Source: Frontier Securities
By Dale Choi
October 28, 2010
Frontier securities has Q&A with aspire, reiterates its view of aspire as highly undervalued, believes in tremendous valuation upside
On October 14, 2010, when Aspire announced its maiden resource, Frontier Securities viewed that Aspire is “undervalued since,
at relative valuation based on trading multiples of global coal companies using mixed coal (not met coal) taking as example Enterprise Value per ton for most conservative example of 0.44AUD per ton of Measured and Indicated for Coal of Africa, Aspire’s valuation would be for Measured and Indicated: 275.7million AUD for Inferred: 25.3 million AUD” on October 25, 2010, according to Aspire Mining Limited ( ASX:AKM) ( PINK:ASPXF),“ it has entered into a binding agreement with SouthGobi Resources Limited ( TSE:SGQ) ( HKG:1878), a leading Mongolian coal producer, that encompasses a A$20.1 million placement and strategic partnership.
Under the agreement, SouthGobi will acquire a 19.9% strategic holding in Aspire through the issue of 105.7 million shares at A$0.19 per share, representing a premium of 8% to the 7-day VWAP of Aspire shares. The 7-day VWAP represents the trading period since Aspire released its maiden 330mt JORC Resource at its 100% owned Ovoot Coking Coal Project (“Ovoot”).
The significant cash injection from SouthGobi will provide cornerstone funding and strategic partnership benefits to accelerate the exploration and development of Ovoot through to the Feasibility Study.
SouthGobi is one of the largest coal miners in Mongolia with a market capitalisation of US$2.2 billion and cash reserves of US$744 million as at 30 June 2010. Its shareholders include Ivanhoe Mines ( NYSE:IVN) and sovereign wealth fund China Investment Corporation.
Importantly Aspire has been able to attract significant financing while retaining unencumbered control of an emerging coking coal province. As a result, Aspire continues to own 100% of its exciting Ovoot project together with the valuable future marketing and off-take rights. At present only 10% of the existing Ovoot project area has been explored.
According to Mr. Alexander Molyneux, President and CEO of SouthGobi Resources, “SouthGobi’s strong financial, technical and commercial capacities have enabled us to assess various growth opportunities. Aspire is an exciting strategic partner for SouthGobi given its large volume of potentially high quality coking coal in Mongolia.
We look forward to sharing our in-country expertise to help fast-track Aspire’s Ovoot coking coal project into production.”
Mr. David McSweeney, Chairman of Aspire Mining Limited said “This transaction will directly accelerate the transformation of Aspire from a quality coal explorer to a world class coking coal mine developer. Aspire believes this strategic partnership with SouthGobi Resources will add value for shareholders of both companies, and we welcome SouthGobi management as our strategic partner.”
SouthGobi has agreed to enter into a strategic partnership with Aspire to assist it with the development of the Company’s Ovoot project. The strategic partnership will involve SouthGobi providing technical and other assistance to further the development of Ovoot; assistance and advice in relation to governmental and regulatory issues; and other assistance as reasonably requested from time to time in order to fast-track the development of the Ovoot project. Aspire also expects to benefit from SouthGobi’s Asian relationships and experience in developing and financing coal mines in Mongolia.
As part of this partnership SouthGobi will be granted the right to appoint a Non- Executive Director. It is expected that Mr Tony Pearson, SouthGobi’s Vice President Corporate Development, will join the Aspire Board post the placement.
Transaction Rights & Obligations
Top Up Right
Aspire has agreed to provide SouthGobi with a right to maintain its shareholding in Aspire if it is diluted under a placement or new issue. This right to top up will be on the same terms as the new issue and will last for a period of up to two years.
SouthGobi also has a right to top up upon the exercise of options for a period up until February 12, 2015. The issue price for these top up shares is the 30 day weighted average closing price ending on the date of the exercise.
SouthGobi has agreed not to acquire shares which would result in voting power increasing to over 19.9% of Aspire for a period of up to 2 years. In return, Aspire has agreed not to issue shares to competitors except in limited circumstances for a period of up to 2 years.
Other Transaction Terms
The transaction is conditional on FIRB approval, Aspire shareholder approval as well as the granting of waivers from ASX in relation to the Top Up Rights. SouthGobi also has the right to terminate if an issue of shares is made to a competitor or there is a significant adverse change to our coal resource prior to completion of the placement.
Aspire has given usual no talk, no shop and notification undertakings in favour of SouthGobi and has agreed to pay SouthGobi a fee of A$300,000 in the event that these undertakings are breached or shareholders do not approve the transaction.
A shareholder meeting to approve the transaction will be convened as soon as practicable but in any event before the end of calendar year 2010. Aspire has been advised by Argonaut and Corrs Chambers Westgarth in relation to the Transaction
About Aspire Mining Limited
Aspire Mining Limited (ASX:AKM) is an ASX listed resource company focused on developing world class quality coking coal projects in Mongolia. The Company acquired 100% of the Ovoot Coking Coal Project and the Nuramt Coal Project in February 2010. Drilling at the Ovoot Coking Coal Project commenced in April 2010 and has now established a significant maiden 330.7 million tonne JORC Resource.
