value (NAV) estimates. We
believe that a NAV based on discounted cash flows is the best metric for assessing the relative value of companies,
especially where a company’s value is largely associated with non-producing assets. We have applied target multiples to
our NAV estimates on an asset-by-asset basis to reflect the relative risk associated with project start-up. Valuation
multiples range from 0.3x for speculative, very early-stage assets such as Adriana Resources’ Lac Otelnuk and New
Millennium’s KéMag and LabMag taconite deposits, to 0.8x for start-up producer Labrador Iron Mines’ DSO project.
The exception to our NAV-based relative valuation approach is the hybrid valuation we apply to Labrador Iron Ore
Royalty Corporation. We believe that a hybrid P/CF and P/NAV approach is appropriate as it places greater emphasis on
the near-term distributions paid to unitholders.
Recommendation. Our recommendations are based on the expected one-year return to shareholders, balanced by the
risk to our target price (including risk of capital cost overruns, delays in permitting and construction, and a company’s
ability to secure financing). We also consider the time period before positive cash flows are expected. Our Top Pick is
Labrador Iron Mines with an C$8.50/share one-year target price, and we have a Buy–Speculative rating on Adriana
Resources and Champion Minerals.
Iron ore equities coverage universe
Price
Mar-16 (C$)
Adriana Resources Inc.
Alderon Iron Ore Corp.
Champion Minerals Inc.
Labrador Iron Ore Royalty Corporation
Labrador Iron Mines Holdings Limited
New Millennium Iron Corp.
Average
1.06
3.09
1.68
36.00
5.00
2.44
Rating
Buy–Speculative
Hold–Speculative
Buy–Speculative
Hold–Average Risk
Top Pick–Above-average Risk
Hold–Speculative
1-yr target
(C$)
Expected
return (%)
Mkt cap
(C$m)
P/NAV
(x)
1.75
4.00
3.00
43.50
8.50
3.50
65
29
79
24
70
43
52
157
311
182
2,289
331
414
0.35
0.46
0.39
0.64
0.47
0.22
0.42
Source: Desjardins Capital Markets, Capital IQ
Jackie Przybylowski, P.Eng.
(416) 607-3092
jackie.przybylowski@
vmd.desjardins.com
This report was prepared by an analyst(s) employed by Desjardins Capital Markets and who is (are) not registered as a research
analyst(s) under FINRA rules. Please see disclosure section on pages 62–63 for company specific disclosures, analyst certification
and legal disclaimers.
Desjardins
Capital Markets
Iron ore
PAGE 2
MARCH 22, 2012
Table of contents
4
Executive summary
6
Focus on Canadian equities
8 Transportation challenges
11
Valuation
12
Sensitivity
14
Adriana Resources Inc.: Huge project, huge risk
15 Company overview
15 Anticipated catalysts
15 Lac Otelnuk—huge project, huge risk
18 No value attributed to non-core assets
18 December Lake
18 Brazore
18 Capital structure
19 Valuation
20 Recommendation
20 Risks
21 Key management and directors
22
Alderon Iron Ore Corp.: Closest to infrastructure and mature mines
23 Company overview
24 Kami—closest to infrastructure and mature mines
27 Valuation
27 Recommendation
28 Risks
30
Champion Minerals Inc.: Portfolio of prospective assets in a mature region
31 Company overview
32 Portfolio of prospective assets in a mature region
34 Valuation
35 Recommendation
35 Risks
37
Labrador Iron Ore Royalty Corporation: Unique opportunity for income while still exposed to
iron ore prices
38 Company overview
39 Carol Lake
41 Valuation
42 Recommendation
42 Risks
Desjardins
Capital Markets
Iron ore
PAGE 3
MARCH 22, 2012
44
Labrador Iron Mines Holdings Limited: Keeping it simple
45 Company overview
46 Keep it simple—direct shipping ore
48 Logistics
49 Other assets—blue-sky potential
50 Valuation
50 Recommendation
51 Risks
53
New Millennium Iron Corp.: World-class mine developer or just along for the ride?
54 Company overview
55 Direct shipping ore
57 Taconite projects
58 Exploration targets
59 Valuation
59 Recommendation
60 Risks
Desjardins
Iron ore
Capital Markets
PAGE 4
MARCH 22, 2012
Executive summary
We are initiating coverage of five Canadian pure-play iron ore equities: Adriana Resources Inc. (ADI, TSX-V), Champion
Minerals Inc. (CHM, TSX), Labrador Iron Ore Royalty Corporation (LIF.UN, TSX), Labrador Iron Mines Holdings Limited
(LIM, TSX) and New Millennium Iron Corp. (NML, TSX). We are also transferring coverage of Alderon Iron Ore Corp.
(ADV, TSX).
Our Top Pick is Labrador Iron Mines based on its attractive potential return to our one-year target price of C$8.50/share,
the company’s significant potential growth in the near term and comparatively low risk associated with its ability to
execute its future expansion plans. Our recommendations and estimates are summarized in Exhibit 1.
Exhibit 1: Iron ore equities coverage universe
Price
Mar-16 (C$)
1-yr target
(C$)
Rating
Expected
return (%)
Mkt cap
(C$m)
P/NAV
(x)
1.06
Buy–Speculative
1.75
65
157
0.35
3.09
Hold–Speculative
4.00
29
311
0.46
1.68
Buy–Speculative
3.00
79
182
0.39
36.00
43.50
24
2,289
0.64
5.00
Hold–Average Risk
Top Pick–Above-average Risk
8.50
70
331
0.47
2.44
Hold–Speculative
3.50
43
414
Average
52
0.22
0.42
We expect the iron ore market to be in balance in the near term. Demand for iron ore should continue to be strong as
urbanization in developing economies drives steel consumption. Iron ore supplies are relatively fixed in the near term as
mine operations are already running at or near capacity. However, in the longer term, we see a risk of oversupply as the
number of expansions and new projects threatens to outpace demand growth.
We expect iron ore benchmark fines prices to average US$137/t fob (63.5% Fe) through 2012 and US$95/t fob (63.5% Fe)
in the long term. In the short term, we forecast that a supply-demand balance will continue, as strong consumption in
China keeps the market tight. However, increasing supplies should cause prices to ease over the longer term. See
Exhibit 2 for a summary of our commodity and currency assumptions.
Exhibit 2: Desjardins commodity price assumptions
(US$/t)
2009
2010
2011
2012E
2013E
Iron ore, fines (63.5% Fe), fob
69
134
168
137
129
95
Iron ore, lump (63.5% Fe), fob
85
154
192
158
151
116
Iron ore, pellet (63.5% Fe), fob
US$/C$
Long-term
93
144
205
165
155
116
0.91
0.98
1.09
1.00
1.00
1.00
Source: Desjardins Capital Markets, AME Mineral Economics
Growth in emerging economies such as China and India, where infrastructure is generally in the earlier stages of
development, has a significant impact on our steel consumption outlook. We believe the urbanization of developing
economies, together with a gradual economic recovery in the western world, will enable raw steel demand—and hence
iron ore demand—to continue to grow at a steady pace in the foreseeable future. In 2012, we forecast that global crude
steel production should grow by 3.8% to 1.6Bt, down from growth of 5.9% in 2011. By 2016, we forecast that global
crude steel production will have reached nearly 1.9Bt. Chinese steel production alone accounted for 65% of global steel
production in 2011 and we expect the country’s rapid growth will continue to outpace growth in the developed world.
We believe the Chinese government will follow its current five-year plan with regard to infrastructure growth,
construction of affordable housing and the development of new industries.
Desjardins
Capital Markets
Iron ore
PAGE 5
MARCH 22, 2012
Exhibit 3: Global crude steel production is expected to reach 1.9Mtpa by 2016
Source: AME Mineral Economics
Under China’s 12th Five-Year Plan (2011–15), Beijing aims to grow GDP by 7% per year. The government plans to
construct 36m low-income dwellings, increase the country’s rail network to 120,000km and its highway network to
100,000km by 2020 (from 86,000km and 65,000km, respectively, in 2009), urbanize China’s western region and develop
seven priority industries (new materials, high-end manufacturing, new IT, biotechnology, environmental protection,
renewable power and clean energy vehicles).
In the long term, we see a risk of oversupply in the iron ore market as the number of expansions and new projects
threatens to outpace demand growth. At the same time, we expect the rate of iron ore demand growth to slow as
developing economies mature. We highlight the risk of oversupply, given the large number of greenfield and expansion
projects that are scheduled to start production within the next five years. According to estimates from market research
group AME Mineral Economics, new projects and expansions in 2012 alone will add approximately 180Mt in global
supply capacity. As illustrated in Exhibit 4, further new developments could grow iron ore supply beyond what can be
supported by demand growth.
Exhibit 4: Iron ore supply could outpace demand in the long term
Source: Desjardins Capital Markets, AME Mineral Economics
Although we do not expect all projects to be completed on schedule, we believe new supply should be sufficient to
move the market into an oversupply situation, putting downward pressure on long-term iron ore prices. We expect
many projects will be delayed or cancelled due to factors such as weakening iron ore commodity prices, infrastructure
constraints and labour availability. However, we believe that many projects (in particular, world-class, low-cost projects
controlled by major global diversified miners) will proceed to production despite these challenges. In our view,
expansion is at least partly motivated by the race to take market share from higher cost operations.
Desjardins
Capital Markets
Iron ore
PAGE 6
MARCH 22, 2012
Highest cost projects and those not supported by major miners are most likely to be impacted. In our view, iron ore
prices will soften as the market moves into oversupply, and marginally profitable development projects are likely to be
delayed or deferred. Chinese domestic iron ore production is generally the highest cost in the world, given the poor (and
declining) iron content of China’s ores, and we would expect Chinese domestic iron ore production to be the most
affected. We note that Canadian iron ore production is generally also relatively high cost, and some Canadian
development projects could also be at risk of becoming uneconomic if markets are weaker than we anticipate.
Focus on Canadian equities
We are initiating coverage of five pure-play iron ore equities with operations or assets in Canada’s Labrador Trough:
Adriana Resources, Champion Minerals, LIORC, Labrador Iron Mines and New Millennium. We are also transferring
coverage of Alderon, which is based in the same region.
The Labrador Trough, which spans the Québec–Labrador border, is the dominant iron ore–producing region in Canada.
Ores in the trough may be present as direct shipping ore (DSO), taconite or meta-taconite. The ore type impacts the
processing required and possible saleable end products.
DSO is a naturally occurring high-grade material (generally 55% Fe or higher) and requires minimal processing. DSO can
be sold as lump, which commands a premium price, as sinter fines material, the benchmark product, or as ultra fines,
which are generally sold at a discount to the ‘fines’ benchmark price.
Although taconite deposits have never been mined in Canada, similar deposits in the Mesabi Iron Range in Minnesota
have been mined in significant quantities since the mid-1950s. Taconite deposits can be as large as 1Gt and show great
lateral continuity. Taconite contains about 25–30% iron, which is present as fine magnetite (Fe3O4) and hematite (Fe2O3)
alternated with silica-rich bands. Taconite must be ground to a fine powder (45 micrometres or 0.045mm particle size)
to liberate the finely dispersed saleable iron ore from the waste rock. Due to its fine particle size, the resulting
concentrate is not suitable for sinter feed and is generally agglomerated into pellets.
Taconite bands that have gone through metamorphosis and folding over time are known as meta-taconites. The
transformation would have concentrated the taconite ore and created a coarser texture. In comparison with taconite
ores, meta-taconites require grinding to only approximately 420 micrometres (0.42mm) particle size to liberate the ore.
While concentrate may be pelletized, it is also often suitable as sinter feed and may be sold in concentrate form to steel
producers who will sinter the iron ore onsite.
Desjardins
Capital Markets
Iron ore
PAGE 7
MARCH 22, 2012
Exhibit 5: Key iron ore properties in the Labrador Trough
Source: Desjardins Capital Markets, company reports, Google Maps
Most known iron ore deposits are centred around two historic mining districts—the Schefferville area and the Labrador
City/Wabush camp.
The Schefferville region was mined by the Iron Ore Company of Canada (IOC) during the 1950s–1980s and is currently
home to early-stage producer Labrador Iron Mines and near-producer New Millennium, as well as developers including
Adriana Resources. The region holds both DSO and taconite deposits.
All mature iron ore operations in Canada are centred in the Labrador City/Wabush region. IOC, Cliffs Natural Resources
and ArcelorMittal Mines Canada currently have combined production capacity of approximately 47Mtpa, with plans for
further expansion. Development-stage assets owned by Champion Minerals and Alderon are also located in close
proximity to these existing mines. The iron ore found in this region is meta-taconite.
The assets and operations of all of the companies in our coverage universe are located in the Labrador Trough. However,
the nature of the deposits and the scale of planned operations vary significantly depending on the type of deposit. Largescale projects with massive infrastructure requirements have been planned for the taconite deposits owned by Adriana
Resources and New Millennium, while much smaller scale projects with minimal capex spending is planned for the DSO
deposits owned by Labrador Iron Mines and New Millennium.
Desjardins
Iron ore
Capital Markets
PAGE 8
MARCH 22, 2012
Exhibit 6: Comparison of iron ore deposits in our coverage universe
16,000
14,000
ADI
Total resouce size (m tonnes)
12,000
10,000
8,000
NML taconite
6,000
4,000
IOC
CHM
2,000
NML DSO
LIM
ADV
0
-2,000
-4,000
20%
25%
30%
35%
40%
Taconite
45%
50%
Average grade (% Fe)
Meta-taconite
55%
60%
65%
DSO
Note: Size of bubble reflects annual long-term production (100% basis), Desjardins Capital Markets estimates
Source: Desjardins Capital Markets, company reports
Planned projects will add significantly to Canada’s iron ore production. As noted earlier, a large number of greenfield
developments and expansion projects are scheduled to start production worldwide in the next five years. Within Canada
alone, many projects in various stages of development currently are also being planned. Over the next 5–10 years, we
forecast that the production volume attributable to iron ore equities in our coverage universe alone will increase to over
45t in 2020 from approximately 3Mt in 2011.
Exhibit 7: We expect a significant jump in iron ore production from our coverage universe
Concentrate (or DSO) production (Mt, attributable)
50
45
40
35
30
25
20
15
10
5
0
2011
2012E
2013E
2014E
LIF
2015E
LIM
NML
2016E
CHM
ADV
2017E
2018E
2019E
2020E
ADI
Note: Calendar year
Transportation challenges
Among Canadian iron ore producers, as with producers in other parts of the world, access to rail, port and power is key.
The availability of existing infrastructure can materially impact the economic viability of a project. Given announced
government funding of a new multi-user port at Pointe-Noire under the Plan Nord, port capacity in Canada is not
expected to be a constraint for new producers. However, rail capacity remains a limitation. Developers who are able to
make use of the existing rail network (we expect this will include Champion Minerals, Labrador Iron Mines and Alderon)
are more likely to move into production.
Desjardins
Capital Markets
Iron ore
PAGE 9
MARCH 22, 2012
IOC owns the Québec North Shore & Labrador Railway (QNS&L), a 418km rail line that connects the ports at Sept-Îles to
the iron ore mines in the Labrador City/Wabush region. Because the QNS&L is considered a ‘common carrier’ line,
Canadian law stipulates that IOC must provide service to any party, including its competitors, at a fair market price as
long as the line has sufficient capacity.
The current capacity of the QNS&L is believed to be about 75–80Mtpa based on our discussions with IOC representatives.
Currently, approximately 37Mtpa is shipped on the railway: up to 22Mt from IOC’s Carol Lake operations, approximately
6Mt from Cliffs’ Scully mine (Wabush operations) and up to 8Mt from its Bloom Lake operations, and approximately 1Mt
from Labrador Iron Mines’ Silver Yards plant.
Room for more, but not all. In our view, expansions at Carol Lake, Bloom Lake and Silver Yards will increase the
production capacity of the existing producers to approximately 53Mtpa within the next few years. Beyond this, the
QNS&L will have sufficient capacity to handle some of the new production planned in the Labrador Trough. We expect
ore from Alderon’s Kami project, Champion Minerals’ Fire Lake North project and New Millennium’s DSO project will be
transported on the QNS&L. However, we do not expect the rail line to have sufficient capacity to handle Adriana
Resources’ Lac Otelnuk project, New Millennium’s KéMag or LabMag projects, or many of the other projects that are in
the early stages of development, which must therefore include alternative transportation options in their development
plans.
A second rail line would provide much needed rail capacity. On March 20, Québec’s government announced a
partnership with CN Rail and the Caisse de dépôt et placement du Québec. According to a government release, the new
rail line will extend 800km from Sept-Îles to the north of Schefferville, although the exact route of the proposed rail line
has not been identified. According to the Caisse de dépôt, the estimated cost of C$5b will be financed half with debt and
half with equity, with CN Rail contributing two-thirds of the equity portion and the Caisse de dépôt one-third.
We view the March 20 announcement as a positive, as it demonstrates government support for a rail project. However,
we note that this project will require stakeholder support, including from mining companies and First Nations groups,
before construction can begin. We anticipate that stakeholder feedback could influence the final design of the rail line
and the financing, ownership and operating structure.
A rail line connects Schefferville to the QNS&L rail line (and ultimately to the ports at Sept-Îles). Tshiuetin Rail
Transportation (TSH Rail) is owned by a consortium of three local First Nations groups which took possession of the
former IOC rail line between Labrador City and Schefferville in 2005. The estimated iron ore haulage capacity of the rail
line is approximately 10Mtpa; we expect this will be evenly divided between Schefferville-area DSO producers Labrador
Iron Mines and New Millennium. However, we believe capacity could be increased with investment in the infrastructure.
The Port of Sept-Îles is one of North America’s largest port facilities. Each year, nearly 23Mt of merchandise is handled,
comprised mainly of iron ore, alumina, aluminium and petroleum products. The iron ore docks include IOC’s Sept-Îles
facility and Cliffs’ ports at Pointe-Noire (including the former Consolidated Thompson port). The port at Sept-Îles is
capable of loading vessels as large as 225,000 tonnes (Capesize), while Pointe-Noire can load Panamax vessels
(approximately 60,000–80,000 tonnes).
Government port solution a boon to the region. The federal government announced in February 2012 that it has
committed C$55m to the construction of a new multi-user deepwater port at Sept-Îles. The first phase of the project is
expected to cost a total of approximately C$220m and will include a 50Mtpa port with two ship loaders and two
conveyor lines. The Port Authority of Sept-Îles has also committed a further C$55m toward construction. We anticipate
that the remaining cost to develop the port will be directly paid by users or indirectly borne by users through user fees.
The port will accommodate vessels as large as Chinamax (up to approximately 388,000 tonnes). Construction of the port
is expected to be completed by the end of March 2014.
Desjardins
Iron ore
Capital Markets
PAGE 10
MARCH 22, 2012
Exhibit 8: Conceptual illustration of future multi-user port at Pointe-Noire
Source: Port Authority of Sept-Îles
Existing alternative is not likely to be made available to new participants. ArcelorMittal Mines Canada also operates a
parallel rail (Cartier Railway) and port (Port Cartier) network but the facilities are private and not accessible to third
parties. As the 420km Cartier Railway does not cross provincial borders, it is not considered a ‘common carrier’ and
ArcelorMittal Mines Canada is not obligated to provide rail service to any third party. The company also operates Port
Cartier, located about 60km west of Sept-Îles. The port facility includes a pellet plant, storage and docks that can handle
vessels as large as 188,000 tonnes.
Infrastructure requirement and project size are key factors in expected capital cost of building projects. The
amount of capital required to develop the planned projects within our coverage universe depends on the size of each
project, the end product and the location of the deposit relative to rail, power and other infrastructure. As expected,
based on the above metrics, Adriana Resources’ Lac Otelnuk project is the most capital-intensive within our coverage
universe, while Labrador Iron Mines’ and New Millennium’s relatively simple DSO projects are expected to be the least
expensive to build.
