19 December 2013 Iron Road Limited (ASX: IRD) Hold INITIATION REPORT: Paving the Road to Feasibility $0.275 Lachlan Rutherford PhD MBA Investment Highlights +618 8217 3900 [email protected] • Iron Road Ltd (ASX: IRD) is assessing the development of magnetite iron resources in the Gawler Craton region of South Australia. Capital Summary • Flagship Central Eyre Iron Project (”CEIP”) has a JORC Total Mineral Resource of 3.7Bt @ 16% Fe at Warramboo. Issued Capital: 581.9m ords 3.3m opts • In addition to the Mineral Resource, an Exploration Target of 8–17 Bt @ Share Price (19/12/13): $0.275 14–20% Fe has been identified elsewhere within the CEIP. 52 week low/high: $0.15 / $0.355 • Metallurgical test work has demonstrated that a high-grade 67% Fe Market Capitalisation: $160.0m magnetite concentrate can be produced at a relatively coarse grind Market Capitalisation (dil.1): $160.9m size (>-130µm). Cash (30/09/13): $51.96m • Resource is amenable to low cost, open pit bulk mining methods. 2 Enterprise Value : $108.1m Preliminary operating cost estimate of A$59/dmt is in the second 1 Fully diluted. quartile of the 2013 price adjusted CFR China cost curve. 2 EV = Market capitalisation – cash + debt. • Definitive Feasibility Study (“DFS”) is assessing the production and export of 20Mtpa of magnetite iron concentrate for +20 years. Directors & Key Management • Capesize vessel capable port and rail infrastructure would be Dr Peter Cassidy Chairman scalable, allowing expansion to meet future primary industry needs of the Mr Jerry Ellis Non-executive Director region. Mr Leigh Hall AM Non-executive Director • CEIP product could be used directly in sintering and pelletising at Mr Julian Gosse Non-executive Director Chinese blast furnaces, marketed as substitute for Brazilian Fines, Mr Ian Hume Non-executive Director Pilbara Fines and Chinese domestic concentrates. Mr Andrew Stocks Managing Director • IRD is assessing expediting development and small-scale production (1– Mr Larry Ingle General Manager 2Mtpa) at the Gawler Iron Project (“GIP”) using existing rail and port Mr Lex Graefe Chief Financial Officer infrastructure. The GIP has the potential to provide IRD with cash Mr Graham Anderson Company Secretary flow in the lead up to development of the CEIP. • Preliminary DCF modelling of a 30Mtpa operation, assuming Capex of Major Shareholders* $4.5b and an iron ore price of US$105/t FOB, generates a post-tax NPV10 (unlevered; non-risked) of A$275m with an IRR of 11%, Sentient Group 423,949,051 72.85% equating to a NPV/share (fully diluted) of A$0.47. National Nominees Ltd 33,109,178 5.69% HSBC Custody Nom. Aust. Ltd 15,619,565 2.68% • Company has a strong Board and Management able to take the CEIP SANBA II Inv Company 9,861,112 1.69% into final investment decision and development. It also has good ongoing support from major shareholder Sentient Group. Gothic Corp. 6,091,844 1.05% • Company is adequately funded to complete DFS in late CY2013, * Directors & Management hold 3%. scheduled for release in Q1 CY14. Share Price Graph (A$) 0.45 900,000 Our View Trade Volume (RHS) IRD $ (LHS) Iron Road has been systematically de-risking the CEIP over the past XSR (x10,000; LHS) few years with extensive technical studies covering all mining and infrastructure components of the project. The physical and chemical 0.30 600,000 qualities of the CEIP magnetite concentrate are unparalleled in the Australian magnetite iron ore sector, providing the CEIP product with sustainable competitive advantages relative to competitors’ products. The remaining key components of the CEIP, including the DFS and 0.15 300,000 Joint Venture agreement(s) incorporating financing and off-take, are viewed as the key price drivers for Iron Road in the next 12 months. Favourable outcomes in these areas offer the potential for re-rating. Until further clarity surrounding these components is provided by the 0.00 0 company, we recommend Iron Road Limited as a Hold. Iron Road Limited Page 2 of 18 Table of Contents Company Overview………….….…….…………...………………….….…....…..….……..…..…… 3. Background Information…….….….….….……..………...….………..………...……..……....…… 4. Geology & Magnetite Resources.….….….….….….………….…..….…………………..… 4. Warramboo Gneiss…….….….….….….……….…………………....….…....……. 4. Key Project – Central Eyre Iron Project……..….….……….…........…........….……………..…… 5. Mineralisation Style……………………………...……….……….…..…………………..…… 5. Mineral Resource……………………………..……...…………....…………….………..…… 6. Processing and Metallurgical Properties….....……...…..….…..….....….………........…… 7. Feasibility Studies……………….………….….…...………….…….………….……..……… 8. Definitive Feasibility Study (DFS)…………………….…….….….….….…....……. 9. Regulations & approvals……….…………………....................…………………… 9. Capital cost estimate….