🕐23.08.10 - 03:27 Uhr

Exco Resources - Shaw Stockbroking - Buy - Target Price Upgraded to $0.80




 

 

Shaw Stockbroking Research - 20.08.10

Exco Resources (EXS)- Deal Looks Imminent...Buy, A$0.80 Target Price Upgraded

It has been en eventful week for copper hopefuls in the Cloncurry district of Queensland, with Cudecos disapointing resource of 31Mt @ 0.67% Cu and 0.11g/t Au (plus cobalt credit?) seeing a 50% share price fall vs EXSs 70% price gain this month.

CDUs resource compares to EXS with 61Mt @ 0.85% Cu, 0.25g/t  Au, with a market cap still 50% of CDU.

Something is not right here, either EXS remains substantially undervalued, or CDU will find a lot more high grade ore.

We believe the former is more likely (CDU: Not Rated).

Things have moved rapidly for Exco in the last 10 days since notification of the A$5m placement to Sin-Tang out of Hong Kong.

Lion Selection Group have sold their stake, the initial 50% going to Soul Pattinson at A$0.40ps, who proceeded to buy on market taking their stake to 6.5%.

The other 50% went to existing shareholder Ivanhoe Australia (IVA) who clearly didnt want to be left out (paying A$0.435ps).

They now have 23%.

The pressure is clearly on one party to make a play for EXS, or alternatively for a deal to be struck with potential offtake partner Xstrata, which should see a handsome return to new and existing shareholders.

Both Ivanhoe and Xstrata look well placed: Xstrata have the mill, Ivanhoe are raising A$200m and have most of the exploration ground in the district, with two mines planned in the next year or so.

Exco are caught in the middle with 60Mt of high quality ore, looking for a home.

Valuation / Recommendation

We have made no earnings adjustment for EXS.

We still believe a deal with Xstrata is the best outcome for EXS shareholders, however we now believe a more hostile bid may emerge in the short term from either player, looking to take full control of the asset via either a cash or scrip bid.

Our valuation, removing our prior risk discount, is increased to A$0.80ps, a level at which we see as reasonable, and based on our valuation of an off-take (Cu at US$2.61/lb vs spot at US$3.37).

To put our valuation in perspective, Xstrata could pay up to A$1.28ps for EXS and still retain value as we believe the Cloncurry project to be worth up to twice as much to Xstrata than EXS under a tolling arrangement (as Xstrata could charge more than A$30mpa above cost-rates) exluding any flow-on benefits from full mill utilisation at Ernest Henry.

This indicates to us there is still plenty of room left on the A$100m value implied by the current market price of EXS (taking off A$50m for White Dam).

The only question now is, who will be first to act? There is plenty of room between A$0.44ps and A$1.28ps.

We retain our BUY on EXS, increasing our target to A$0.80ps.


Geoff Muers
Mining Analyst
SHAW Stockbroking

Ph      02 9238 1275
Fax     02 9232 2182
Email  

GPO Box 3604 Sydney 2001

Analysis Certification

The Research Analyst who prepared this document hereby certifies that the views expressed in this document accurately reflect the analysts personal views about the Company and its financial products.

The Research Analyst has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendations or views in this report.

As at the date of this report the Research Analyst does not have an interest in the financial products of the Company.

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