Exhibit 9: Development costs are related to project size and deposit type
Total development capital, 100% project level (US$b)
12
10
8
6
4
2
0
ADI
NML
taconite
CHM
ADV
LIF (IOC expansion)
LIM
NML
DSO
Desjardins
Iron ore
Capital Markets
PAGE 11
MARCH 22, 2012
End product and deposit geology are key factors in long-term operating costs. Our estimate for the unit cash cost of
each mining operation in our coverage universe depends on the nature of the mining and processing (for instance,
pelletizing costs are higher than the cost of producing concentrate-for-sale, while DSO mining and processing costs
should be lower than either pellet or concentrate costs, all else equal). Other factors that influence cost include the size
and shape of the deposit (assets with a higher strip ratio generally have higher overall operating costs) and agreements
with third-party rail and port operators. As illustrated in Exhibit 10, the Kami project is expected to have the lowest longterm operating cost due to its low strip ratio and its plan to sell ore as concentrate-for-sale rather than to further process
this into pellets. New Millennium’s KéMag and LabMag taconite projects are also expected to be low-cost due to the
company’s plan to transmit concentrate via pipeline, which is expected to be materially cheaper than rail transportation.
Exhibit 10: Long-term operating costs in our coverage universe
70
Long-term unit cash cost (US$/t)
60
Carol Lake
50
KéMag/LabMag
40
Kami
LIM
DSO
Lac Otelnuk
Fire Lake
North
NML/Tata
DSO
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
110
120
130
Cumulative production, 100% basis (Mt)
Valuation
We believe that a net asset value (NAV) based on discounted cash flows is the best metric for assessing relative value for
companies where the asset value is associated with non-producing assets. Our primary valuation method for the five
development-stage or near-producing companies in our coverage universe is P/NAV; our NAV is based on a discounted
cash flow analysis, all at a consistent 8% discount rate.
We have applied target multiples to our NAV estimates on an asset-by-asset basis to reflect the relative risk associated
with project start-up. Iron ore projects may be susceptible to capital cost overruns and delays in permitting, construction
and financing. Our target multiples also reflect the anticipated time period before cash flows are received.
Exhibit 11: Methodology for applying target multiples within our coverage universe
P/NAV range (x)
Relative risks
0.0–0.3
Speculative—very little information currently available about the project; permitting and construction uncertain
0.4–0.5
Reasonable probability of construction; growing confidence on construction timeline
0.6–0.7
Likely—financed, near production or in the commissioning phase
0.8–1.0
Producing; stable cash flow stream
Source: Desjardins Capital Markets
A unique approach for a unique company. We use a hybrid P/CF and P/NAV approach to value LIORC. We believe this
approach is appropriate as it places greater emphasis on the near-term distributions paid to unitholders. With a high
payout ratio (average of 80% over the past three years), LIORC’s relatively high yield is attractive to many investors and is
an important factor in determining the company’s unit price.
Desjardins
Iron ore
Capital Markets
PAGE 12
MARCH 22, 2012
Exhibit 12: Summary of target multiples applied in our coverage universe
Company
Valuation method based on 8% discount rate
0.3x NAV
0.5x NAV
0.5x NAV
12x NTM cash flow (50%) & 1x NAV (50%)
0.8x NAV
0.6x NAV DSO project & 0.3x NAV taconite and other assets
Sensitivity
The financial performance of the equities in our coverage universe will be largely driven by the iron ore price. Also, as
revenues are received in US dollars and operating costs paid in Canadian dollars, the US$/C$ exchange rate can have a
material impact on performance.
Labrador Iron Mines is the best way to take advantage of current historically strong iron ore prices. Companies with
the strongest growth offer significantly higher leverage to the iron ore commodity price, and high leverage is preferred in
the current environment of historically high prices. Companies with the largest long-term projects as well as relatively
high-cost producers have a higher sensitivity to iron ore commodity prices, as illustrated in Exhibit 13.
Although we expect historically high prices will be sustained in the short term by strong demand, we see a risk of lower
iron ore commodity prices in the long term as new mines increase the risk of market oversupply. LIORC offers an
excellent hedge against falling iron ore commodity prices due to its low NAV leverage to changes in the iron ore price
and its relatively stable revenue base. LIORC also offers lower sensitivity to iron ore prices because its royalty and
commission-based revenue streams are not affected by costs such as operating expenses and capital expenditures. On
the other hand, its 15.1% equity stake in IOC provides some upside to rising markets as well as to organic growth and
expansion opportunities.
Exhibit 13: Labrador Iron Mines has the highest sensitivity within our coverage
universe to iron ore commodity prices
LIM
NML
ADI
CHM
ADV
LIF
0
200
400
600
800
1,000
1,200
NAV sensitivity to 10% chg in iron ore price per C$1,000 invested (C$)
Companies with meaningful near-term capital spending or high future expected capex are the most sensitive to changes
in the US$/C$ exchange rate, given we have assumed that capital costs are tied to the US dollar (as most equipment will
be purchased overseas). Lower margin operations will also have high sensitivity to the exchange rate on an ongoing
basis.
Desjardins
Iron ore
Capital Markets
PAGE 13
MARCH 22, 2012
Exhibit 14: Labrador Iron Mines has the highest sensitivity within our coverage
universe to changes in the US$/C$ exchange rate
LIM
NML
ADI
CHM
ADV
LIF
-1,000
-900
-800
-700
-600
-500
-400
-300
-200
-100
NAV sensitivity to 10% chg in US$/C$ exchange rate per C$1,000 invested (C$)
0
Desjardins
Capital Markets
PAGE 14
MARCH 22, 2012
Adriana Resources Inc. (ADI C$1.06, TSX-V)
Huge project, huge risk; initiating coverage with a Buy rating and C$1.75 target price
Rating
Target
Valuation
Buy–Speculative
C$1.75
0.3x NAV (8%)
Symbol
Exchange
Sector
ADI
TSX-V
Bulk Commodities
President & CEO Allen Palmiere
Website www.adrianaresources.com
Share price
C$1.06
Potential return
65%
52-week range
C$0.71–1.82
3m volume traded
180,000
1m volume traded
103,000
Shares O/S*
149m
Dividend yield
Reported cash*
Cash/sh*
Reported total debt*
Reported book value/sh*
Current market cap
Current EV
0%
C$18m
C$0.12
C$6m
C$0.46
C$157m
C$156m
Resources (100% basis at asset level)
M&I
4,890Mt at 27.3% Fe
Inferred
1,560Mt at 27.1% Fe
Historical
6,318Mt at 33.0% Fe
 Adriana Resources is working with joint venture partner WISCO, a Chinese state-owned steel producer. WISCO
owns a 60% stake in the Lac Otelnuk project and holds a 19.9% equity stake in Adriana Resources; it also has
an offtake agreement and equity stake in Cliffs Natural Resources’ Bloom Lake mine
 We are initiating coverage with a Buy–Speculative rating and C$1.75 target price
Highlights. Adriana Resources is working with joint venture partner Wuhan Iron and Steel Group Corporation (WISCO) to
develop the Lac Otelnuk project. Lac Otelnuk is Canada’s largest iron ore deposit, and with further definition drilling, the
deposit is potentially among the largest in the world. Production is expected to begin in 2017 and should ultimately
grow to 50Mtpa pellets (100% basis), approximately double the expected capacity at the Iron Ore Company of Canada,
currently the largest producer in the region. The anticipated capital cost of the Lac Otelnuk project is substantial—we
estimate that the development capex will total approximately US$12b (on a 100% project basis), including construction
of a new 815km rail line linking the mine site to Sept-Îles.
Valuation. Our valuation is based on a 0.3x multiple applied to our Lac Otelnuk net asset value and a 1.0x multiple to
current net working capital. While we foresee potential for significant large and long-lived cash flows from the Lac
Otelnuk project, we note that development based on the anticipated timeline remains a significant risk at this stage in
the company’s growth. Adriana Resources and WISCO have outlined an extremely ambitious project that is expected to
have the largest scale construction and highest capital cost in our coverage universe. We also see some risk to WISCO’s
honouring its commitment to developing the project in a timely manner. In our view, WISCO could elect to delay the Lac
Otelnuk development in favour of its agreement with Century Iron Ore Corporation to jointly develop Century’s projects,
or if it identifies lower cost alternative supplies elsewhere.
Recommendation. We are initiating coverage of Adriana Resources Inc. with a Buy–Speculative rating and C$1.75/share
one-year target price, which implies an expected return of 65% to the current share price.
Adriana Resources fully financed NAV estimate
2.00
Price (C$)
* As at October 31, 2011
Source: Desjardins Capital Markets,
Capital IQ, company reports
 Lac Otelnuk, Adriana Resources’ flagship project, is the largest iron ore deposit in Canada. The company is
working to build what would be the largest pellet producer in Canada
Asset (C$m)
1.50
Volume (m)
1.00
0.50
2
1
0
Mar-11
Source: Bloomberg
Jun-11
Sep-11
Dec-11
Feb-12
Lac Otelnuk
Other assets
NPV multiple (x)
Current working capital
Current long-term debt
Corporate adjustments
Proceeds from options and warrants
Anticipated financing
Reported basic shares O/S (m)
Shares O/S post financing (m)
NAV
NAV/share (C$)
NPV (8%)
NPV (10%)
2,061
0
0.30
4
0
-126
6
4,791
149
1,117
3,381
3.03
1,067
0
0.30
4
0
-115
6
4,791
149
1,117
2,397
2.15
Desjardins
Capital Markets
PAGE 15
MARCH 22, 2012
Company overview
Adriana Resources is a development-stage iron ore–focused company with deposits in the Labrador Trough and an
ownership stake in an iron ore port project in Brazil. The company’s flagship asset is the Lac Otelnuk project in northern
Québec. Adriana Resources is working with its joint venture partner Wuhan Iron and Steel Group Corporation (WISCO) to
advance Lac Otelnuk toward feasibility and into production. The company currently envisions construction of mine,
concentrator, pelletizing facilities and rail line to support a 50Mtpa pellet operation.
Exhibit 1: Lac Otelnuk location
Source: Company reports
Anticipated catalysts
 Feasibility study expected in 4Q13
 Construction of Lac Otelnuk from 2013–17
 Production expected to start in 2017
Lac Otelnuk—huge project, huge risk
Adriana Resources’ flagship project is Lac Otelnuk, a large taconite deposit located in the Labrador Trough approximately
155km northwest of Schefferville. The site is very remote, with no access by road or rail; several lakes adjacent to the
property are accessible via float plane.
Adriana Resources and WISCO have formed a joint venture to oversee development at Lac Otelnuk. WISCO holds a 60%
ownership interest in the project and controls three seats on the JV board, while Adriana Resources controls two seats
and will act as operator of the project.
Desjardins
Capital Markets
PAGE 16
MARCH 22, 2012
Exhibit 2: Lac Otelnuk camp (July 2011)
Iron ore resources. Lac Otelnuk is already Canada’s largest known iron ore deposit and, with further definition drilling,
Adriana Resources believes it could potentially be one of the largest in the world. The property’s South Zone contains
approximately 6.45Bt measured, indicated and inferred resources, and the North Zone contains approximately 6.3Bt
historical resources (not NI 43-101–compliant) with potential for further resource delineation that could bring the total
resource to 15Bt or more, according to company estimates. Current NI 43-101–compliant resources imply a minelife of
approximately 30 years; however, additional drilling, including upgrading historical resources to NI 43-101–compliant
resources, could increase the minelife to at least 75 years.
Exhibit 3: Total estimated iron ore resources at Lac Otelnuk as at April 2011
Measured & indicated
Inferred
Historical (not NI 43-101–compliant)
Tonnes (m)
% Fe
Tonnes (m)
% Fe
Tonnes (m)
% Fe
North Zone
-
-
-
-
6,318
33.0
South Zone
4,890
27.3
1,560
27.1
-
-
Total
4,890
27.3
1,560
27.1
6,318
33.0
Massive open pit mining operations are planned at Lac Otelnuk, with an average of approximately 300Mt material
(waste and ore) mined each year. Approximately 175Mtpa run-of-mine ore will be processed at an onsite concentrator to
produce approximately 50Mtpa concentrate at 68.5% Fe. The concentrate will then be converted to approximately
49Mtpa high-grade (67–69% Fe) pellets at an onsite pellet plant. Given the deposit is a taconite-type ore, concentrate is
not suitable for sale as sinter feed and must be agglomerated (eg formed into pellets) before it can be charged into a
blast furnace.
Logistics, while always an important consideration, are especially critical for Lac Otelnuk. Our US$12b (100% basis)
development capital cost estimate, shown in Exhibit 4, includes an estimated US$4.75b for rail, port and power
infrastructure. Lac Otelnuk’s expected large production and sales volumes will exceed anticipated capacity available on
the Québec North Shore & Labrador Railway and existing capacity on the Tshiuetin Rail Transportation line. The project
partners must therefore construct a new rail line between the Lac Otelnuk site and Sept-Îles (approximately 815km).
Desjardins
Capital Markets
PAGE 17
MARCH 22, 2012
Exhibit 4: Expected capital cost at Lac Otelnuk
(US$m)
Mine
Crusher and concentrator
800
2,500
Pellet plant
3,500
Rail
3,500
Port
650
Power
600
Other
450
Total
12,000
Rail infrastructure is one of the biggest hurdles to project completion, in our view. Rail construction represents an
upfront fixed cost that is largely independent of the final size of the project. While the mine fleet, concentrator and
pelletizing facilities may be scaled down to reflect any potential change to the market outlook or to WISCO’s
requirements (note that the concentrator and pelletizing facilities will each be constructed as three standalone
modules), rail capacity cannot be easily adjusted once construction is underway.
We believe Adriana Resources could see significant cost creep in rail construction costs beyond the approximately
US$2.7b (100% basis) allotted to the development of the railway transport system in the project PEA. Our estimates
include about US$3.5b (100% basis) for rail construction, which is in line with industry estimates of C$3–5m per
kilometre of rail constructed.
A government-supported rail construction will impact Adriana Resources’ capital costs. The proposed 800km rail line by
the government of Québec and partners CN Rail and the Caisse de dépôt et placement du Québec that was announced
on March 20 is planned to extend from Sept-Îles to north of Schefferville. We expect a third-party rail solution would
reduce Adriana Resources’ capital costs but increase the company’s operating costs. For conservatism, we assume that
Adriana and its joint venture partner WISCO will be fully responsible for funding the capital cost of a rail line.
A third potential solution balances capital costs and operating expenses. A partnership agreement with other Labrador
Trough iron ore producers or developers could mitigate the high risk and cost of the rail line. Potential members of a rail
partnership include Cliffs Natural Resources, Champion Minerals and Alderon which could utilize the portion of the rail
line between Sept-Îles and Labrador City/Wabush, as well as Labrador Iron Mines, New Millennium and Century which
could use the portion of the rail line between Sept-Îles and Schefferville. If all of the potential participants joined the rail
partnership, we estimate Lac Otelnuk’s proportionate share of construction costs would drop to approximately US$2b.
However, for conservatism, we have not included the cost-sharing scenario in our estimates. Establishment of a
partnership could be a lengthy process and is not likely to include all of the potential participants identified above.
Port construction will be completed through Plan Nord. Based on discussions with government officials, Adriana
Resources expects that the second or third phase of the anticipated multi-user port in Pointe-Noire will have 50Mtpa of
port capacity available for sales from Lac Otelnuk. We have allocated US$650m to Adriana Resources’ share of port
development, which will include stockpile facilities and dedicated stacker/reclaimer equipment. Actual costs to Adriana
Resources could be less, depending on government contributions to the expansion.
Lower operating costs offset high capex. The economies of scale associated with the relatively large 50Mtpa planned
operation at Lac Otelnuk, combined with the company’s plan to own its independent rail network, result in operating
costs that are below levels expected for smaller facilities operating in similar remote conditions. Our long-term operating
cost estimates are shown in Exhibit 5.
Desjardins
Capital Markets
PAGE 18
MARCH 22, 2012
Exhibit 5: Expected long-run cash operating costs at Lac Otelnuk
(US$/t pellets)
Mining
8.50
10.00
Pelletizing
16.00
Transport/loading
18.00
G&A
2.00
Total
54.50
No value attributed to non-core assets
In addition to the flagship Lac Otelnuk property, Adriana Resources has other assets, including December Lake and
Brazore. We view these assets to be non-core and do not expect Adriana Resources to spend significant capital on the
development of these properties.
December Lake
December Lake is comprised of 159 mineral claims totalling approximately 74km2 65km from the Lac Otelnuk property
and 230km north of Schefferville in the Nunavik region of northern Québec. In addition to the Lac Otelnuk property,
Adriana Resources transferred its 100% ownership stake in December Lake to the joint venture partnership with WISCO.
A very long-term project. Although Adriana Resources has identified over 20km of untested magnetic anomalies on this
property, we believe development of December Lake is a very long-term prospect as the joint venture is currently focused
on the development of Lac Otelnuk. We do not expect Adriana Resources to develop December Lake in the near term.
Brazore
Adriana Resources currently holds an effective 56.1% direct interest in Brazore Ltda., which is developing a deepwater
iron ore port facility approximately 70km west of Rio de Janeiro in Brazil. The proposed port would facilitate access to
the seaborne market for Worldlink (Canada) Resources Ltd. (which has the right of first refusal to access the full capacity
of the facility on reasonable commercial terms) and/or for various independent iron ore miners in the region. The
current facility design incorporates a capacity of 45Mtpa and would include railcar dumpers, stockpile,
stacker/reclaimers, a conveyor tunnel under a strait and island, and a deepwater load-out facility that can accommodate
Capesize vessels.
Waiting for an opportunity to sell. In our view, the Brazore port project is a non-core asset for Adriana Resources. We
anticipate that Adriana Resources will divest of the port project within the next few years in order to focus management
attention on the Lac Otelnuk project and to provide funds for development of the Lac Otelnuk site. As at October 31, 2011,
Brazore Ltda. had spent approximately US$32m on port development, which would imply an US$18m ADI stake.
However, we anticipate that the value of the port project would increase on receipt of environmental permits.
Capital structure
Adriana Resources Inc. is listed on the TSX Venture Exchange under the symbol ‘ADI’. As at October 31, 2011, Adriana
Resources had approximately 149.3m shares issued and outstanding, and an additional 9.8m options and warrants
outstanding. WISCO is Adriana Resources’ largest single shareholder, with a 19.9% equity stake; individuals and insiders
hold a further 3.9% of the shares outstanding.
The company most recently raised funds on January 12, 2012 upon closing of its joint venture agreement with WISCO.
Under the terms of the agreement, Adriana Resources has transferred ownership of the Lac Otelnuk and December Lake
assets to a joint venture company (WISCO 60%, Adriana Resources 40%). In exchange, WISCO provided approximately
C$91.6m, of which C$51.6m was paid directly to Adriana Resources and C$40.0m to the joint venture company (ADI
stake C$16.0m). WISCO has also agreed to use commercial best efforts to obtain project financing for 70% of the
Desjardins
Capital Markets
PAGE 19
MARCH 22, 2012
development and construction costs of the Lac Otelnuk project, and has agreed to buy its 60% proportionate share of all
iron ore production from Lac Otelnuk at market prices. We believe it is likely that WISCO will purchase all ore from Lac
Otelnuk, which should simplify sales and marketing.
About WISCO. Wuhan Iron and Steel Group Corporation (WISCO) is a Chinese state-owned integrated iron and steel
company. From its inception in 1955, WISCO has become a global giant with annual steelmaking capacity of 40Mt and
ranks fourth in the world. The group will strive to reach an annual capacity of 60Mt in support of China’s 12th Five-Year
Plan (2011–15).
WISCO has a record of investing in the Labrador Trough. The group previously participated in Consolidated Thompson’s
Bloom Lake project, acquiring a 19.9% equity interest in Consolidated Thompson, a 25% stake in Bloom Lake (which it
has retained following the acquisition of Consolidated Thompson by Cliffs) and a 4Mtpa offtake agreement for the life of
Bloom Lake (which it also retained following the acquisition). More recently, WISCO acquired a 25% equity interest in
development-stage Century Iron Mines Corporation, and holds a 40% stake in Century’s ownership interest in several
development projects, including Sunny Lake, Duncan Lake and Attikamagen; WISCO has agreed to take its 40% share of
production plus an additional 20% offtake at market prices from these deposits.