….…………….….….….…..….…...….…………………… 9. Operating cost estimate…….………..……….….…..….…...……………………… 9. Marketing…….….….……..….….………………..…………..……………………… 9. Indicative operating cash flow……………….……..………….….….….…...……… 9. Infrastructure………………………………….…………………………………….…..…….… 10. Port & Rail….……………………….................….….…....….…………….….….…. 10. Power & Water………….…..…..…….……………....……….….........................… 10. Gawler Iron Project……….……....……......………….....….…..…..….…..….….……..……...….… 11. Boomer Prospect……….……..………..…….….........….………….……….…...…..……… 12. Scoping Study….….…………..………..…….….........….………….……….…...…..……… 13. Conceptual Financial Analysis………..…….…….………..……….………………….….……..… 13. CEIP Project Valuation…….….….….…………....….………….…………...…….………… 13. Sensitivity analysis……………….………..……….…….…………....……………… 14. 2013-2014 Key Milestones….…….….….….….….……..…………...…….……….....…………..… 15. Corporate……………….……………..….….……..……..…...………..…………....……..………..… 15. Board and Management……………………..….….……..…….…..…….…………....…………..… 15. Investment Risks………….………......……..….….………..…..…..……………....……………..… 15. Recommendation………….…….…..….…..….…………..……….….………….....……….……..… 16. Board of Directors & Key Management……………….…….……..…..…..…..…………….….… 17. Taylor Collison Limited 19 December 2013 Iron Road Limited Page 3 of 18 Company Overview Iron Road Limited (“Iron Road” or “The Company”) is an ASX listed resource company with a focus on magnetite gneiss iron ore deposits in South Australia. Iron Road’s flagship project is the Central Eyre Iron Project (“CEIP”) which is located on the Eyre Peninsula, ~330km NW of Adelaide near the regional town of Wudinna (Fig. 1). The Definitive Feasibility Study currently underway on the CEIP is evaluating the development of a large-scale mine and ore treatment facility augmented by scalable rail and export facilities. The CEIP has a JORC compliant Total Mineral Resource of 3.7Bt @ 16% Fe, including 2.7Bt in the Measured and Indicated Resource categories. Mineralisation is coarse-grained, shallow, continuous and compositionally consistent over more than 6km of strike length. This makes it amenable to large-scale, open pit mining methods. The existing Mineral Resource defined for the CEIP offers the potential for an operating mine life in excess of 30 years. There is ample scope to increase the potential mine life as the Company has identified a conceptual exploration target of 8–17Bt at 14–20% Fe of magnetite gneiss. Iron Road has determined that treatment of the magnetite gneiss ore by conventional crushing, milling and magnetic separation can produce a premium magnetite concentrate containing ~67% Fe at the relatively coarse grainsize of -106µm (p80). The Company is also assessing the potential to incorporate a gravity circuit into the processing facilities after the rough magnetic separation stage. This would separate relatively coarse (up to -200µm) iron ore prior to finer grinding and final magnetic separation. Such a process has the potential to reduce the volume of material passing through the entire processing facilities with flow-on benefits including reductions in power consumption and infrastructure requirements. In addition, the average grain size of the concentrate could increase to >-130µm (p80) which increases the marketability of the CEIP product. Marketing studies have indicated the CEIP product can be used as a high quality blending feedstock to the international sinter market which feeds the majority of blast furnaces. The Company is currently finalising the Definitive Feasibility Study (“DFS”) for the CEIP in which it is assessing the production of 20Mtpa of magnetite concentrate, up from 12.4Mtpa being assessed in the Prefeasibility Study. Final capital expenditure (“Capex”) estimates for all aspects of the project will be detailed in the DFS. The Company has indicated that estimates on operating expenditure (“Opex”) will be similar to that in the PFS, at A$59/t FOB. This places the CEIP in a competitive position in the second quartile of the price adjusted CFR China cost curve. An important aspect of the DFS is the infrastructure component of the project which includes scalable rail and Capesize capable port facilities. The DFS is assessing a capacity of 30Mtpa for these facilities but they will be designed to be able to be expanded up to 90Mtpa. This is a critical aspect of the CEIP as it allows the owners of the rail and port to benefit from servicing other primary producers in the region. There is also potential to tap into the existing Trans-Australian railway network which would allow ~25% of Australia’s land mass access to the port. Preliminary DCF modelling of the 20Mtpa CEIP, assuming full ownership, mine life of 30 years, Capex of A$4.5b, a long-term 67% Fe iron ore price of US$105/t