Potential to consolidate and simplify WISCO’s investments. Given WISCO’s involvement in both Adriana Resources and
Century, and the relatively close proximity of the Lac Otelnuk deposit to Century’s Sunny Lake and Attikamagen deposits,
it is possible that WISCO could co-ordinate the combination of the two companies. This would reduce redundancies in
management and in some assets and infrastructure through the sharing of rail and potentially concentrator, pellet plant
and maintenance/support facilities. In our view, Adriana Resources is the most likely acquirer due to its advanced stage
of development and management expertise in mining operations.
Valuation
Our primary valuation approach for Adriana Resources is P/NAV; our NAV is based on a discounted cash flow analysis (at
an 8% discount rate) using the US$/C$ exchange rate and iron ore price assumptions summarized in Exhibit 2 on page 4.
Our estimated net asset value is C$3.03/share (see Exhibit 6) after an assumed C$4.8b financing to raise Adriana
Resources’ share of development costs for Lac Otelnuk. Adriana Resources’ NAV is based exclusively on the Lac Otelnuk
iron ore deposit; we attribute no value to its December Lake property or to its Brazore assets. We note that the sale of the
Brazore project would represent upside to our estimates. We have applied a 0.3x target multiple to the Lac Otelnuk
assets and a 1.0x multiple to current working capital to derive our target price of C$1.75/share. We believe that a 0.3x
multiple is appropriate based on our perception of relative risk for the assets (given factors such as the high expected
capital cost and long period to production).
Exhibit 6: Adriana Resources net asset value details
NPV (8%) (C$m)
Lac Otelnuk—NPV estimate of future cash flows
4
Expected proceeds from options and warrants
6
Total capital expenditure requirement (attributable to ADI)
4,791
Portion of capex to be financed by debt
3,354
Portion of capex to be financed by equity
1,437
NAV
3,381
Current number of basic shares outstanding (m)
149.3
Number of shares to be issued at an assumed C$1.50/share (m)
958.0
Options with exercise price of C$0.59/share (m)
7.4
Warrants with exercise price of C$0.50/share (m)
2.4
Pro forma fully diluted shares outstanding (m)
NPV/share (C$)
1,935
1,117.1
3.03
Desjardins
Capital Markets
PAGE 20
MARCH 22, 2012
Recommendation
We are initiating coverage of Adriana Resources Inc. with a Buy–Speculative rating and C$1.75/share one-year target
price, which implies an expected return of 65% to the current share price.
Adriana Resources holds a 40% interest in Lac Otelnuk, Canada’s largest iron ore deposit. The company has partnered
with WISCO, a large Chinese state-owned steel producer, which will provide or arrange a significant component of total
development costs for the Lac Otelnuk project.
However, we view the Lac Otelnuk project as very high risk. Its capital cost is the highest among peers because of its
extremely ambitious scale and the new rail infrastructure required. In addition, we see some risk to WISCO’s honouring
its commitment to developing the project in a timely manner. In our view, WISCO could elect to delay the development
of Lac Otelnuk in favour of its Century commitment or if it identifies lower cost alternative supplies elsewhere.
Risks
We have a ‘Speculative’ risk qualifier for Adriana Resources.
Start-up and operating risk. There is a significant risk that the exploration, development and completion of the Lac
Otelnuk project could be delayed due to circumstances beyond Adriana Resources’ control. Setbacks could include
delays in securing financing or in construction or commissioning.
Liquidity and financing. The development of the Lac Otelnuk project will require significant capital, and there is no
assurance that Adriana Resources will be able to obtain sufficient financing at favourable rates. Adriana Resources may
be unable to invest capital for its development and exploration programs, take advantage of business opportunities or
respond to competitive pressures.
Iron ore prices. The company’s future profitability is directly related to the volume of iron ore products sold and the
price of these products. Iron ore prices have historically been volatile and are primarily affected by the demand for, and
price of, steel. Iron ore prices are also affected by numerous other factors beyond the company’s control, including
global and regional demand, political and economic conditions, and global production volumes and operating costs.
Foreign exchange. Once in production, Adriana Resources will be subject to foreign exchange risks because revenues
will be received in US dollars while operating costs will be in Canadian dollars. Fluctuations in exchange rates, principally
the US$/C$ exchange rate, can significantly impact earnings and cash flows.
Licences and permits. The exploration and development activities at Lac Otelnuk require permits and approvals from
various government authorities and are subject to federal, provincial and local laws. The company will be required to
obtain additional licences and permits to continue and expand its development activities, and there can be no
guarantee that these licences will be obtained or maintained. There is also a risk that future legislation and regulations
could result in additional expenses at Lac Otelnuk’s operations and in reclamation obligations, the extent of which
cannot be predicted.
First Nations land claims. The Lac Otelnuk property falls within an area subject to First Nations land claims. In January
2008, Adriana Resources signed a letter of intent with Makivik Corporation, the development corporation mandated to
manage the heritage funds of the Inuit of Nunavik. However, Adriana Resources has not yet signed firm impact benefit
agreements with affected First Nations groups. Even with agreements in place, ongoing or new aboriginal claims to
lands may have an impact on the company’s ability to develop the property.
Desjardins
Capital Markets
PAGE 21
MARCH 22, 2012
Key management and directors
Donald K Charter, Chairman. Mr Charter is currently the President and CEO of Corsa Coal Ltd. He was previously a
partner at a national law firm where he practised as a securities lawyer specializing in mergers and acquisitions, as well
as President and CEO of Dundee Securities Corporation. Mr Charter holds or held director positions at a number of
public and private companies, including IAMGOLD Corporation, Dundee Real Estate Investment Trust, Lundin Mining
Corporation, Great Plains Exploration Inc. and Baffinland Iron Mines Corporation.
Allen J Palmiere, President, CEO and director. Mr Palmiere has more than 35 years of extensive experience in senior
executive and leadership roles in the mining industry. His former positions include Chairman, President and CEO of
HudBay Minerals Inc., President and CEO of Silk Road Resources Ltd., CEO and CFO of Breakwater Resources Ltd., CFO of
Zemex Corporation and Executive Chairman of Barplats Investments Limited.
Daniel Im, CFO. Mr Im, a Chartered Accountant and lawyer, was appointed CFO in July 2011. Prior to joining Adriana
Resources, Mr Im worked as a securities lawyer at a major Toronto law firm after obtaining his law degree from Osgoode
Hall Law School. Prior to law school, Mr Im had obtained his CA designation in 2003 while working at Deloitte & Touche
LLP. He earned his Master of Accounting and Honours Bachelor of Arts in Accounting from the University of Waterloo.
Frank Condon, P.Eng., Director of Québec Operations. Mr Condon has 35 years of experience in various positions with
Noranda (1964–99) including General Manager, and Hopewell Phosphate Corp. (1976–86) where he was responsible for
the acquisition, evaluation and development of the Hopewell phosphate mine.
Desjardins
Capital Markets
PAGE 22
MARCH 22, 2012
Alderon Iron Ore Corp. (ADV C$3.09, TSX)
Closest to infrastructure and mature mines; initiating coverage with a Hold rating and C$4 target
price
Rating
Target
Valuation
Hold–Speculative
C$4.00
0.5x NAV (8%)
Symbol
Exchange
Sector
ADV
TSX
Bulk Commodities
President & CEO Tayfun Eldem
Website www.alderonmining.com
Share price
C$3.09
Potential return
29%
52-week range
C$2.09–4.00
3m volume traded
178,000
1m volume traded
158,000
Shares O/S*
83m
Dividend yield
Reported cash*
Cash/sh*
Current market cap
Current EV
0%
C$13m
C$0.16
C$0m
C$1.22
C$311m
C$298m
M&I
490Mt at 30.0% Fe
Inferred
598Mt at 30.3% Fe
* As at September 30, 2011
 Alderon’s flagship Kami property is located in the Labrador City/Wabush region, close to mature mines owned
by Cliffs Natural Resources and the Iron Ore Company of Canada. There is rail, road and power infrastructure
nearby, and an existing skilled labour pool as well as maintenance and support services can be sourced from
local towns
 A joint venture or offtake agreement is anticipated over the next few months. We expect an agreement would
be an important milestone as it would represent guaranteed long-term sales for a significant portion of
Kami’s anticipated future production
 We are initiating coverage with a C$4 target price and Hold–Speculative rating as we believe Alderon’s shares
are fairly valued
Highlights. Alderon is working to develop its Kamistiatusset (Kami) project into production by 2015. We believe it is
highly likely that Kami will be developed into a near-term producer, given its relatively low anticipated development
cost and low operating costs. Because Kami is located close to mature producing mines in the Labrador City/Wabush
area, infrastructure requirements are minimal compared with other, more remote sites in the Labrador Trough.
Additionally, the Kami deposit is expected to have relatively low operating costs due to its low stripping ratios and the
relatively minimal processing required to prepare concentrate-for-sale (as compared with pellet production).
Valuation. Our valuation is based on a 0.5x multiple applied to our Kami net asset value and a 1.0x multiple to current
net working capital. We believe that the Alderon team is highly capable and experienced in mine development and
operations, and we expect the company will maximize value for shareholders from its Kami property as the asset is
developed over the next few years.
Recommendation. We are initiating coverage of Alderon Iron Ore Corp. with a Hold–Speculative rating and C$4/share
one-year target price. We have applied a Hold rating as we believe Alderon’s share price already reflects the company’s
strong management team, the relatively advanced stage of development at Kami and the relatively low anticipated
capex and operating costs. Our C$4/share target price implies an expected return of 29% to the current share price vs the
average expected return of 52% for our coverage universe.
Alderon fully financed NAV estimate
Volume (m)
Price (C$)
4
Asset (C$m)
3
2
3
2
1
0
Mar-11
Source: Bloomberg
Jun-11
Sep-11
Dec-11
Feb-12
Kami
Other assets
NPV multiple (x)
NAV
NAV/share (C$)
NPV (8%)
NPV (10%)
1,312
0
0.50
-15
0
-100
19
1,200
83
253
1,698
6.70
957
0
0.50
-15
0
-89
19
1,200
83
253
1,354
5.35
Desjardins
Capital Markets
PAGE 23
MARCH 22, 2012
Company overview
Alderon is a development-stage iron ore–focused company with a single asset in the Labrador Trough. The company’s
100%-owned Kamistiatusset (Kami) iron ore project is located entirely in Labrador, right on the Québec–Labrador
border, in a relatively busy area of the trough, near the town of Labrador City (with a local population of about 15,000)
and in close proximity to mature producers. Kami is close to Cliffs Natural Resources’ Bloom Lake mine (formerly owned
by Consolidated Thompson) and 5.0km southwest of Cliffs’ Scully mine. There is a paved highway 2.5km from the
property and power lines approximately 15.5km away; the existing common carrier rail network (Québec North Shore &
Labrador Railway or QNS&L) may be accessed with the construction of a 15km rail spur line.
Exhibit 1: Location of Kami property
Desjardins
Capital Markets
PAGE 24
MARCH 22, 2012
 Resource update at Rose North expected by June 2012
 First offtake agreement, likely with an Asian steelmaker, expected to be signed mid-year 2012
 Feasibility study expected to be published in 4Q12
 Ordering of long-lead-time equipment could begin before the end of 2012
 All permits, including environmental assessment, expected in 3Q13
 Mine construction expected to begin in 3Q13 on receipt of permits
 Production expected to start in 2015
Kami—closest to infrastructure and mature mines
Exhibit 2: Kami site plan
The Kami project is comprised of three ore zones—Rose Lake, North Rose and Mills Lake (see Exhibit 2). Exploration
results to date include nearly 500Mt indicated resources and nearly 600Mt inferred resources at approximately 30% Fe,
as shown in Exhibit 3. Exploration drilling continues to define the orebody; Alderon’s current exploration drill program
should be completed in April 2012. The focus of the current program is to upgrade the existing North Rose inferred
resource to the indicated category. The company expects to report the results in an updated resource estimate by June
2012.
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Capital Markets
PAGE 25
MARCH 22, 2012
Exhibit 3: Total estimated iron ore resources at Kami
Indicated resources
Inferred resources
Tonnes (m)
% Fe
376
-
Mills Lake
Total
Rose Central
Rose North
Tonnes (m)
% Fe
29.8
46
29.8
-
480
30.3
114
30.5
72
30.7
490
30.0
598
30.3
We continue to envision an operation with 8Mtpa concentrate production at the Kami site. The Rose Central and Rose
North deposits will be mined first as one large super pit, followed by mining of the Mills Lake deposit after 5–10 years of
operation. Construction of the mine and concentrator is expected to commence after environmental permits are
received, which is anticipated in 3Q13. According to the company’s project development timeline, mining is expected to
begin in 2015 and commercial production achieved by late 2015. We have taken a slightly more conservative approach
and assume that production will begin in 3Q15.
We expect the capital costs to develop Kami into an 8Mtpa concentrator will total about US$1.3b, slightly above the
company’s estimate of US$1.0b. Our detailed capital cost assumptions are shown in Exhibit 4.
Exhibit 4: Expected capital cost at Kami
(US$m)
Mine
120
Concentrator and site infrastructure
500
Rail
60
Port
200
Power
50
Other
400
Total
1,330
Further upside not reflected in our estimates. Following successful ramp-up to 8Mtpa, Alderon is planning for further
expansion to 16Mtpa. This is similar to the expansion planned by Consolidated Thompson management for the Bloom
Lake mine (prior to the acquisition of Consolidated Thompson by Cliffs). According to Alderon’s estimates, Phase 2
expansion would follow four years after the start-up of Phase 1. We have not yet included the second phase in our
estimates, as the expansion is conceptual at this time.
A relatively simple rail and port solution. Unlike many of the other projects in our coverage universe, transportation
issues at Kami are relatively straightforward. The deposit’s close proximity to existing mature mines and infrastructure
means that only a short 15km spur line is required to connect to the existing rail network. We expect that QNS&L will
continue to have adequate capacity when production begins at Kami. We also expect Alderon will participate in the new
multi-user port at Pointe-Noire, which is expected to be completed well before first sales at Kami. We have allocated
US$200m in our capital cost estimates to Alderon’s share of port costs, including stockpile facilities and dedicated
stacker/reclaimer equipment.
Very competitive operating costs. As illustrated in Exhibit 10 on page 11, the Kami project is expected to have the
lowest per-unit cash operating costs in our coverage universe. This is attributable to several factors: (1) We expect Alderon
will sell Kami material as concentrate for sinter feed, and the additional expense of pelletizing operations are not
included in our estimates; (2) Kami enjoys cost advantages due to its central location and relative proximity to power,
rail, port and an established labour pool; and (3) Its relatively low expected stripping ratio reduces mining costs relative
to operations such as Champion Minerals’ Fire Lake North project, where a significantly higher volume of waste must be
moved to produce the same concentrate volume. Our long-term operating cost estimates are outlined in Exhibit 5.
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MARCH 22, 2012
Exhibit 5: Expected long-run cash operating costs at Kami
(US$/t concentrate)
Mining
Transport/loading
15.00
7.50
18.00
G&A
2.00
Total
42.50
Not included in the above operating cost estimate is a 3% gross sales royalty payable to Altius Minerals Corporation.
Alderon acquired a 100% interest in the Kami property from Altius on December 6, 2010 in exchange for 32.3m ADV
shares (a 37% stake in the company at the time) and the 3% royalty payment.
Ore quality is most suited to Asian buyers. The concentrate from Kami is expected to have low levels of most gangue
elements; however, the sulphur and manganese content could be marginally higher than the generally accepted limit in
Europe. According to the 2011 preliminary economic assessment report, the sulphur level at Rose Central is 0.053%,
slightly above the acceptable limit of 0.050%. Manganese levels at Rose Central are expected to average 0.75%, which was
considered by the authors of the study to be in excess of levels acceptable to most blast furnace operations. However, we
expect that the manganese content at Rose North will be significantly lower. With careful pit design and blending, we
believe the final ore product could have a manganese level of about 0.3–0.5%, within acceptable limits for Asian buyers.
Still fully independent but we expect a deal to be done. At the present time, Alderon has not signed any joint venture
or offtake agreements with third parties. However, we expect the company is in talks with potential partners, most likely
Asian steel producers. Executive Chairman Mark Morabito had indicated to reporters in late 2011, “You have to be
patient…I could do a deal today, I’ll tell you that right now, but we don’t want to. We want to get the best possible terms
we can, and that requires patience as you create competitive tensions amongst the potential offtake parties. It’s a longterm game. We started the file early, and we’re giving ourselves till the middle of next year to get the best possible deal”.
We expect an offtake deal to be announced by mid-2012, in line with Mr Morabito’s comments. The signing of an offtake
agreement for concentrate production in the range of 3–5Mtpa would be an important milestone, as it would represent
guaranteed long-term sales for a significant portion of Kami’s future production and commercial acceptance of
Alderon’s ore.
Capital structure
Alderon Iron Ore Corp. is listed on the Toronto Stock Exchange under the symbol ‘ADV’. As at September 30, 2011,
Alderon had approximately 82.7m shares issued and outstanding, and 7.6m options and warrants outstanding. Altius
Minerals Corporation remains Alderon’s largest shareholder, with a ~32.4% ownership stake. Liberty Metals & Mining
Holdings, LLC is also a significant shareholder with a 15.0% stake. Individuals and insiders hold approximately 4.8% of
the shares outstanding, including Executive Chairman Mark Morabito’s 3.0% stake.
Altius has been a shareholder since the December 2010 transaction whereby Alderon acquired 100% of the property
rights for the Kami project from Altius in exchange for 32.3m ADV shares (a 37% stake in the company at the time) and a
3% gross sales royalty on any future sales from Kami. Altius is a natural resources-project-generating and royalty business
based in Newfoundland and Labrador. The company’s business model is centred around early-stage exploration and
discovery of iron ore, base metals, gold, uranium and rare earth elements in eastern Canada. Altius prefers to create
partnerships or corporate structures in connection with the opportunities it generates, with the company carrying
minority and non-operating project or equity interests and/or royalty interests.
Liberty Metals & Mining, a wholly owned subsidiary of Boston-based insurance giant Liberty Mutual Group, acquired
approximately 15m shares (approximately 15.0% stake in the company) for C$40m on January 16, 2012. Alderon intends
to use the net proceeds of the placement primarily to fund the drilling program and feasibility study for the Kami
project, to secure long-lead-time equipment and for general and administrative expenses.
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MARCH 22, 2012
Potentially a long-term supporter. We expect Liberty Metals & Mining will be a long-term investor and will continue to
support Alderon through the construction stage at Kami. Under the terms of the January 2012 subscription agreement,
Liberty Metals & Mining has a pre-emptive right to participate in future equity financings by Alderon, and we believe it
will do so.
Valuation
Our primary asset valuation approach for Alderon is P/NAV; our NAV is based on a discounted cash flow analysis (at an
8% discount rate) using the US$/C$ exchange rate and iron ore price assumptions summarized in Exhibit 2 on page 4.
Our estimated net asset value is C$6.70/share (see Exhibit 6) after an assumed C$1.2b financing to fund development
and construction of the Kami project. We apply a 0.5x target multiple to our primary asset NAV and a 1.0x multiple to
current working capital to derive our one-year target price of C$4/share. We believe a 0.5x target multiple is appropriate,
given the relative risk of successful start-up. In our view, the risk associated with the long-term development of a mineral
deposit is offset in Alderon’s case by its experienced and well-connected management team and by the Kami project’s
proximity to mature mines, which reduces permitting and infrastructure risk.
Exhibit 6: Alderon net asset value details
NPV (8%) (C$m)
Kami—NPV estimate of future cash flows
Total capital expenditure requirement (attributable to ADV)
NAV
1,213
-15
19
1,200
720
481
1,698
97.7
148.0
2.8
4.9
NPV/share (C$)
253.3
6.70
Recommendation
We are initiating coverage of Alderon Iron Ore Corp. with a Hold–Speculative rating and C$4/share one-year target price,
which implies an expected return of 29% to the current share price.
We believe the Alderon team is highly experienced in mine development and operations, and we expect the company
will maximize the value from its Kami property over the next few years. The property is in close proximity to existing and
mature infrastructure and benefits from low expected operating costs (due to low stripping ratios and minimal
processing required to prepare the ore for sale as sinter feed).
However, we believe that the company’s share price already reflects its strong management team, the relatively
advanced stage of development at Kami and the relatively low anticipated capex and operating costs. Relative to our
coverage universe, Alderon shares are fairly valued and offer limited upside at this time. Please see Exhibit 1 on page 4
for a comparative analysis of iron ore–focused equities in our coverage universe.
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MARCH 22, 2012
Risks
We have a ‘Speculative’ risk qualifier for Alderon.
Start-up and operating risk. There is a significant risk that the exploration, development and completion of the Kami
iron ore project could be delayed due to circumstances beyond Alderon’s control. Setbacks could include delays in
finding a strategic partner, securing financing or in construction or commissioning.
Ability to secure financing. The development of the Kami project will require significant capital, and there is no
assurance that Alderon will be able to obtain financing at favourable rates. Alderon may be unable to invest capital for
its development and exploration programs, take advantage of business opportunities or respond to competitive
pressures.
Foreign exchange. Once in production, Alderon will be subject to foreign exchange risk because revenues will be
received in US dollars while operating costs will be in Canadian dollars. Fluctuations in exchange rates, principally the
US$/C$ exchange rate, can significantly impact earnings and cash flows.
Licences and permits. The exploration and development activities at Kami require permits and approvals from various
government authorities and are subject to federal, provincial and local laws. The company will be required to obtain
additional licences and permits to continue and expand its development activities, and there can be no guarantee that
these licences will be obtained or maintained. There is also a risk that future legislation and regulations could result in
additional expenses in Kami’s operations and in reclamation obligations, the extent of which cannot be predicted.
Aboriginal land rights. The Kami property falls within an area where five different aboriginal parties from three
different aboriginal groups assert their rights and title. Aboriginal assertions to traditional rights and title on the property
between the aboriginal groups may have an impact on the company’s ability to develop the Kami property. Alderon is
engaged in meaningful discussions with the five aboriginal groups that have asserted rights and title or that have
traditional territories in proximity to the Kami property:
 Innu Nation—a memorandum of understanding (MOU) was signed in August 2010
 Matimekush-Lac John—consultation with the company is ongoing
 Naskapi Nation of Kawawachikamach—consultation with the company is ongoing
 NunatuKavut Community Council (NCC)—consultation with the company is ongoing
 Uashat mak Mani-Utenam—consultation with the company is ongoing
Mark Morabito, Executive Chairman. Mr Morabito has a background in corporate finance and securities law; he has
over 15 years of experience in public markets, with a strong focus on junior mining and small business venture capital,
as well as extensive experience in capital-raising and corporate development. Mr Morabito obtained a BA from Simon
Fraser University and completed his JD at the University of Western Ontario.
Stan Bharti, Vice-Chairman. Mr Bharti brings over 25 years of business, management and financing experience to
Alderon. In the last 10 years, he has been involved in acquiring, restructuring and financing public companies, and has
raised over C$2b in public markets in the last five years. His experience in public markets includes acquisitions of
companies in Europe, Australia and North America. Mr Bharti has held several positions (including CEO) with
Consolidated Thompson Iron Mines Ltd. (2005–09). He holds a Master’s degree in engineering from Moscow, Russia, and
the University of London, England.
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MARCH 22, 2012
Tayfun Eldem, President, CEO and director. Mr Eldem worked for the Iron Ore Company of Canada for more than 20
years. During this period, he held many senior roles including Vice-President, Expansion Projects & Engineering and
Vice-President, Operations & Engineering. Mr Eldem holds a Bachelor of Engineering degree from Dalhousie University,
along with Operations & Strategic Management Certificates from the Richard Ivey School of Business and London
Business School.
Keith Santorelli, CFO. Mr Santorelli has over 16 years of experience, including three years with a publicly traded
biopharmaceutical company as Vice-President, Finance. He has wide-ranging expertise in various areas of complex US
GAAP and IFRS accounting in both publicly traded and private companies in the US, Canada and internationally.
Mr Santorelli holds a Bachelor’s degree in Accountancy from the University of Massachusetts and an MA from McGill
University.
Bernard Potvin, Executive Vice-President, Project Execution. Mr Potvin has over 37 years of experience in mining and
processing operations. He has held senior roles at Québec Cartier Mining Company, Canadian Reynolds Metals, Alcoa
Primary Metals Group, Alcoa Primary Growth Group and the Iron Ore Company of Canada. During his tenure at IOC,
Mr Potvin was General Manager of Expansion Projects, and successfully managed greenfield and brownfield expansion
projects in Labrador City and Sept-Îles. Mr Potvin holds a Mechanical Engineering degree from Laval University.
Danny Williams, Special Advisor to the Chairman. Mr Williams served as Premier of Newfoundland and Labrador from
October 2003 until his retirement in November 2010. In addition to his distinguished public service career, Mr Williams
has been deeply involved in private sector business development in the province, including in his position as President
of offshore oil & gas supply and services company OIS Fisher (later Spectrol). Mr Williams studied political science and
economics at Memorial University of Newfoundland. Awarded the Rhodes scholarship in 1969, he received a degree in
Arts in Law from Oxford University in England, and returned to Canada to earn a Bachelor of Law degree from Dalhousie
University in Halifax. He practised law in Newfoundland and Labrador beginning in 1972 and was appointed Queen’s
Counsel in 1984.
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MARCH 22, 2012
Champion Minerals Inc. (CHM C$1.68, TSX)
Portfolio of prospective assets in a mature region; initiating coverage with a Buy rating and C$3
target price
Rating
Target
Valuation
Buy–Speculative
C$3.00
0.5x NAV (8%)
Symbol
Exchange
Sector
CHM
TSX
Bulk Commodities
President & CEO
Tom Larsen
Website www.championminerals.com
Share price
C$1.68
Potential return
79%
52-week range
C$0.77–2.46
3m volume traded
775,000
1m volume traded
635,000
Shares O/S*
88m
Dividend yield
Reported cash*
Cash/sh*
Current market cap
Current EV
0%
C$16m
C$0.18
C$1m
C$0.77
C$182m
C$173m
Measured
8Mt at 35.0% Fe
Indicated
392Mt at 30.5% Fe
Inferred
1,823Mt at 25.5% Fe
 There is potential for significant upside as the properties are developed or sold, as we assign only a nominal
value to most of Champion Minerals’ assets at this time
 We are initiating coverage with a Buy–Speculative rating and C$3/share target price
Highlights. Champion Minerals has the most prospective collection of land claims in the Fermont, Québec, region, with
a portfolio of 17 iron ore properties separated into three clusters. The company is currently working to develop its Fire
Lake North property. We expect that the company will concurrently develop the nearby Oil Can deposit to advance nearterm production of the valuable coarse-grained hematite ores found at both sites and to optimize development and
operating costs for the overall operation.
Valuation. Our valuation is based on a 0.5x multiple applied to our Fire Lake North net asset value and a 1.0x multiple
to current net working capital. In our view, several of Champion Minerals’ other properties could be sold to raise funds
for the development of Fire Lake North. We currently assign a value of only C$50m for the present exploration value of
Champion Minerals’ other assets. However, we note that there is potential for considerable upside to our estimates if
one or more of these assets is monetized. The strategic location of Champion Minerals’ properties within the Fermont
region could offer valuable synergies with nearby mining operations, processing facilities and infrastructure. In our view,
ArcelorMittal Mines Canada and Cliffs Natural Resources are best positioned to realize these synergies, based on the
nearby locations of their existing operations.
Recommendation. We are initiating coverage of Champion Minerals Inc. with a Buy–Speculative rating and C$3/share
one-year target price, which implies an expected return of 79% to the current share price.
Asset (C$m)
2
1
0
6
4
2
0
Mar-11
Source: Bloomberg
Champion Minerals fully financed NAV estimate
3
Volume (m)
* As at December 31, 2011
 Champion Minerals has substantial land holdings, with a portfolio of 17 iron ore properties located in close
proximity to ArcelorMittal Mines Canada’s and Cliffs Natural Resources’ assets in the Fermont, Québec, region
Price (C$)
Jun-11
Sep-11
Dec-11
Feb-12
Fire Lake North
Other assets
NPV multiple (x)
NAV
NAV/share (C$)
NPV (8%)
NPV (10%)
1,199
50
0.50
50
0
-33
24
1,600
88
445
1,930
4.34
893
50
0.50
50
0
-31
24
1,600
88
445
1,626
3.66
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Company overview
Champion Minerals is one of the largest landholders in the Fermont, Québec, region, with a portfolio of 17 iron ore
properties separated into three clusters. The town of Fermont is home to ArcelorMittal Mines Canada’s mature Mont
Wright mine and has ready access to power, roads and the Québec North Shore & Labrador Railway (QNS&L) common
carrier rail network. Champion Minerals is currently focused on the development of its Fire Lake North property but has
also explored other projects nearby in Clusters 1 and 2.
Exhibit 1: Detailed map of Champion Minerals’ Fermont properties
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MARCH 22, 2012
 Mineral resource estimate at Oil Can expected in 1Q12
 Mineral resource estimate at Moire Lake expected in 1Q12 after Oil Can
 Feasibility on Fire Lake North expected in 3Q12
 PEA on Oil Can expected to be completed during 1H12
 Construction of Fire Lake North mine and concentrator expected to start in late 2013
 Production at Fire Lake North expected to start in early 2016
Portfolio of prospective assets in a mature region
Champion Minerals owns a portfolio of 17 iron ore properties in the Fermont region. The properties are separated into
three clusters, based on geographic proximity to infrastructure and existing mining operations. Please see Exhibit 2 for a
summary of the currently available reserve and resource estimates for Champion Minerals’ properties.
Cluster 1 includes the Moire Lake (Lac Moire) property, which is adjacent to ArcelorMittal Mines Canada’s Mont Wright
mine and close to Cliffs Natural Resources’ Bloom Lake mine.
Cluster 2 contains Champion Minerals’ most advanced assets, including Fire Lake North, Oil Can, Bellechasse and
Harvey-Tuttle. The assets are adjacent to Cliffs’ Lamêlée and Peppler deposits and ArcelorMittal Mines Canada’s Fire Lake
mine, which operates seasonally.
Cluster 3 is furthest from development. The properties surround ArcelorMittal Mines Canada’s Mont Reed deposit.
Exhibit 2: Total estimated iron ore resources
Measured resources
Tonnes (m)
Indicated resources
% Fe
Tonnes (m)
Inferred resources
% Fe
Tonnes (m)
% Fe
Bellechasse
-
-
-
-
215
28.7
Fire Lake North
8
35.0
392
30.5
661
27.7
Harvey-Tuttle
-
-
-
-
947
23.2
Total
8
35.0
392
30.5
1,823
25.5
Potential for a number of consecutive operations. Champion Minerals is presently focused on the development of its
flagship Fire Lake North project (Champion Minerals holds an 82.5% stake, with Fancamp Exploration Ltd. holding the
remaining 17.5% interest) and on the exploration of other deposits in Cluster 2. Further drilling and exploration on
Champion Minerals’ extensive land package could justify the development of mines to feed ore through the Fire Lake
North concentrator (such as the nearby Oil Can deposit), or the development of additional standalone operations.
Our current estimates reflect only the development of Fire Lake North. All other deposits combined are assigned a
nominal value of only C$50m for exploration potential. As Champion Minerals moves to develop these assets, they could
represent additional upside to our current estimates.
Drill results at Fire Lake North have delineated regions of coarse-grained ore. The deposit contains a blend of high-grade
coarse specular hematite and meta-taconite mineralization, which is typical of the region. The specular hematite is a
desirable product because it produces a high-quality sinter feed, which could command a premium price. Due to its
coarse grain size, the material does not have to be finely ground to liberate the ore; grind size of 0.6–0.7mm is expected
to be sufficient (vs about 0.42mm for typical meta-taconite or 0.045mm for taconite). Hematite also does not require
magnetic separation to produce a high-grade concentrate, which should reduce both development capital costs and
ongoing operating costs in the near term.
Plans to produce a concentrate product. Champion Minerals intends to produce concentrate-for-sale from the Fire
Lake North property. Due to the coarse grain size of the ore, Fire Lake North and Oil Can ores are expected to be highly
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MARCH 22, 2012
desirable sinter feed products. The company envisions a concentrator that will produce approximately 10Mtpa
concentrate in the first five years of minelife and an average 8.7Mtpa concentrate in the first 25 years of minelife.
Construction of the mine and concentrator is expected to start in late 2013 after all permits are received. We expect the
company will begin mining in early 2016.
Capex. We estimate that the total capital costs to develop Fire Lake North will be about US$1,650m, above the
company’s estimate of C$1,368m (US$1,368m assuming US$/C$ parity). Our detailed capital cost assumptions are shown
in Exhibit 3.
Exhibit 3: Expected capital cost at Fire Lake North
(US$m)
Mine
125
550
Rail
250
Port
200
Power
75
Other
450
Total
1,650
Rail costs could be reduced with Plan Nord support. We currently assume that Champion Minerals will build a 62km
rail spur to connect its properties to the QNS&L. Our US$250m cost estimate equates to approximately US$4m per
kilometre of rail to be constructed, which is in line with industry estimates of US$3–5m per kilometre of rail constructed.
However, any potential rail construction subsidized by the government’s Plan Nord program could reduce the cost to
Champion Minerals.
Rail partnership is another option, but this is not likely to result in capital cost savings. As noted in the Adriana Resources
Inc. section, it is possible that existing producers and developers such as Champion Minerals could join together to build
and operate a new rail line in the Labrador Trough region. Although this could result in operating cost savings for
Champion Minerals, we do not anticipate that development capex would be significantly different, as Champion
Minerals would be expected to contribute a comparable amount to the partnership.
Port construction will be completed through Plan Nord. We expect that Champion Minerals will participate in the
new multi-user port at Pointe-Noire, completion of which is planned for 2014, well before first sales at Fire Lake North.
We have allocated US$200m in our capital cost estimate to Champion Minerals’ share of port costs, which include the
cost of stockpile facilities and dedicated stacker/reclaimer equipment.
High strip ratio is the biggest contributor to costs. We anticipate that operating costs at Fire Lake North will be
relatively high compared with the other operations in our coverage universe. Although we assume similar per-unit
mining costs for Fire Lake North and Kami, the cost per tonne of concentrate produced at Fire Lake North is high due to
the large volumes of waste that must be moved. For example, the November 2011 preliminary economic assessment
(PEA) study estimates the life-of-mine strip ratio at Fire Lake North at 3.6:1 vs the life-of-mine strip ratio of 2.16:1 at
Alderon’s Rose Central property (this is expected to decrease with further pit optimization) and 1.07:1 at its Mills Lake
deposit, and approximately 1:1 at Cliffs’ Bloom Lake mine. See Exhibit 4 for our operating cost assumptions for Fire Lake
North.
Exhibit 4: Expected long-run cash operating costs at Fire Lake North
(US$/t concentrate)
Mining
Transport/loading
27.00
7.00
18.00
G&A
2.00
Total
54.00
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Not included in our estimate of operating cost is a 3% net smelter return (NSR) royalty payable to Fancamp and Sheridan
Platinum Group Ltd. The royalty may be reduced to 2% in exchange for a C$3m payment. Champion Minerals
completed the acquisition of its majority stake in Fire Lake North from Fancamp and Sheridan in July 2010.
Opportunity to refine the operating plan. Champion Minerals’ current economic assessment is based on plans to mine
from Fire Lake North and to process at a concentrator onsite. However, we expect this plan will be further refined to
maximize the economic benefit once additional exploration results are available. Specifically, Champion Minerals could
coordinate the concurrent development and mining of Fire Lake North and nearby Oil Can, where early drill results
indicate further zones of coarse-grained hematite similar to the coarse specular hematite at Fire Lake North. Focusing on
the hematite deposits first would accelerate any premiums paid to Champion Minerals for the high-quality ore and also
ensure lower capital costs in the early years as magnetic separation would likely be unnecessary on start-up.
Capital structure
Champion Minerals Inc. is listed on the Toronto Stock Exchange under the symbol ‘CHM’. As at December 31, 2011,
Champion Minerals had approximately 88.0m shares and 19.4m options and warrants outstanding. The company does
not have a strategic partner or investor. Individuals and insiders hold approximately 5.6% of the shares outstanding,
including CEO Tom Larsen’s 2.6% stake.
Recent C$30m financing will fund near-term activities. Champion Minerals recently announced a bought deal
financing of 15m shares for C$30m. An over-allotment option gives the underwriters the option to acquire an additional
2.25m shares, which would increase the total size of the offering to C$34.5m. Proceeds will be used for exploration and
development and for general working capital purposes. The offering closed on March 12, 2012. Following the financing
(including the over-allotment option), we expect Champion Minerals will have a cash balance of C$57m, sufficient to
fund exploration activities in 2012.
Not expecting a strategic partner right now. We believe Champion Minerals will continue exploration and
development activities at its development projects, including Fire Lake North, without seeking a strategic investor.
We believe Champion Minerals is looking to divest of a portion of its sizeable land package. Champion Minerals
could sell one or more of its non-core assets in order to fund construction of its flagship Fire Lake North project. The
strategic location of the company’s 17 properties within the Fermont region could offer valuable synergies with nearby
mining operations, processing facilities and infrastructure. In our view, ArcelorMittal Mines Canada and Cliffs are best
positioned to realize synergies based on the location of their existing operations.
Sale of the entire company or Fire Lake North is a second (although much less likely) possibility. Although
Champion Minerals is currently focused on moving Fire Lake North into production, we believe the property is a natural
fit with ArcelorMittal Mines Canada’s Fire Lake mine or Cliffs’ Lamêlée and Peppler deposits. Development of Fire Lake
North in combination with either of these neighbouring properties could reduce duplication of processing facilities
and/or infrastructure, and would maximize the value of all deposits in the Fermont area.
Valuation
Our primary asset valuation approach for Champion Minerals is P/NAV; our NAV is based on a discounted cash flow
analysis (at an 8% discount rate) using the US$/C$ exchange rate and iron ore price assumptions summarized in Exhibit 2
on page 4.
Our estimated net asset value is C$4.34/share (see Exhibit 5) after an assumed C$1.6b financing to fund development
and construction of the Fire Lake North project. We apply a 0.5x target multiple to our primary asset NAV and a 1.0x
multiple to current working capital to derive our one-year target price of C$3/share. We believe that a 0.5x target
multiple is appropriate, given the relative risk of successful financing, construction and start-up.
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Exhibit 5: Champion Minerals net asset value details
NPV (8%) (C$m)
Fire Lake North—NPV estimate of future cash flows
Exploration properties
Total capital expenditure requirement
NAV
1,168
50
50
24
1,600
960
640
1,930
NPV/share (C$)
105.3
320.0
12.5
6.9
444.7
4.34
Recommendation
We are initiating coverage of Champion Minerals Inc. with a Buy–Speculative rating and C$3/share one-year target price,
which implies an expected return of 79% to the current share price.
Potential for significant upside as properties are developed or sold. At this time, we attribute value only to Champion
Minerals’ Fire Lake North project. A further C$50m is added for the current value of exploration properties in our net
asset value estimate. However, as properties continue to be drilled and explored, or as non-core properties are
monetized, the value attributed to these other assets could increase materially.
Risks
We have a ‘Speculative’ risk qualifier for Champion Minerals.
Start-up and operating risk. There is a significant risk that the exploration, development and completion of the Fire
Lake North project and other projects owned by Champion Minerals could be delayed due to circumstances beyond the
company’s control. Setbacks could include delays in finding a strategic or offtake partner, securing financing or in
construction or commissioning.
Ability to secure financing. The development of Fire Lake North or other Champion Minerals projects will require
significant financing, and there is no assurance that Champion Minerals will be able to obtain financing at favourable
rates. The company may be unable to invest capital for its development and exploration programs, take advantage of
business opportunities or respond to competitive pressures.
Foreign exchange. Once in production, Champion Minerals will be subject to foreign exchange risk as revenues will be
Licences and permits. The exploration and development activities at Fire Lake North and Champion Minerals’ other
properties require permits and approvals from various government authorities and are subject to federal, provincial and
local laws. The company will be required to obtain additional licences and permits to continue and expand its
development activities, and there can be no guarantee that these licences will be obtained or maintained. There is also a
risk that future legislation and regulations will result in additional expenses in Champion Minerals’ operations and in
reclamation obligations, the extent of which cannot be predicted.
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MARCH 22, 2012
First Nations land claims. Champion Minerals has recognized the claims of Innu Takuaikan Uashat mak Mani-Utenam
on its lands, including the Fire Lake North deposit and proposed rail spur line corridor. Champion Minerals has reported
that advanced discussions with the group are ongoing.
Tom Larsen, Chairman, President and CEO. Mr Larsen has held the role of President and CEO of the company since
2006. He has over 30 years of experience in the investment industry, specializing in corporate finance and management
of junior mining companies. Prior to joining Champion Minerals, Mr Larsen held senior executive positions at a number
of junior resource companies where he was also involved in corporate finance and management activities. He is a
director of Eloro Resources Ltd., Northfield Metals Inc. and Bear Lake Gold Ltd. Mr Larsen is a member of the company’s
Environmental, Health and Safety Committee.
Alexander Horvath, Executive Vice-President, Exploration and director. Mr Horvath joined Champion Minerals as a
director in September 2007 and was appointed Executive Vice-President, Exploration in March 2008; he brings over 28
years of experience in mineral exploration and mining. Since 2006, Mr Horvath has been President of A.S. Horvath
Engineering Inc., an Ottawa-based exploration/mining geological services firm. He also spent over 20 years with Asarco
Inc. and its associated international subsidiaries in Canada, Portugal and French Guyana in progressively senior
operational roles, where he was involved in managing base and precious metals exploration, mineral resource
estimates, feasibility studies, reserves audits and acquisition due diligence reviews. Mr Horvath is currently a director of
Bear Lake Gold Ltd. and Eloro Resources Ltd. He is a member of the company’s Compensation and Nominating
Committee and Environmental, Health and Safety Committee.
Martin Bourgoin, Executive Vice-President, Operations. Mr Bourgoin joined Champion Minerals as Executive VicePresident in December 2007, bringing with him over 25 years of experience in both mining and exploration program
management. Since 1999, Mr Bourgoin has been President of MRB & Associates, a Val D’Or, Québec–based geological
consulting firm. Prior to founding MRB & Associates, Mr Bourgoin worked as Chief Geologist at Sigma Mines, a worldclass gold mine located in Val D’Or; he has held similar positions with Placer Dome Inc. and Agnico-Eagle Mines Ltd.
Mr Bourgoin holds a Bachelor of Science degree in geology from the University of New Brunswick and is a member of
Ordre des géologues du Québec.
Jeff Hussey, Executive Vice-President, Development. Mr Hussey was appointed to the position of Executive VicePresident, Development in March 2011; he joined Champion Minerals as Vice-President, Exploration in February 2008,
bringing with him over 25 years of international exploration and mining experience, including 19 years with
Noranda Inc. and Falconbridge Ltd. (now part of Xstrata Plc). Mr Hussey also worked at Brunswick Mines, Mines Gaspe
and the Antamina mine start-up in Peru. He has also worked as a senior scientist with the mining group at the Noranda
Technology Centre and as general foreman, open pits and surface projects, at Raglan Mines, where he led Six Sigma
optimization projects for the concentrator and surface projects departments. Mr Hussey holds a Bachelor of Science
degree in geology from the University of New Brunswick.
Richard Quesnel, Senior Technical Advisor and Head of Advisory Board. Mr Quesnel was named as the company’s
senior technical advisor in September 2011. He brings over 30 years of senior mine management and engineering
experience to Champion Minerals. Most recently, Mr Quesnel served for more than five years as President and CEO of
Consolidated Thompson Iron Mines Inc. During his tenure at Consolidated Thompson, Mr Quesnel was responsible for
the successful construction and production ramp-up of the Bloom Lake iron ore mine as well as the construction of a
rail spur line and ore-handling facilities near the port of Pointe-Noire. Under Mr Quesnel’s guidance, Bloom Lake
entered into commercial production in early 2010, on schedule and just four years after completion of its feasibility
study. Mr Quesnel and the Consolidated Thompson team raised over C$850m in financing, negotiated and concluded a
C$240m strategic investment by Wuhan Iron and Steel Group Corporation (WISCO), and completed offtake agreements
with WISCO, Worldlink Resources Ltd. of China and SK Networks Co. Ltd.
Miles Nagamatsu, CFO. Mr Nagamatsu joined Champion Minerals as CFO in March 2006, bringing with him over 30
years of experience in accounting, management, lending, restructurings and turnarounds. Since 1993, Mr Nagamatsu
has acted as CFO at public and private companies, primarily in the mineral exploration and investment management
sectors. Mr Nagamatsu has served as volunteer Treasurer and director of Cystic Fibrosis Canada for over 25 years. He
holds a Bachelor of Commerce degree from McMaster University and is a Chartered Accountant.
Desjardins
Capital Markets
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MARCH 22, 2012
Labrador Iron Ore Royalty Corporation (LIF.UN C$36.00, TSX)
Unique opportunity for income while still exposed to iron ore prices; initiating coverage with a
Hold rating and C$43.50 target price
Rating
Hold–Average Risk
Target
C$43.50
Valuation 12x NTM cash flow (50%)
& 1x NAV (8%) (50%)
Symbol
Exchange
Sector
LIF.UN
TSX
Bulk Commodities
President & CEO
Bruce Bone
Website www.labradorironore.com
Unit price
C$36.00
Potential return
21%
52-week range
C$28.60–39.57
3m volume traded
125,000
1m volume traded
184,000
Units O/S*
64m
Dividend yield
2.8%
Reported cash*
C$41m
Cash/un*
C$0.65
C$248m
Reported book value/un* C$4.28
Current market cap
Current EV
C$2,289m
C$2,495m
Measured
227Mt at 39% Fe
Indicated
864Mt at 38% Fe
Inferred
1,372Mt at 38% Fe
 Its equity stake in IOC offers leverage to iron ore prices and participation in IOC’s planned and future capacity
expansion projects
 LIORC’s royalty revenue stream limits downside risk as the royalties are not influenced by operating costs,
capital spending requirements, tax rates or financing costs
 We are initiating coverage with a Hold–Average Risk rating and C$43.50/unit target price
Highlights. Labrador Iron Ore Royalty Corporation (LIORC) is not a mine operator or developer. Rather, its revenues are
directly tied to the sales and earnings performance of the Iron Ore Company of Canada (IOC) through royalty and
commission payments and its 15.10% equity stake in IOC. As the company itself has minimal overhead and operating
costs, LIORC offers its unitholders a very high payout ratio (average 80% over the past three years).
Valuation. Because LIORC’s units are valued both for near-term income as well as for the long-term value of the
company’s equity stake in IOC and its other revenue streams, we have applied a hybrid 12.0x P/CF (NTM) (50%) and 1.0x
P/NAV (8%) (50%) multiple to our estimates to derive our target price.
Recommendation. We are initiating coverage of Labrador Iron Ore Royalty Corporation with a Hold–Average Risk rating
and C$43.50/unit one-year target price, which implies an expected total return of 24% to the current unit price. Although
we expect historically high prices will be sustained in the short term by strong demand, we see a risk of lower iron ore
commodity prices in the long term as new mines increase the risk of market oversupply. We view LIORC as a safe
alternative in weak markets, and believe it is the best choice among the iron ore–focused equities in our coverage
universe in an environment of falling prices. Royalty and commission revenues, which constitute a material proportion
of the corporation’s revenue base, are relatively unaffected by changes in iron ore commodity prices as they are not
influenced by operating costs, capital spending requirements, tax rates or financing costs.
Asset (C$m)
35
30
25
1.5
1.0
0.5
0.0
Mar-11
Source: Bloomberg
LIORC NAV estimate
40
Volume (m)
 LIORC represents a unique opportunity for income in the bulk commodities sector as it offers a high dividend
yield relative to most mining companies
Price (C$)
Labrador Iron Ore Royalty
Corporation
Jun-11
Sep-11
Dec-11
Feb-12
IOC royalties
IOC commissions
IOC dividends
NPV multiple (x)
Reported basic units O/S (m)
NAV
NAV/share (C$)
NPV (8%)
NPV (10%)
2,318
26
1,220
1.00
69
0
-10
64
3,623
56.62
2,037
23
1,074
1.00
69
0
-9
64
3,193
49.89
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Capital Markets
PAGE 38
MARCH 22, 2012
Company overview
Labrador Iron Ore Royalty Corporation (LIORC) is not a mine operator or developer. Rather, its revenues are directly tied
to the sales and earnings performance of the Iron Ore Company of Canada (IOC) through royalty and commission
payments and its equity stake in IOC.
Royalty. LIORC holds 12 long-term leases and six licences from the government of Newfoundland and Labrador. Under
a long-term agreement, LIORC has granted IOC the rights to mine 100% of the ore on those lands in exchange for a 7%
gross overriding royalty on all iron ore products at Carol Lake sold by IOC.
Commissions. LIORC also receives a commission fee of C$0.10/t on all iron ore products sold by IOC. We note that
commissions are not currently a material revenue stream relative to the royalty and dividends.
Equity. LIORC owns a total equity interest of 15.10% in IOC and controls two seats on the IOC board of directors. The
other equity partners are majority shareholder and operator Rio Tinto (58.72%) and Mitsubishi Corporation (26.18%). The
IOC board typically declares dividends to its shareholders on a semi-annual basis, depending on its earnings and capital
requirements. LIORC is entitled to its proportionate 15.10% share of the declared dividends.
Participation in iron ore commodity prices and IOC growth expansion through equity interest. LIORC unitholders
should benefit from the current expansion at IOC’s Carol Lake mine (IOC’s only producing mine operation), as we expect
IOC to expand concentrate production capacity from 18.4Mtpa to 26Mtpa by 2016. Plans by majority shareholder and
operator Rio Tinto to expand further to 50Mtpa are not reflected in our forecasts and would represent upside to our
estimates.
Exhibit 1: Carol Lake pits
 Commissioning Phase 1 expansion expected in early 2012
 IOC board approval of Phase 3 expansion expected in 1H12
 Completion of Phase 2 expansion expected in late 2012 and commissioning in early 2013
 Commissioning of Phase 3 expansion expected in early 2016
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Capital Markets
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MARCH 22, 2012
Carol Lake
Carol Lake has approximately 1.4Bt of ore reserves, which implies a minelife of over 30 years from the existing reserve
base at current production rates, and an additional 2.5Bt of resources (Exhibit 2).
Exhibit 2: Total estimated iron ore reserves and resources (IOC 100%) at Carol Lake
as at December 31, 2011
Tonnes (m)
% Fe
Proven reserves
844
38
Probable reserves
530
38
1,374
38
Measured resources
227
39
Indicated resources
864
38
Total reserves
Inferred resources
1,372
38
Total resources
2,463
38
Facilities at Carol Lake include two active mining pits (Humphrey Main and Luce), a concentrator and pellet plant. IOC’s
concentrate production capacity has historically been approximately 18.4Mtpa although this is somewhat dependent on
product mix. The capacity of the pellet plant is approximately 13.0Mtpa and ore that is not pelletized is typically sold as
concentrate-for-sale for sinter feed.
Mining costs at the mature producer are expected to fall slightly in the long term as the expansion increases total iron
production and sales volumes. As illustrated in Exhibit 3, we estimate that the long-term average cash operating costs at
Carol Lake will be approximately US$62/t concentrate.
Exhibit 3: Expected long-run cash operating costs at Carol Lake
(US$/t)
Concentrate unit costs
US$/t concentrate
Pellet unit costs
US$/t pellet
50
20
Average cash operating costs
US$/t concentrate
62
Three-phased expansion underway. IOC has outlined a plan to expand the concentrate production capacity at the
Carol Lake operation from 18.4Mtpa to 26Mtpa in three phases. At this time, the company does not plan to increase
pelletizing capacity. Please see Exhibit 4 for a summary of our development capital cost assumptions for the expansion
project.
 Phase 1 increased concentrate production capacity to 22.0Mtpa from 18.4Mtpa and cost US$486m. Pellet capacity
was unchanged at approximately 13.0Mtpa. Construction has been completed and the project is currently being
commissioned.
 Phase 2 is expected to increase concentrate capacity to 23.3Mtpa at a cost of approximately US$300m. IOC started
construction of Phase 2 in early 2011 and has spent approximately US$100m on the project to date. We expect first
production from this phase of the expansion by late 2012, with commissioning completed in early 2013.
 Phase 3 could increase concentrate capacity further to 26Mtpa. We anticipate that the IOC board of directors will
approve the third phase shortly. While the company has not announced a cost estimate or project timeline for the
Phase 3 expansion, we are assuming that the project will cost approximately US$600m and that it will be
commissioned by early 2016.
 Potential for further expansion in the long term. Rio Tinto has indicated (see Exhibit 5) that capacity at Carol Lake
could expand further to 50Mtpa in the long term; however, we have not included any further expansion in our
estimates. We do not believe the current concentrator and pellet plant site have space for such an aggressive
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Capital Markets
PAGE 40
MARCH 22, 2012
expansion; we speculate that additional expansion could be achieved through the development of a third mine and
the construction of a second concentrator facility.
Exhibit 4: Remaining capital costs for Phase 2 and Phase 3 expansion (IOC 100%)
(US$m)
Phase 2 expansion
200
Phase 3 expansion
600
Total
800
Exhibit 5: IOC concentrate capacity could grow beyond 26Mtpa
80
(Mtpa)
60
50
40
26
20
18
0
Current
Concentrate
expansion project
(CEP)
New mine studies
Further options
Source: Rio Tinto plc company reports
Capital structure
Labrador Iron Ore Royalty Corporation units are listed on the Toronto Stock Exchange under the symbol ‘LIF.UN’. As at
December 31, 2011, LIORC had 64m stapled units outstanding. Insider holdings are modest at 0.08%.
LIORC was originally incorporated in 1995 as Labrador Iron Ore Royalty Income Fund and was structured as an income
trust. LIORC converted to a corporation in July 2010 in anticipation of changes to Canada’s Income Tax Act, which
became effective in 2011. Under the conversion, unitholders exchanged their units in the fund for shares in LIORC. LIORC
also distributed C$248m in 12.08% subordinated notes to unitholders that trade alongside the shares as stapled units on
the TSX. Each stapled unit consists of one common share and C$3.875 face amount of subordinated notes of LIORC that
are entitled to interest payments of C$0.468/year.
At the time of Labrador Iron Ore Royalty Income Fund’s conversion to a corporation, the stapled units represented the
most tax-efficient arrangement for unitholders. An announcement by the Canadian government in July 2011 will
increase taxes payable by stapled unit structures (expected to take effect in July 2012). Under the new proposals, interest
paid on the debt portion of a stapled security is not deductible in computing the corporation’s income for tax purposes.
Dividend policy. LIF.UN units are unique in our coverage universe because of their relatively high dividend yield. We
assume that LIORC will maintain its regular distribution (dividend and interest on subordinated notes) of
C$0.25/unit/quarter going forward. In addition, we expect LIORC will declare special dividends corresponding to the
dividends paid to LIORC by IOC. As illustrated in Exhibit 6, special dividends paid to LIORC unitholders are generally
highly correlated with the dividends that the corporation receives from IOC.
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MARCH 22, 2012
Exhibit 6: Dividends paid to unitholders are generally highly correlated with dividends received from IOC
1.60
1.40
(C$/LIORC unit)
1.20
1.00
0.80
0.60
0.40
0.20
4Q12E
3Q12E
2Q12E
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
IOC dividend received by LIORC (per LIF unit)
1Q12E
Special dividend
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
Dividend
4Q11E
Interest payment
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
0.00
Valuation
Unique high-yield equity deserves a unique approach to valuation. LIORC pays a high dividend yield relative to most
mining companies and is the only dividend-paying name in our coverage universe. We believe the company should be
attractive to investors seeking steady income in addition to exposure to iron ore markets. We believe that a hybrid P/CF
and P/NAV approach is appropriate in valuing LIORC as it places greater emphasis on the near-term distributions paid to
unitholders. Our target price is weighted 50% to the value derived from P/CF (NTM) and 50% to the value derived from
P/NAV (8%).
Our 12.0x P/CF (NTM) target multiple considers the company’s expected near-term cash flows. LIORC’s relatively high
yield is attractive to many investors and is an important factor in determining the unit price. Consensus operating cash
flow per share is an effective proxy for distributions to unitholders, given LIORC’s high payout ratio (average 80% over the
past three years). In our view, the average consensus P/CF (NTM) multiple for LIORC over the past five years
(January 2007–December 2011) best reflects the appropriate target multiple. As illustrated in Exhibit 7, LIF.UN units have
traded at an average of 12x consensus NTM CFPS over the past five years; we expect the units to continue to trade within
this range.
Exhibit 7: LIF.UN units trade at an average of 12x NTM cash flow
24
48
20
40
Average consensus P/CF (NTM)
multiple Jan-07–Dec-11: 12x
32
12
24
8
16
4
8
Consensus P/CF (NTM) (LHS)
LIF unit price (RHS)
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
(x)
(C$)
16
Desjardins
Capital Markets
PAGE 42
MARCH 22, 2012
Our estimated net asset value is C$56.62/unit (see Exhibit 8). We apply a 1.0x multiple to our NAV; this is based on a
discounted cash flow analysis (at an 8% discount rate) using the iron ore price forecast and US$/C$ exchange rate
assumptions summarized in Exhibit 2 on page 4. We believe a 1.0x multiple is appropriate, given the relatively low risk
associated with LIORC’s royalty and commission revenue streams and the corporation’s equity interest in IOC, a low-risk,
long-lived, mature producer.
Exhibit 8: Net asset value details
NPV (8%) (C$m)
IOC royalties
IOC commissions
2,318
26
IOC dividends
1,220
Total primary assets
3,564
NAV
Number of units outstanding (m)
NPV/unit (C$)
69
-10
3,623
64.0
56.62
Recommendation
We are initiating coverage of Labrador Iron Ore Royalty Corporation with a Hold–Average Risk rating and C$43.50/unit
one-year target price, which implies an expected total return of 24% to the current unit price.
Unique opportunity for income in the bulk commodities sector. LIORC pays a high dividend yield relative to other
miners, and we believe LIF.UN units are valued by investors seeking steady income in addition to exposure to the iron
ore markets. In order to emphasize the near-term distributions to unitholders, we have applied a hybrid 12.0x P/CF
(NTM) (50%) and 1.0x P/NAV (8%) (50%) multiple to derive our one-year target price.
Some leverage to iron ore prices...Through LIORC’s equity stake in IOC, LIORC unitholders can participate in the strong
iron ore commodity markets and benefit from planned and future capacity expansion projects. While we have reflected
the current three-phase expansion program at Carol Lake in our forecasts, potential future expansion would represent
upside to our estimates.
…but royalty ‘hedge’ limits downside risk. LIORC’s royalty and commission-based revenues are relatively unaffected by
changes in iron ore commodity prices, as the royalties and commissions are not influenced by operating costs, capital
spending requirements, tax rates or financing costs.
Risks
We have an ‘Average’ risk qualifier for LIORC.
Iron ore prices. Royalty payments to LIORC as well as IOC’s earnings are directly related to the volume of iron ore
products sold and the price of these products. Iron ore prices have historically been volatile and are primarily affected by
the demand for, and price of, steel. Iron ore prices are also affected by numerous other factors beyond the company’s
control, including global and regional demand, political and economic conditions, and global production volumes and
operating costs.
Foreign exchange. A majority of IOC’s revenues are received in US dollars while operating costs are in Canadian dollars.
Fluctuations in exchange rates, principally the US$/C$ exchange rate, can significantly impact earnings and cash flows.
Additionally, the royalty payments received by LIORC are denominated in US dollars and hence its revenue in Canadian
dollars is impacted by the US$/C$ exchange rate.
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MARCH 22, 2012
Dependence on IOC. Royalty revenue is earned only when IOC mines and sells iron ore from the Carol Lake mine. A
decision by IOC to cease operations or to mine iron ore elsewhere would eliminate revenue from the royalty. Dividend
income from LIORC’s equity stake in IOC is also dependent upon IOC’s earnings and dividend policy.
Licences and permits. IOC’s activities are subject to federal, provincial and local laws. Permits from a variety of
regulatory authorities are required for many aspects of mining operations. There is also a risk that future legislation and
regulations could result in additional expenses in IOC’s operations and in reclamation obligations, the extent of which
William J Corcoran, Chairman. Mr Corcoran has been a director of LIORC since 1995 and was elected Chairman in 2010.
He is Vice-Chairman and an independent director at Jarislowsky Fraser Limited. Mr Corcoran has worked in the
corporate finance area at ScotiaMcLeod. He is also a director at E-L Financial Corporation Limited.
James C McCartney, Vice-Chairman and Executive Vice-President. Mr McCartney has been a director of LIORC since
1995 and was named Vice-Chairman of LIORC in May 2007. He is a retired partner and former Chairman of McCarthy
Tétrault LLP and acts as counsel in the firm’s Corporate Finance and Mergers & Acquisitions Group.
Bruce C Bone, President, CEO and director. Mr Bone serves as President and CEO of LIORC and has been a director
since 1995. He also serves as a director of IOC. Mr Bone was previously Vice-President and Treasurer of Noranda Inc.
Alan R Thomas, CFO and director. Mr Thomas, a Chartered Accountant, has been an LIORC director since 2004 and was
appointed CFO in May 2007. Mr Thomas previously served as CFO of ShawCor Ltd. and Noranda Inc., and as a partner
with Clarkson Gordon (now Ernst & Young). Mr Thomas is also a director of Teranga Gold Corporation.
Duncan NR Jackman, director. Mr Jackman has been a director of LIORC since 2010. He also currently serves as the
Chairman, CEO and President of E-L Financial Corporation Limited and Chairman of Algoma Central Corp., and as a
director on a number of other boards, including The Empire Life Insurance Company, The Dominion of Canada General
Insurance Company and First National Financial Corporation.
Paul H Palmer, director. Mr Palmer has been a director of LIORC since 1995. He previously served as Vice-President of
Finance at Global Atomic Fuels Corporation (formerly Global Uranium Corporation), Manager at Deloitte & Touche and
in various roles including CFO at Sierra Health Services, Inc.
Donald J Worth, director. Mr Worth has been a director of LIORC since 1995. He served as Vice-President of the Global
Mining Group at the Canadian Imperial Bank of Commerce (CIBC) from July 1984 through August 1997. Prior to that,
Mr Worth was the mining specialist at Canadian Imperial Bank of Commerce (Canada) in Toronto from 1964–84.
Mr Worth is well known in the Canadian exploration and mining community and currently serves on the boards of Royal
Gold Inc. and Sentry Select Capital Inc., in addition to LIORC.
Desjardins
Capital Markets
PAGE 44
MARCH 22, 2012
Labrador Iron Mines Holdings Limited (LIM C$5.00, TSX)
Keeping it simple; initiating coverage with a Top Pick rating and C$8.50 target price
Labrador Iron Mines Holdings
Limited
 There is significantly reduced risk of capex creep and construction delays, as the company is already in the
early stages of production
Rating Top Pick–Above-average Risk
Target
C$8.50
Valuation
0.8x NAV (8%)
 The company’s modular expansion is flexible—stages can be built as cash flows permit and as market
demand dictates
Symbol
Exchange
Sector
LIM
TSX
Bulk Commodities
President & CEO
John Kearney
Website www.labradorironmines.ca
Share price
C$5.00
Potential return
70%
52-week range
C$4.67–14.82
3m volume traded
613,000
1m volume traded
531,000
Shares O/S*
54m
Dividend yield
Reported cash*
Cash/sh*
Current market cap
Current EV
0%
C$22m
C$0.40
C$2m
C$4.94
C$331m
C$311m
M&I
36.9Mt at 57.4% Fe
Inferred
1.6Mt at 55.1% Fe
Historical
124.9Mt, grade NA
 We view Labrador Iron Mines as a potential acquisition target; a takeout could provide upside to our target
price
 We are initiating coverage with a Top Pick–Above-average Risk rating and C$8.50/share target price
Highlights. Labrador Iron Mines is in the early stages of production at its direct shipping ore (DSO) project in the
Schefferville region. The company’s 20 DSO deposits are individually short-lived but together contain over 150Mt of total
reserves of high-grade iron ore that require minimal processing to prepare for market. The deposits will be developed in
several stages, beginning with the near-producing James mine and Silver Yards beneficiation plant.
Valuation. Our valuation is based on a 0.8x multiple applied to our DSO deposit net asset value and a 1.0x multiple to
current net working capital. This is the highest target multiple applied to any development-stage mine in our coverage
universe, given the relatively low risk of capex creep and construction delays at the James mine/Silver Yards beneficiation
plant.
Recommendation. We are initiating coverage of Labrador Iron Mines Holdings Limited with a Top Pick–Above-average
Risk rating and C$8.50/share one-year target price, which implies an expected return of 70% to the current share price.
Labrador Iron Mines is our Top Pick owing to its high return relative to the average expected return of 52% for our
coverage universe. In our view, Labrador Iron Mines is the most attractive investment within our coverage universe,
given the low risk to shareholders relative to other development-stage equities.
We believe Labrador Iron Mines is a potential acquisition target, given the company’s position as a pure-play iron ore
producer with no strategic partner or offtake agreement. In our view, the Iron Ore Company of Canada (IOC) is the most
logical acquirer, given majority owner and operator Rio Tinto’s aggressive plans to expand capacity at IOC, as well as
IOC’s previous operating experience in the Schefferville region and its existing shipping and sales agreement with
Labrador Iron Mines. A takeout could provide additional upside to our target price and is not considered in our
estimates.
Labrador Iron Mines fully financed NAV estimate
Volume (m)
Price (C$)
16
Asset (C$m)
12
Direct shipping ore
Other assets
NPV (10%)
697
551
0
0
NPV multiple (x)
0.80
0.80
4
10
103
103
-1
-1
5
-55
-51
0
Mar-11
8
Jun-11
Sep-11
Dec-11
Feb-12
NAV
NAV/share (C$)
Source: Bloomberg
NPV (8%)
8
8
54
54
71
71
752
610
10.60
8.60
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MARCH 22, 2012
Company overview
Labrador Iron Mines is in the early stages of production at its direct shipping ore (DSO) project in the Schefferville region.
While some of the company’s 20 DSO deposits are individually short-lived (such as James and Redmond), together they
contain over 150Mt of total reserves of high-grade ore (see Exhibit 2) that require minimal processing to prepare for
market. These properties were previously owned by the Iron Ore Company of Canada (IOC) but were never mined or
prepared for mining by IOC.
Labrador Iron Mines is also investigating the value of other assets located on its property, including high-grade stockpiles
left from IOC’s mining operations in 1954–82, potential taconite deposits and a historical magnetite resource located on
the deposit.
Exhibit 1: Labrador Iron Mines’ DSO project in Québec and Labrador
 James mine and Silver Yards seasonal start-up—open pit mining resumes in March 2012, rail operations in April and
Silver Yards processing and sales in May
 Revised resource estimates at James, Knob Lake, Houston and Malcolm expected in 1Q12
 Commercial production expected to be declared at James mine and Silver Yards beneficiation plant in 2Q12
 Commissioning of Silver Yards expansion to 3.0Mtpa capacity expected in late 2Q12 or early 3Q12
 Development of Stage 2 Houston deposit expected in 2Q12–4Q12
 Production from Houston deposit expected in 2013
Desjardins
Capital Markets
PAGE 46
MARCH 22, 2012
Keep it simple—direct shipping ore
Labrador Iron Mines plans to develop its 20 DSO deposits in four stages. Its DSO deposits are each relatively dispersed; to
overcome the challenges of long haul distances and high transportation charges, Labrador Iron Mines has devised a
unique approach to ore processing; as illustrated in Exhibit 3, the company plans to orchestrate mine ramp-up and
closures in order to maintain a steady production run rate of 5.0Mtpa (its share of Tshiuetin Rail Transportation (TSH
Rail) capacity). We believe the company’s staged approach is a competitive advantage given the flexibility in staged
expansion. Modules can be built as company cash flows permit and Labrador Iron Mines is free to expand production or
maintain current output levels as market demand dictates.
Exhibit 2: Total estimated iron ore resources
Inferred
Historical (not NI 43-101–compliant)
Tonnes (m)
% Fe
Tonnes (m)
% Fe
Tonnes (m)
% Fe
Stage 1A—James
8.1
57.7
0.1
53.6
-
-
Stage 1A—Redmond
2.9
56.4
0.1
53.7
-
-
Stage 1A—Denault
6.4
54.8
0.4
53.9
-
NA
Stages 1B and 1C
-
-
-
-
17.1
Stage 2—Houston
19.5
58.3
1.0
55.8
-
-
Stage 2—Malcolm
-
-
-
-
2.9
NA
Stage 3
-
-
-
-
34.5
NA
Stage 4
-
-
-
-
19.8
NA
Stage 5
-
-
-
-
50.7
NA
36.9
57.4
1.6
55.1
124.9
NA
Total
Exhibit 3: Labrador Iron Mines production profile
2.5
1.0
2.0
5.0
5.0
5.0
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.0
1.5
2019E
2018E
2017E
2016E
2015E
2014E
2013E
0.6
2011
5.0
2.5
1.0
2020E
0.6
5.0
1.5
2.5
2.0
2
5.0
2025E
2.5
5.0
2024E
2.0
5.0
0.5
1.0
3
0
5.0
2023E
3.5
2012E
(Mtpa)
4
1
5.0
4.5
2022E
5.0
5
2021E
6
Plant 3—Howse North Central Zone
Plant 2—Houston/Redmond South Central Zone & South Zone
Plant 1—Silver Yards Central Zone
Direct shipping ore requires minimal processing to prepare it for sale. Due to its high grade, most of Labrador Iron
Mines’ ore will require only crushing, washing and screening at a beneficiation plant. Further, some ore occurs naturally
at sufficiently high grades such that beneficiation is not even necessary; this ore, which Labrador Iron Mines refers to as
‘direct railing ore’, is loaded onto rail cars for sale directly from the James mine. Presently, direct railing ore makes up
approximately 25% of Labrador Iron Mines’ production, although we conservatively expect all ore to be processed in the
longer term.
Desjardins
Capital Markets
PAGE 47
MARCH 22, 2012
A simple approach to development means lower capex, shorter construction time and lower risk. Results from the
James mine and Silver Yards beneficiation plant confirm that Labrador Iron Mines can achieve quick start-up and
relatively low capital costs. The approach has allowed the company to begin mining operations at the James mine with
a small beneficiation plant that was relatively inexpensive to build; the first phase was essentially built and
commissioned in one season.
We anticipate that the company will continue to expand operations toward its long-term run rate of 5.0Mtpa. During the
2012 summer season, we expect the company will install a dry in-pit crusher at the Houston deposit in anticipation of
production in 2013. We also expect that a second beneficiation plant will be built at Houston/Redmond in 2013 (for
production in 2014).
Development costs for the expansion to Stage 2 are expected to be relatively low based on the low cost of Stage 1
construction and start-up. However, development costs for Stages 3 and 4, which we expect the company will begin to
incur in 2015, are expected to be significantly higher due to the longer distance to existing rail and road networks, and
the resulting additional infrastructure that will be required. See Exhibit 4 for a summary of our development capital cost
assumptions.
Exhibit 4: Expected capital costs at Labrador Iron Mines’ DSO project
(US$m)
Stage 1 (remaining)
Stage 2
45
175
Stages 3 and 4
350
Total
570
Labrador Iron Mines started production at the James mine and Silver Yards beneficiation plant in June 2011. A total of
564,000 tonnes iron ore was hauled to the Port of Sept-Îles in 2011 and three shipments to China totalling
386,000 tonnes were completed. In addition, approximately 265,000 tonnes of iron ore are held in inventory at Silver
Yards and a stockpile of approximately 178,000 tonnes of direct rail ore remains at the port.
Exhibit 5: James mine (July 2011)
Current operating costs are not known but are believed to be high. Because Labrador Iron Mines did not declare
commercial production in 2011, its cash operating costs have not been disclosed. In our assessment, the prevailing view
among investors is that operating costs, including the shipping rates and selling fees charged by IOC and Rio Tinto in
particular, were high, which would have significantly impacted Labrador Iron Mines’ margins in 2011. However, we
believe the cost for sales and marketing services is competitive and should continue to improve in the long term (see
Exhibit 6).
Desjardins
Capital Markets
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MARCH 22, 2012
Exhibit 6: Expected near-term and long-run cash operating costs
(US$/t ore)
2012E
Long-term
Mining
12.50
11.75
18.00
7.00
Transport/loading
45.00
30.00
7.00
2.00
G&A
Sales and agency
Total
25.00
5.00
107.50
55.75
In the long term, we expect Labrador Iron Mines’ relatively low capital costs to be offset by high cash operating costs
(relative to other DSO producers). In our view, two factors contribute to the higher costs: (1) the seasonal operation of its
beneficiation plants and shipping functions, and (2) the company’s reliance on contract labour for mining, operation of
the wash plant and maintenance.
Optimization of Silver Yards is in progress. The Silver Yards facility was started in June 2011 with an initial capacity of
1.0Mtpa. A hydrosizer and filter were installed in 2011 to recover ‘ultra fines’ from the waste, improving iron recovery
and increasing the plant capacity to approximately 2.0Mtpa. Further expansion to approximately 3.0Mtpa is underway
and is expected to be completed by June 2012.
Exhibit 7: Silver Yards beneficiation plant (August 2011)
Logistics
Rail access to the Silver Yards site is settled. A 6.0km spur line connects the Silver Yards plant to the TSH Rail line,
which links to the Québec North Shore & Labrador Railway (QNS&L) to access the ports at Sept-Îles. Labrador Iron Mines
has reached rail agreements with both TSH Rail and QNS&L for access to these key rail lines. Up to five locomotives will
be operated by Genesee & Wyoming, and rail cars have been purchased and refurbished to suit the company’s
requirements.
Shipping and sales agreement renewed for 2012. Labrador Iron Mines recently announced it had renewed its
agreement with IOC, where all of Labrador Iron Mines’ 2012 production and the remaining 2011 stockpile will be
shipped through IOC’s port, which is capable of loading cost-effective Capesize vessels. The ore will also be sold by IOC’s
marketing organization on the spot market for delivery to Asian markets. Although the terms of the agreement are
confidential, we believe the cost for sales and marketing services is competitive relative to market rates charged by other
third-party sales agents.
Desjardins
Capital Markets
PAGE 49
MARCH 22, 2012
Other assets—blue-sky potential
Labrador Iron Mines is also investigating the value of other assets known to be located on its property. While we do not
attribute any value to these assets in our net asset value, the ‘blue-sky’ potential represents possible upside to our
estimates.
Waste stockpiles left from IOC’s 1954–82 mining operations will be studied and sampled in the summer 2012 season to
determine if the waste ore can be economically processed at Silver Yards. The waste stockpiles contain an estimated
50% Fe, are pre-crushed rock and easily accessible by existing roads or rail bed (on which a road may be built). If the bulk
sampling is successful, stockpiles could represent potentially five years’ worth of relatively high-margin feed.
The company is planning to ramp up its efforts to explore for taconite deposits on its Schefferville properties over the
summer 2012 season. Labrador Iron Mines has identified approximately 2.5Bt of taconite targets in four areas on its
Schefferville property. The company will conduct exploration drilling in 2012 with the aim of defining an inferred
resource. We do not attribute any value to the taconite potential at this time. However, discovery of an economic
taconite deposit could create significant value for the company.
A historical manganese deposit is also located on Labrador Iron Mines’ property. Typically, manganese ore is
beneficiated in a process similar to that at the Silver Yards plant. In the summer 2012 season, Labrador Iron Mines will
sample the manganese ore to determine its suitability for treatment at Silver Yards. If this is successful, the company
could mine and sell occasional manganese shipments to supplement its revenue from iron ore sales.
Capital structure
Labrador Iron Mines Holdings Limited is listed on the TSX under the symbol ‘LIM’. As at December 31, 2011, Labrador
Iron Mines had approximately 54.1m common shares issued and outstanding, and an additional 1.9m options
outstanding. Following the February 2012 financing, including the over-allotment, we expect the company will have
approximately 69.0m shares outstanding. Anglesey Mining plc is the largest shareholder with 26% of the common shares
outstanding following the recent equity issue. Individual insiders hold a modest 1.6% of the shares outstanding.
About Anglesey Mining. UK-based Anglesey Mining’s primary assets are its equity interest in Labrador Iron Mines and its
wholly owned Parys Mountain zinc-copper-lead deposit in north Wales. In our view, the objectives of Anglesey Mining
are likely to be aligned with those of Labrador Iron Mines’ board and management. Labrador Iron Mines Chairman and
CEO John Kearney also acts as Chairman of Anglesey Mining; in addition, former LIM Vice-Chairman (and retired COO)
Bill Hooley serves as an Anglesey director and Chief Executive.
Recent C$80m financing will fund 2012 development and expansion. On February 28, 2012, Labrador Iron Mines
announced an equity financing of 11.5m common shares and 1.75m flow-through shares for gross proceeds of
approximately C$72m. We assume the over-allotment option to purchase an additional 1.725m shares at C$5.30/share
will also be exercised, bringing total gross proceeds to approximately C$80m. Labrador Iron Mines will use the proceeds
to fund Phase 3 expansion at Silver Yards, contribute its share of capital to railway improvement and upgrades, for
development of its Houston project, exploration of mineral properties (including the Houston and Malcolm DSO
deposits as well as the manganese deposit and IOC stockpiles), and for general corporate and working capital purposes.
Working capital and growth will be funded going forward. We do not anticipate that the company will be required to
raise capital in the near term, as it has C$29.3m in cash on hand (as at December 31, 2011) and an additional C$19.2m
in accounts receivable, mostly related to the third shipment sold (but not completed) in 2011, as well as the expected
C$80.8m recently raised (including over-allotment). We believe that the cash on hand, along with internally generated
cash flows anticipated in 2012, should be sufficient to finance working capital, expansion activities at Silver Yards and
future exploration and development. However, we note that if cash flows are below expectations (due to weak or
delayed sales, low commodity prices or high operating costs), the company may have to delay expansion plans or raise
additional capital.
Among the most likely in our coverage universe to be an acquisition target. We believe Labrador Iron Mines is a
potential acquisition target, given the company’s position as a pure-play iron ore producer with no strategic partner or
offtake agreement. In our view, the most likely acquirer is Rio Tinto through its subsidiary IOC. Labrador Iron Mines
could contribute to IOC’s aggressive long-term growth objective to target future capacity expansion to 50Mtpa or higher
Desjardins
Capital Markets
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MARCH 22, 2012
at IOC (from 26Mtpa following the current expansion). Although Labrador Iron Mines is a relatively small producer, it has
potential for growth to 5.0Mtpa in the near term as well as potential for further expansion with additional capex to
increase TSH Rail capacity. In addition, IOC is familiar with Labrador Iron Mines’ assets, given it was the original operator
in the Schefferville region (1954–82) and through its 2011 and 2012 shipping and selling agreements with Labrador Iron
Mines.
Valuation
Our primary valuation approach for Labrador Iron Mines is P/NAV; our NAV is based on a discounted cash flow analysis
(at an 8% discount rate) using the US$/C$ exchange rate and iron ore price assumptions summarized in Exhibit 2 on
page 4.
Our estimated net asset value is C$10.60/share (see Exhibit 8). We apply a 0.8x target multiple to our primary asset NAV
and a 1.0x multiple to current working capital and long-term debt to derive our one-year target price of C$8.50/share.
We believe a 0.8x multiple is appropriate in view of the company’s relative low start-up and financing risk, given it has
already demonstrated construction, production and sales.
Exhibit 8: Labrador Iron Mines net asset value details
NPV (8%) (C$m)
DSO project—NPV estimate of future cash flows
642
103
Long-term debt
-1
8
NAV
752
69.0
Options with weighted average exercise price of C$4.37/share (m)
NPV/share (C$)
1.9
70.9
10.60
Recommendation
We are initiating coverage of Labrador Iron Mines Holdings Limited with a C$8.50/share one-year target price, which
implies an expected return of 70% to the current share price. Labrador Iron Mines is our Top Pick within our coverage
universe.
Already generating cash flow. Labrador Iron Mines is the only junior in the Labrador Trough that has sold material
shipments of iron ore and that is generating cash flow. The company’s relatively quick construction period and proven
production and sales reduce the construction and start-up risk.
Near-term growth is fully financed, long-term growth is flexible. We do not anticipate that the company will need to
raise significant capital in the near term, as it had C$29.3m in cash on hand (as at December 31, 2011); along with the
recent C$80m financing and internally generated cash flows anticipated in 2012, this should be sufficient to finance
working capital and expansion activities at Silver Yards. In the long term, we believe the company’s staged approach is a
competitive advantage as expansion stages can be built as company cash flows permit and Labrador Iron Mines is free
to expand production or maintain current output levels as market demand dictates.
Takeout potential. We believe Labrador Iron Mines is a potential acquisition target, given the company’s position as a
pure-play iron ore producer with no strategic partner or offtake agreement. In our view, Rio Tinto is the most logical
acquirer given its aggressive plans to expand capacity at IOC, as well as IOC’s previous operating experience in the
Schefferville region and its existing shipping and sales arrangement with Labrador Iron Mines. A takeout could provide
additional upside to our target price and is not considered in our estimates.
Desjardins
Capital Markets
PAGE 51
MARCH 22, 2012
Risks
We have an ‘Above-average’ risk qualifier for Labrador Iron Mines.
Start-up and operating risk. There is a significant risk that the exploration, development and completion of the DSO
project could be delayed due to circumstances beyond Labrador Iron Mines’ control. Setbacks could include delays in
securing financing or in construction or commissioning.
Liquidity and financing. The development of subsequent stages of the DSO project will require additional capital, and
there is no assurance that Labrador Iron Mines will be able to finance development from internally generated cash
flows. The company may be unable to invest capital for its development and exploration programs, take advantage of
price of these products. Iron ore prices have historically been volatile and are primarily affected by numerous other
factors beyond the company’s control, including global and regional demand, political and economic conditions, and
global production volumes and operating costs.
Foreign exchange. Labrador Iron Mines is subject to foreign exchange risk because revenues will be received in US
dollars while operating costs are in Canadian dollars. Fluctuations in exchange rates, principally the US$/C$ exchange
rate, can significantly impact earnings and cash flows.
Licences and permits. The company’s exploration and development activities require permits and approvals from
obtain additional licences and permits to continue and expand its development activities and there can be no guarantee
that these licences will be obtained or maintained. There is also a risk that future legislation and regulations could result
in additional expenses in Labrador Iron Mines’ operations and in reclamation obligations, the extent of which cannot be
predicted.
First Nations land claims. Labrador Iron Mines’ operations fall within an area subject to conflicting First Nations land
claims. Although the company has signed impact benefit agreements with all recognized groups, aboriginal claims to
lands and the conflicting claims to traditional rights between aboriginal groups may have an impact on the company’s
ability to develop its deposits. Labrador Iron Mines has recognized the claims of four First Nations groups. The Labrador
Metis Nation has also asserted a land claim in parts of Labrador, which may include the Schefferville area. However, this
claim has not been accepted for negotiation by the government of Canada or Newfoundland and Labrador. Completed
agreements are as follows:
 Labrador Innu—impact benefit agreement signed in July 2008
 Naskapi Nation of Kawawachikamach—impact benefit agreement signed in September 2010
 Innu Matimekush-Lac John—impact benefit agreement signed in June 2011
 Innu Takuaikan Uashat mak Mani-Utenam—impact benefit agreement signed in February 2012
Labrador Iron Mines also reached an agreement with the NunatuKavut Community Council, which represents the
Southern Inuit of Labrador, in February 2012. The agreement addresses such matters as environmental and cultural
protection, jobs, training and aboriginal contracting.
John F Kearney, Chairman and CEO. Mr Kearney holds degrees in law and economics from University College Dublin
and an MBA from the University of Dublin (Trinity College). Mr Kearney has over 37 years of experience in the mining
industry and is active on numerous boards and management teams, including active roles in the following: Chairman
and CEO, Labrador Iron Mines; Chairman of Labrador Iron Mines’ parent company, Anglesey Mining plc; Executive
Chairman, Minco plc, a subsidiary of Anglesey Mining plc; Chairman and President, Canadian Zinc Corporation;
Chairman, Xtierra Inc.; Chairman, Conquest Resources Limited; Director, Vatukoula Gold Mines plc; Director, Avnel Gold
Mining Limited; and Director, Mining Association of Canada.
Desjardins
Capital Markets
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MARCH 22, 2012
Bill Hooley, Vice-Chairman. Mr Hooley is currently Chief Executive of Anglesey Mining plc. He is a professionally
qualified mining engineer and has over 40 years of experience in the mining industry. Previously, Mr Hooley served as
COO of Labrador Iron Mines until his retirement in 2011. He holds a degree in mining engineering from the Royal School
of Mines, Imperial College, London.
Terence McKillen, Executive Vice-President and director. Mr McKillen is a professional geologist and has over 40 years
of experience in the mining industry. He is currently President, CEO and director of Xtierra Inc. and Conquest Resources
Limited, and Chief Executive of Minco plc. He holds degrees in geology from the University of Dublin (Trinity College) and
a Master’s degree in mining geology and mineral exploration from the University of Leicester.
Rod Cooper, President and COO. Mr Cooper is a mining engineer with over 30 years of experience in the resource
industry. Prior to joining Labrador Iron Mines, Mr Cooper was a senior analyst, base metals, at Dundee Securities. He was
formerly COO of Baffinland Iron Mines Corporation, and Vice-President, Technical Services for Kinross Gold Corporation.
Mr Cooper holds a degree in mining engineering (honours) from Queen’s University and a Master’s degree in business
administration from the University of Toronto.
Desjardins
Capital Markets
PAGE 53
MARCH 22, 2012
New Millennium Iron Corp. (NML C$2.44, TSX)
World-class mine developer or just along for the ride? Initiating coverage with a Hold rating and
C$3.50 target price
Rating
Hold–Speculative
Target
C$3.50
Valuation 0.6x NAV (8%) DSO project
& 0.3x NAV (8%) taconite
and other assets
Symbol
Exchange
Sector
NML
TSX
Bulk Commodities
President & CEO Dean Journeaux
Website
www.nmliron.com
Share price
C$2.44
Potential return
43%
52-week range
C$1.00–3.60
3m volume traded
474,000
1m volume traded
532,000
Shares O/S*
176m
Dividend yield
Reported cash*
Cash/sh*
Current market cap
Current EV
0%
C$17m
C$0.10
C$0m
C$0.84
C$414m
C$327m
DSO
76Mt at 58.5% Fe
KéMag
3,462Mt at 31.2% Fe
LabMag
5,741Mt at 29.5% Fe
 The company’s long-term relationship with Tata Steel limits upside for New Millennium shareholders
 We are initiating coverage with a Hold–Speculative rating and C$3.50/share target price
Highlights. New Millennium is working to advance its properties in the Schefferville region, including its direct shipping
ore (DSO) project, the KéMag and LabMag taconite projects, and additional prospective exploration targets. New
Millennium’s joint venture partner, Tata Steel, holds an 80% interest in the DSO project and an option to acquire a 64%
stake in the KéMag and LabMag taconite projects, subject to positive feasibility study results. Tata Steel also holds a
26.8% equity interest in New Millennium.
Valuation. Our valuation is based on a 0.6x target multiple applied to our NAV for the DSO asset and a 0.3x multiple to
our NAV for the taconite and exploration assets. We believe these multiples are appropriate, given the relatively short
time to production of the DSO project and the relatively high risk of construction delays and capital cost overruns for the
taconite projects.
Recommendation. We are initiating coverage of New Millennium Iron Corp. with a Hold–Speculative rating and
C$3.50/share target price, which implies an expected return of 43% to the current share price. We have applied a Hold
rating for two primary reasons. First, production and positive cash flows from New Millennium’s taconite projects, which
make up approximately 87% of our NAV estimate, are several years away and are at high risk of construction delays or
capital cost overruns. Second, the company’s close relationship with Tata Steel could limit upside to New Millennium
shareholders as Tata Steel is expected to exercise its option to acquire a 64% ownership stake on positive feasibility study
results.
4
New Millennium fully financed NAV estimate
3
Asset (C$m)
2
1
Volume (m)
* As at September 30, 2011
 New Millennium owns low-cost, large-volume deposits with both near-term and long-term production
potential
Price (C$)
0
3
2
1
0
Mar-11
Source: Bloomberg
Jun-11
Sep-11
Dec-11
Feb-12
Direct shipping ore
NPV multiple (x)
Taconite projects
Other assets
NPV multiple (x)
NAV
NAV/share (C$)
NPV (8%)
NPV (10%)
163
0.60
1,965
10
0.30
79
0
-140
10
176
189
2,086
11.04
148
0.60
1,586
10
0.30
79
0
-129
10
176
189
1,703
9.02
Desjardins
Capital Markets
PAGE 54
MARCH 22, 2012
Company overview
Multiple projects in the pipeline. New Millennium’s asset portfolio includes high-grade direct shipping ore (DSO)
deposits, the KéMag and LabMag taconite deposits, and several prospective regions that are believed to hold additional
taconite resources (see Exhibit 2 for a summary of currently defined reserves and resources (100% basis)). We assume the
US$500m (100% basis) DSO project will produce approximately 4Mtpa ore (100% basis), with production beginning in
late 2012. The US$5.8b (100% basis) taconite projects will likely produce 22Mtpa (100% basis), with production beginning
in 2017.
Partnership with Tata Steel a long-term relationship. New Millennium has partnered with Tata Steel to develop its
assets. Tata Steel has signed a joint venture agreement for the DSO project, and will contribute the first C$300m toward
development of the project in exchange for an 80% ownership stake. Tata Steel also has an option to acquire a 64% stake
in the taconite projects, which we expect it will exercise in 1H13. Tata Steel also has a 26.8% equity interest in New
Millennium.
Although New Millennium’s deposits have potential for significant future production volumes, we expect the company
will ultimately hold a ‘small piece’ of the ‘big pie’ as ownership of its assets is transferred to Tata Steel in exchange for
project financing. As the majority owner of the projects and likely sole offtaker, we expect Tata Steel will have control
over the future of the developments. In our view, Tata Steel could defer development of the taconite deposits due to
unfavourable feasibility study results, poor steel market conditions, the availability of lower cost alternative supplies or if
Tata Steel cannot secure project financing.
Exhibit 1: New Millennium asset locations
Desjardins
Capital Markets
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MARCH 22, 2012
Exhibit 2: Total estimated iron ore reserves and resources (100% basis)
Proven & probable
reserves
Tonnes (m)
% Fe
DSO
64
58.8
KéMag
2,141
LabMag
3,545
Total taconite
5,686
resources
Tonnes (m)
% Fe
Inferred
resources
Tonnes (m)
% Fe
Historical (not
NI 43-101–compliant)
Tonnes (m)
% Fe
5
58.9
7
55.9
40
NA
31.2
307
31.3
1,014
31.2
-
-
29.6
1,045
29.5
1,151
29.3
-
-
30.2
1,352
29.9
2,165
30.2
-
-
 Resource estimate on exploration targets Lac Ritchie and Perrault Lake expected in 2Q12
 Completion of construction of the DSO project expected by 4Q12
 Production from the DSO project expected to start in 1Q13
 Completion of KéMag and LabMag feasibility study expected in 4Q12
 Tata Steel expected to exercise its right to acquire a 64% stake in KéMag and LabMag in 2Q13–3Q13
 Construction of the taconite projects expected to start in late 2013
 Production at KéMag and LabMag expected to start in early 2017
Direct shipping ore
Tata Steel is majority owner of the DSO project and New Millennium’s strategic partner. Tata Steel acquired an 80%
interest in the DSO project in September 2010. In exchange, Tata Steel agreed to reimburse New Millennium for 80% of
the cost of the feasibility study and to arrange debt and/or equity funding for up to C$300m of the capital cost of the
project (similar to New Millennium’s estimated total cost to build the project but below our estimate of approximately
C$500m). Tata Steel has also committed to purchasing 100% of DSO iron ore production at market prices for the life of
the mining operation.
Processing DSO is relatively simple. New Millennium’s facility will comprise crushing, washing, screening, and gravity
and magnetic separation processes to upgrade the iron content of the ore. Due to the nature of DSO, the processing
required to prepare it for sale is relatively simple in comparison with the processing required for meta-taconites and
taconites found elsewhere in the Labrador Trough. For this reason, we expect operating costs will be among the lowest
in our coverage universe, with long-term operating costs expected to total US$48/t (see Exhibit 3).
Exhibit 3: Expected long-run cash operating costs at New Millennium’s DSO project
(US$/t ore)
Mining
Transport/loading
11.50
6.00
28.50
G&A
2.00
Total
48.00
The first phase of construction includes development of the deposits in DSO Areas 2 and 3 (as illustrated in Exhibit 1),
construction of the plant and installation of a 26km rail spur to connect the plant site to the main Tshiuetin Rail
Transportation (TSH Rail) line. We expect that Phase 1 construction will be completed for production start-up in early
2013 (according to the construction timeline in Exhibit 5), and that the capital cost of Phase 1 will total approximately
C$425m.
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MARCH 22, 2012
Quick construction for start-up early next year. Camp construction began in July 2011 and long-lead-time equipment
is on order. The concrete foundation and dome structure that will form the base of the beneficiation plant are being
fabricated at manufacturers’ locations and will be delivered to site. Ramp-up to full production should be relatively
quick (assuming construction is completed on time), given that the first orebodies to be mined are essentially prestripped. New Millennium noted on February 8, 2012 that construction was on track for production to begin in late 2012
as outlined in the JV partners’ project timeline shown in Exhibit 6. We are anticipating first sales from the project in
1Q13, essentially in line with the target schedule.
Exhibit 4: DSO project camp construction (September 2011)
Exhibit 5: Expected capital cost at New Millennium’s DSO project
(US$m)
Phase 1
Phase 2
Total
425
75
500
Phase 2 greenfield development to follow. The second phase of development includes preparation of deposits in DSO
Area 4 (as illustrated in Exhibit 1) and construction of a 38km haul road to connect the Area 4 deposits to the Phase 1
facilities. Phase 2 represents the most significant opportunity for DSO production as about 75% of the DSO reserves lie in
Area 4 (according to New Millennium company estimates). We expect construction of Phase 2 to take one year and
estimate the capital cost of Phase 2 at approximately C$75m.
Exhibit 6: Joint venture partners’ proposed project timeline
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MARCH 22, 2012
Rail and port. The company plans to ship ore to Sept-Îles via the TSH Rail and the Québec North Shore & Labrador
Railway. At Sept-Îles, the ore will be carried by Cliffs Natural Resources’ Arnaud Railway to its shiploading facilities at the
Pointe-Noire terminal.
New Millennium has signed an agreement with the Port Authority of Sept-Îles for the shipment of DSO products at the
authority’s dock at Pointe-Noire, which is currently used to ship ore from Cliffs’ Scully mine. Negotiations with Cliffs are
ongoing with regard to the use of its stockpile facilities and stacker/reclaimer equipment; we expect an agreement to be
completed before production begins at the DSO project.
Taconite projects
New Millennium currently holds a 100% interest in the KéMag property in Québec and an 80% interest in the LabMag
property in Labrador. The First Nations group, Naskapi Nation of Kawawachikamach (NNK), has a 20% free-carry interest
on LabMag.
We expect that Tata Steel will exercise its option to acquire a 64% ownership stake in the assets. Tata Steel is working with
New Millennium on the feasibility study at KéMag and LabMag, and will contribute 64% of the total cost of the feasibility
study (expected to be approximately C$50m). Under an agreement signed in March 2011, Tata Steel has an option to
acquire a 64% ownership stake in the taconite deposits. In exchange, Tata Steel will arrange financing for up to C$4.85b
toward development of the projects. New Millennium will have an option to acquire a 16% equity interest in addition to
a 20% free-carry equity interest. New Millennium could also have future opportunity to increase its ownership stake to
40% (from 36%) as the company will have the right of first refusal to acquire up to 4% of paid equity. NNK will continue
to hold a 20% free-carry interest in New Millennium’s equity stake in the LabMag deposit.
A long-term project. We expect the feasibility study will be completed in late 2012; Tata Steel has four months from
completion of the study to make its investment decision. Construction on the KéMag and LabMag project is expected to
begin in late 2013 following a positive investment decision by Tata Steel. We believe Tata Steel could request extensions
to the current deadline as it did during negotiations for the DSO project; we have therefore factored in a six-month delay
in our estimated project timeline. We expect that production from the taconite projects will begin in early 2017.
We envision that the KéMag and LabMag deposits will be built into a 22Mtpa pellet producer. We expect a concentrator
will be built onsite and that concentrate produced at the site will be pumped through an ore transmission pipeline to a
pellet plant that will be constructed near the future multi-user port at Pointe-Noire. Pipeline transmission is expected to
be significantly more economical than rail haulage. We estimate that transportation (including pipeline and port loading
costs) will total approximately US$8/t in the long term, compared with US$18/t to transport taconites from Adriana
Resources’ Lac Otelnuk deposit.
A combined taconite project is the most likely scenario. The most recently published KéMag (2009) and LabMag
(2006) prefeasibility studies proposed separate and independent development of the two deposits, with standalone
mining operations, concentrators, slurry pipelines and pellet plants. However, we speculate that the upcoming feasibility
study will re-imagine the projects as a joint development. We believe that project economics would be significantly
improved if KéMag and LabMag are combined into a single 22Mtpa operation as redundancies in the concentrator,
pellet plant and 600–700km slurry pipeline could be reduced or eliminated. We have estimated the project size at
22Mtpa as we believe the project will be designed to meet Tata Steel’s European iron ore requirements to avoid selling
ore on the open market. We expect that the planned 22Mtpa output will be entirely purchased by Tata Steel at market
rates.
Development of the taconite projects will require significant infrastructure, which we estimate will cost approximately
C$5.8b (100% basis). We expect that a combined KéMag and LabMag operation would include a 22Mtpa concentrator at
the minesite, a slurry pipeline to transport concentrate to processing facilities at Pointe-Noire, a 22Mtpa pellet plant and
a shiploading facility at the new multi-user port at Pointe-Noire. Please see Exhibit 7 for a summary of our capital cost
assumptions.
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MARCH 22, 2012
Exhibit 7: Expected capital cost at New Millennium’s taconite projects
(US$m)
Mine
300
1,200
Pellet plant
1,700
Pipeline
1,450
Port
400
Power
300
Other
410
Total
5,760
Competitive operating costs. Pipeline transmission of taconite concentrates is expected to result in meaningful cost
savings relative to traditional rail transportation. As illustrated in Exhibit 8, we estimate that the taconite projects could
operate at long-run unit costs of approximately US$46/t, which is expected to be competitive vs other pellet producers in
Canada.
Exhibit 8: Expected long-run cash operating costs at New Millennium’s taconite
projects
(US$/t pellets)
Mining
10.30
10.00
Pelletizing
16.00
Transport/loading
8.00
G&A
2.00
Total
46.30
Exploration targets
The Millennium Iron Range, where the DSO and KéMag and LabMag taconite deposits were discovered, continues to be
highly prospective. Only 10% of the 210km range has been fully explored to date.
A 2010 airborne magnetometer survey identified several potential exploration targets. The company selected two
properties, Lac Ritchie and Perrault Lake, for its initial drilling program in 2011. New Millennium also completed an
exploration drill program at the Lac Ritchie property in 2011 and is currently working on a resource estimate, which is
expected to be released in 2Q12.
We currently ascribe a nominal value of C$10m for exploration assets in our net asset value estimate. Any future
deposits discovered by New Millennium, including Lac Ritchie and Perrault Lake, will be 100% owned by New
Millennium and are not included under its current agreements with Tata Steel. Should New Millennium choose to
develop these potential future deposits, the company could form a joint venture or sell an offtake agreement to Tata
Steel or another potential partner.
Capital structure
New Millennium Iron Corp. is listed on the Toronto Stock Exchange under the symbol ‘NML’. As at September 30, 2011,
the company had approximately 176.2m shares issued and outstanding, and 12.7m options and warrants outstanding.
Tata Steel is New Millennium’s largest shareholder with a 26.8% equity stake; individuals and insiders hold a further 3.3%
of the shares outstanding.
Tata Steel is a close partner as well as New Millennium’s largest shareholder. Tata Steel also acts as joint venture
partner with New Millennium on the DSO project. In exchange for an 80% stake in the project, Tata Steel agreed to
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MARCH 22, 2012
arrange financing for up to C$300m toward development and construction costs. Tata Steel also reimbursed New
Millennium for 80% of the cost of the feasibility study. Tata Steel is also working with New Millennium on a feasibility
study at the KéMag and LabMag properties. We believe Tata Steel will exercise its option to acquire a 64% ownership
interest in the assets, in which case it will arrange financing for its proportionate share of the capital costs, including New
Millennium’s 20% free-carry interest.
About Tata Steel. Established in 1907, Tata Steel is one of the world’s largest steel companies, with current crude steel
capacity of 28Mtpa and plans to increase production to 40Mtpa by 2020. Tata Steel is one of the world’s most
geographically diversified steel producers with operations in 26 countries, including a significant presence in Europe as a
result of its acquisition of UK-based Corus Steel in 2007.
Valuation
Our primary valuation approach for New Millennium is P/NAV; our NAV is based on a discounted cash flow analysis (at
an 8% discount rate) using the US$/C$ exchange rate and iron ore price assumptions summarized in Exhibit 2 on page 4.
Our estimated net asset value is C$11.04/share (see Exhibit 9) after an assumed C$100m financing for the company’s
share of development costs for the DSO and taconite projects. New Millennium’s NAV is based exclusively on the iron ore
assets it holds in the region of Schefferville, Québec. We have applied a 0.6x target multiple to the DSO assets, a 0.3x
multiple to the taconite and exploration assets, and a 1.0x multiple to current working capital to derive our target price
of C$3.50/share. We believe these multiples are appropriate based on our perceived relative risk of the assets (given the
expected capital cost, time to production and other factors).
Exhibit 9: New Millennium net asset value details
NPV (8%) (C$m)
DSO project—NPV estimate of future cash flows attributable to NML
Taconite project—NPV estimate of future cash flows attributable to NML
Exploration properties—estimated current value to NML
163
1,824
10
79
10
Total capital expenditure requirement (attributable to NML)
100
100
0
NAV
2,086
176.2
12.7
188.9
NPV/share (C$)
11.04
Recommendation
We are initiating coverage of New Millennium Iron Corp. with a Hold–Speculative rating and C$3.50/share one-year
target price, which implies an expected return of 43% to the current share price.
Once Tata Steel exercises its option to acquire the majority stake in the KéMag and LabMag projects, New Millennium
will hold minority stakes in each of its known deposits. We caution that reliance on Tata Steel could be a risk. In our
view, Tata Steel could defer development of the taconite deposits due to unfavourable feasibility study results, poor steel
market conditions, the availability of lower cost alternative supplies or if Tata Steel cannot secure project financing. We
estimate that the development cost of the taconite deposits will total C$5.8b, which implies a C$3.7b cost to Tata for a
64% stake in the projects.
Desjardins
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MARCH 22, 2012
Risks
We have a ‘Speculative’ risk qualifier for New Millennium.
Start-up and operating risk. There is a significant risk that the exploration, development and completion of the DSO or
taconite iron ore projects could be delayed due to circumstances beyond New Millennium’s control. Setbacks could
include delays in securing financing or in construction or commissioning.
Liquidity and financing. The development of the projects, particularly KéMag and LabMag, will require significant
capital, and there is no assurance that New Millennium will be able to obtain sufficient financing at favourable rates.
New Millennium may be unable to invest capital for its development and exploration programs, take advantage of
price of these products. Iron ore prices have been volatile historically and are primarily affected by the demand for, and
Foreign exchange. Once in production, New Millennium will be subject to foreign exchange risk as revenues will be
Licences and permits. The company’s exploration and development activities require permits and approvals from
obtain additional licences and permits to continue and expand its development activities, and there can be no
guarantee that these licences will be obtained or maintained. There is also a risk that future legislation and regulations
will result in additional expenses in New Millennium’s operations and in reclamation obligations, the extent of which
First Nations land claims. New Millennium’s DSO and taconite projects fall within an area subject to conflicting First
Nations land claims. Aboriginal claims to lands and the conflicting claims to traditional rights between aboriginal groups
could have an impact on the company’s ability to develop the properties. New Millennium and Tata Steel are engaged in
discussions with four First Nations groups affected by the projects:
 Naskapi Nation of Kawawachikamach—impact benefit agreement for the DSO project signed in June 2010
 Innu Matimekush-Lac John—impact benefit agreement for the DSO project signed in June 2011
 Labrador Innu—impact benefit agreement for the DSO project signed in November 2011
 Innu Takuaikan Uashat mak Mani-Utenam—impact benefit agreement for the DSO project signed in February 2012
Lee CG Nichols, Chairman. Mr Nichols has over 42 years of experience in the mining industry. Since 1963, Mr Nichols
has worked for the Iron Ore Company of Canada, Syncrude Canada Ltd. and Luscar Ltd. in various engineering roles
including Chief Mine Engineer. Since 1983, he has been the President of Terracon Geotechnique Ltd., a private
consulting company. Mr Nichols received a Bachelor of Science and Engineering (Engineering Geology) from Queen’s
University in 1966. He is a Registered Professional Engineer and Professional Geologist in the province of Alberta and
British Columbia.
Dean Journeaux, President, CEO and director. Mr Journeaux became President and CEO of New Millennium on
July 1, 2011 and continues as a director. He was most recently COO, a post he had held since 2008; he has been involved
with the company from its inception in 2003. Mr Journeaux has over four decades of experience in the mining industry
and has held various engineering, operations and management positions with Québec Cartier Mining Company and
Met-Chem Canada Inc., both of which were US Steel subsidiaries at the time. Mr Journeaux received a Bachelor of
Engineering (Mining) from McGill University in 1960. He is a Member of the Ordre des ingénieurs du Québec (retired
Desjardins
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MARCH 22, 2012
category), a member of the Association of Iron and Steel Engineers and a Fellow of the Canadian Institute of Mining,
Metallurgy and Petroleum.
Mark Freedman, CFO. Mr Freedman, CA, was appointed CFO of New Millennium in 2011; he had been acting as interim
CFO since 2008. Mr Freedman has been a partner of the Montréal-based accounting firm Roll Harris & Associés since
2001. Mr Freedman obtained his graduate diploma in Public Accountancy from McGill University in 1993 and has been
a member of the Ordre des comptables agréés du Québec since 1994.
Bish Chanda, Senior Vice-President, Marketing & Strategy. Mr Chanda has been with the company since its inception.
He has over 40 years of experience, with over 35 years in iron ore. He worked for 25 years with the Iron Ore Company of
Canada, where he held various technical and senior management positions in engineering, and process and quality
improvements. In 1997, Mr Chanda became an independent consultant and was involved internationally in the iron ore
development field. Mr Chanda received his Bachelor of Technology in Civil Engineering from the Indian Institute of
Technology, Kharagpur, in 1962. He is a member of both the Ordre des ingénieurs du Québec and Professional
Engineers Ontario.
Moulaye Melainine, Senior Vice-President, Development. Mr Melainine has been with New Millennium since
November 2005. He has over 31 years of experience in the iron ore sector in operations, planning and management.
From 1979–87, he was the Head of the Mining Division and later Corporate Comptroller of Société Nationale Industrielle
et Minière (SNIM), the Mauritanian state-owned iron ore producer. Mr Melainine then worked for 10 years on numerous
international projects as a staff member of Met-Chem, the Montréal-based steel, iron ore, mining and minerals
consulting company. Prior to joining New Millennium, Mr Melainine served as Regional Vice-President of Tecsult
International Inc., an engineering consulting company based in Montréal, from 2000–05. Mr Melainine received his
degree in Mining Engineering in 1977 from École Polytechnique and his Master’s in Mineral Industry Economics in 1979
from McGill University.
Jean-Charles Bourassa, Vice-President, Mining. Mr Bourassa began his career at Québec Cartier Mining Company’s
Mont Wright iron ore project in 1972. He was transferred to Met-Chem Canada Inc. in 1976 to be part of its mine
development team for the Kudremukh Iron Ore Company Ltd.’s iron ore project in India, which focused on the
development of mining, concentration, slurry pipeline and port facilities. As an employee of Met-Chem Canada Inc. he
served as Assistant Project Manager (1980–82) and as Production Manager (1982–84) for the National Iron Ore Company,
a producer of washed natural ores (similar to those at New Millennium’s DSO project) in Liberia. A 1972 graduate of
École Polytechnique with a BSc in Mining Engineering (Honours), Mr Bourassa is also a member of the Ordre des
ingénieurs du Québec and a CIM fellow.
Ernest Dempsey, Vice-President, Investor Relations & Corporate Affairs. Mr Dempsey joined New Millennium in 2011
as Vice-President, Investor Relations & Corporate Affairs, bringing more than 35 years of international experience in all
commercial aspects of the iron ore industry. He most recently served as Vice-President of Sales & Marketing for
Mitsubishi Development Pty. Ltd.’s 50%-owned Crosslands Resources Ltd. iron ore joint venture in Perth, Western
Australia. He held the same position at Iron Ore Company of Canada from 1997–2004, and subsequently represented
Rio Tinto’s iron ore businesses in Europe. Earlier in his career, Mr Dempsey was with US-based mining companies
Cleveland Cliffs Inc. (now Cliffs Natural Resources Inc.) and Pickands Mather & Co., where his roles included commercial
responsibilities in Canadian iron ore. Mr Dempsey received a Bachelor of Arts in History and French (dual major) from
the University of Virginia in 1973 and an MBA from John Carroll University in Cleveland, Ohio, in 1983.
Desjardins
Iron ore
Capital Markets
PAGE 62
MARCH 22, 2012
DISCLOSURES
Distribution of ratings
Rating
category
Desjardins
rating
Desjardins coverage
universe (# of stocks)
%
distribution
Desjardins Investment
Banking (# of stocks)
%
distribution
Buy
Hold
Sell
Total
Top Pick/Buy
Hold
Sell
118
28
2
150
79
19
2
100
36
10
2
48
75
21
4
100
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Disclosures for issuers discussed in this publication
Adriana Resources Inc.: 7b, 13
Labrador Iron Ore Royalty Corporation: 7b, 13
Alderon Iron Ore Corp.: 7b, 13
Labrador Iron Mines Holdings Limited: 7b, 13
Champion Minerals Inc.: 1, 7b, 13
New Millennium Iron Corp.: 1, 7b, 13
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Desjardins
Iron ore
Capital Markets
PAGE 63
MARCH 22, 2012
STOCK RATING SYSTEM
Top Pick
Desjardins’ best investment ideas – stocks
that offer the best risk/reward ratio and
that are expected to significantly
outperform their respective peer group*
over a 12-month period
Buy
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outperform their respective
peer group* over a 12month period
Hold
perform in line with their
respective peer group* over a
12-month period
Sell
underperform their
respective peer group* over
a 12-month period
Not Rated
Stock is being
covered exclusively
on an
informational basis
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Risk represented by the stock is in line with its peer
group* in terms of volatility, liquidity and earnings
predictability
Above-average Risk
Risk represented by the stock is greater than that
of its peer group* in terms of volatility, liquidity
and earnings predictability
Speculative
High degree of risk represented by the stock,
marked by an exceptionally low level of
predictability
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(514) 985-3576
Jeremy Rosenfield, CFA, Associate
(514) 985-1862
Chase Bethel, CFA, Associate
Materials
ed.sollbach@vmd.desjardins.com
deep.jaitly@vmd.desjardins.com
philippe.gear@vmd.desjardins.com
Consumer Discretionary
keith.howlett@vmd.desjardins.com
chase.bethel@vmd.desjardins.com
(416) 607-3012
Financial
Banks & Diversified Financials/Insurance
Michael Goldberg, CFA
(416) 607-3018
benoit.poirier@vmd.desjardins.com
etienne.durocher-dumais@vmd.desjardins.com
david.rochow@vmd.desjardins.com
jeremy.rosenfield@vmd.desjardins.com
Oil & Gas
Tim Murray, CFA
tim.murray@vmd.desjardins.com
(403) 532-6611
Josie Ho, Associate
(403) 532-6615
Allan Stepa, P.Eng.
(403) 532-6613
Chris MacCulloch, Associate
(403) 532-6617
josie.ho@vmd.desjardins.com
allan.stepa@vmd.desjardins.com
chris.macculloch@vmd.desjardins.com
jenny.ma@vmd.desjardins.com
Maher Yaghi, CMA, CFA
(514) 281-8664
Matthew Logan, CFA, Associate
(416) 607-3024
maher.yaghi@vmd.desjardins.com
matthew.logan@vmd.desjardins.com
Utilities
(514) 985-1862
(416) 607-3092
Production
Aleem Ladak, Associate
(416) 607-3080
karen.voon@vmd.desjardins.com
Paul Medici, Associate
(416) 607-3027
Precious Metals
Brian Christie
(416) 607-3013
Brendan McCormack
(416) 607-3025
Heather Snow
(416) 607-3081
Translation
aleem.ladak@vmd.desjardins.com
brian.christie@vmd.desjardins.com
Chris Martino, Associate
chris.martino@vmd.desjardins.com
Adam Melnyk, P.Eng.
adam.melnyk@vmd.desjardins.com
Karen Voon, Head of Production
(416) 607-3014
Simon Dukes
(416) 607-3016
marigold.demesa@vmd.desjardins.com
simon.dukes@vmd.desjardins.com
(416) 607-3026
brendan.mccormack@vmd.desjardins.com
(416) 607-3029
heather.snow@vmd.desjardins.com
Johanne Chevalier, C. Tr.
Administration
(416) 607-3015
Christine Wise
(514) 281-2313
tonia.dicenso@vmd.desjardins.com
Mathieu d’Anjou, CFA
Benoit P Durocher
Francis Généreux
(514) 281-4389
Tonia Di Censo
christine.wise@vmd.desjardins.com
François Dupuis, Vice-President & Chief Economist
Yves St-Maurice, Senior Director & Deputy Chief
Economist
(416) 607-3031
Marigold de Mesa
johanne.chevalier@vmd.desjardins.com
www.desjardins-securities.ca
http://strategy.vmd.ca
Desjardins Economics
(416) 607-3028
Jeremy Rosenfield, CFA
paul.medici@vmd.desjardins.com
Energy
Jenny Ma, CFA
(416) 607-3021
john.hughes@vmd.desjardins.com
Pooya Hemami, CFA
pooya.hemami@vmd.desjardins.com
(514) 281-4231
jackie.przybylowski@vmd.desjardins.com
(514) 985-7574
david.rochow@vmd.desjardins.com
Pierre Lacroix, CFA
Metals & Mining/Fertilizers
John Hughes
michael.goldberg@vmd.desjardins.com
Stefanie Lau, Associate
(416) 607-3023
stefanie.lau@vmd.desjardins.com
Healthcare
(514) 281-8653
(514) 281-4231
Jimmy Jean
Hendrix Vachon
(514) 281-2336
desjardins.economics@vmd.desjardins.com
Equity Capital Markets
Sales
Paul Pint, CA, Head of Sales
(416) 867-7590
Robert Dennison
(604) 656-2665
Simon Dionne, Analyst
(514) 985-5064
paul.pint@vmd.desjardins.com
robert.dennison@vmd.desjardins.com
simon.dionne@vmd.desjardins.com
Trading
Fabienne Evans
(416) 867-3580
Chung Kim
(416) 867-3581
Stephen Lloyd, CFA
(416) 867-3598
fabienne.evans@vmd.desjardins.com
chung.kim@vmd.desjardins.com
stephen.lloyd@vmd.desjardins.com
André Pagé
(514) 281-2291
Wolfgang Rosner
(514) 281-8632
Paul Sun, PEng, CFA
(416) 867-1404
andre.page@vmd.desjardins.com
wolfgang.rosner@vmd.desjardins.com
paul.sun@vmd.desjardins.com
Felix Bélanger
(514) 985-5072
Meiwen Gouadec
(416) 867-3423
Michael Nicholishen
Eric Bouchard
(514) 985-1889
David Lailey
(416) 867-8612
Mel Peralta
Peter Byrne, Liability Trading
(416) 867-2260
François Laplante, Head of Liability Trading (514) 281-7707
Jose Estevez
(416) 867-2266
felix.belanger@vmd.desjardins.com
eric.bouchard@vmd.desjardins.com
peter.byrne@vmd.desjardins.com
jose.estevez@vmd.desjardins.com
Administration
meiwen.gouadec@vmd.desjardins.com
david.lailey@vmd.desjardins.com
francois.laplante@vmd.desjardins.com
Reid McGregor
reid.mcgregor@vmd.desjardins.com
(416) 867-1232
(416) 867-3436
michael.nicholishen@vmd.desjardins.com
(416) 867-1710
mel.peralta@vmd.desjardins.com
John Shingler, Associate
(416) 867-3757
john.shingler@vmd.desjardins.com
Pierre-Olivier Tardif
(514) 281-8771
pierre-olivier.tardif@vmd.desjardins.com
Lindsay Booth (Sales)
(416) 867-3586
Jo-Ann Deguire
(514) 281-7251
Meni Stoikos
(416) 867-3586
Yasmina Borki (Trading)
(416) 867-2262
Angela Di Pede (Trading)
(416) 867-1465
Rick Sturch
(416) 867-3594
Marie-Eve Boulé
(514) 281-2894
Jay Peralta (Trading)
(416) 867-1888
Angelique Welsch
(514) 985-1844
David Paul
(416) 867-3772
Alex Somjen
(416) 867-3751
lindsay.booth@vmd.desjardins.com
yasmina.borki@vmd.desjardins.com
marie-eve.boule@vmd.desjardins.com
Preferred Shares
John Nagel, Vice-President
john.nagel@vmd.desjardins.com
(416) 867-3535
jo-ann.deguire@vmd.desjardins.com
angela.dipede@vmd.desjardins.com
jay.peralta@vmd.desjardins.com
david.paul@vmd.desjardins.com
meni.stoikos@vmd.desjardins.com
rick.sturch@vmd.desjardins.com
angelique.welsch@vmd.desjardins.com
alex.somjen@vmd.desjardins.com

Desjardins - Adriana Resources Inc.

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