The Company has three quality coal projects in Mongolia and is looking to aggressively develop this portfolio further in the coming year.”
According to SouthGobi on October 26,2010,
“Alexander Molyneux, President and CEO of SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878), announced today that SouthGobi Resources has entered into an agreement with Aspire Mining Limited (“Aspire”) (ASX: AKM) to acquire 105,726,650 common shares of Aspire in a private placement at a price of A$0.19 per share, for an aggregate of approximately A$20.1 million.
On completion of the private placement, SouthGobi will hold approximately 19.9% of Aspire. SouthGobi also will have the right to nominate one director to the Board of Aspire and the right to maintain its proportionate shareholding in Aspire for a period of two years.
Closing of the transaction is expected to be on or before January 31, 2011 and is subject to the approval of the Australian Stock Exchange and the Foreign Investment Review Board (FIRB).
“Aspire has moved quickly to establish a measured plus indicated JORC resource in excess of 275.7 million tonnes of coking coal in Mongolia,” said Mr. Molyneux. “It’s a business that has the potential to replicate the SouthGobi story and we appreciate the opportunity to participate in Aspire’s growth as a friendly strategic partner.”
About Aspire Mining
Aspire Mining Limited is a coal resource company which owns 100% of the Ovoot Coking Coal Project in Mongolia along with the Nurant and Shanagan Coal Projects. In addition, the company owns a 45% interest in the Windy Knob gold and base metals project located in Western Australia.
Based on Aspire’s disclosure, the Ovoot Coking Coal Project has a measured resource of 93.3 million tonnes, an indicated resource of 182.4 million tonnes and an additional inferred resource of 55.0 million tonnes. The raw coal results to date from samples taken below the oxidized horizon indicate the potential for a large tonnage, high-ranking coking coal resource.
Initial data results on the combined seams below the oxidation level are: Inherent Moisture (IM) – 0.6%, Ash – 17.8%, Volatiles – 28%, Sulphur – 1.1%, CN (Crucible Swelling Index) – 7.8, Energy Kcal/kg – 6,761. Data results are on an air dried average basis for raw coal samples and based on nine holes and 124 samples. Further coal quality test work, including studies on washing yield and washed product quality are ongoing.
The categories of resources under JORC are similar to those which would be reported under Canadian Institute of Mining (CIM).
About SouthGobi Resources
SouthGobi Resources is focused on exploration and development of its Permian-age
metallurgical and thermal coal deposits in Mongolia’s South Gobi Region. The
company’s flagship coal mine, Ovoot Tolgoi, is producing and selling coal to
customers in China. The company plans to supply a wide range of coal products to markets in Asia.
SouthGobi Resources is listed on the Toronto (SGQ) and Hong Kong (1878) stock exchanges. Key shareholders include Ivanhoe Mines (57.2%) and China Investment Corporation (13.3%). Current market capitalization exceeds US$2.2 billion.”
Frontier Securities analyst Dale Choi had Q&A on October 27,2010 with management of Aspire Mining Limited represented by Country Manager Kerry Griffin.
Frontier Securities: “What is infrastructure situation of the project?
Aspire: “I think we have achieved a great deal in a short space of time. We started drilling at the Ovoot project in April of this year and have as you know recently released a JORC reportable resource of 330mt. This is a good start however our aim over the next 12 months is to at least double this resource to demonstrate our ability to support a long term (30 years+) mining operation with an annual production rate of 10-15mt of hard coking coal to export markets in Japan and South Korea. In order to reach these markets we need to have a rail link from Ovoot to Erdenet, which is the closest rail head. Access to the eastern Russian ports would then be via the trans-Mongolian and Trans-Siberian rail network.
We have identified a feasible rail route through a scoping level study undertaken by Calibre Rail. Aspire would need to build a stand alone route to Murun, the provincial capital of Khuvsgul Province, which is a distance of 160km. From Muren to Erdenet is a distance of 390km, and this will probably be built in conjunction with other entities.
Frontier Securities: “We know that Khuvsgul rail will have strong political support as it will be wide gage and music to ears for proponents of the wide gage, including perhaps Minister of Roads and Transportation Kh. Battulga himself, which seem to have a lead at the establishment. However, during influential Khusgul DP MP L.Gundalai’s lobbying at the discussion of state railroad policy resolution, the Minister downplayed priority for tourism railroad to Khuvsgul which we think makes commercial sense actually in view of Khuvsgul Lake being major tourist attraction in the country besides obvious economic development significance for northwest Mongolia. How much political support is there for Khuvsgul rail and what are current positions of party caucuses? Also, the Prime Minister visited Khuvsgul recently,did he express his position on Khuvsgul rail, by any chance? Any comments on Government’s commitments for railroad, etc?”
Aspire: “We cannot really comment on political views or statements, but we can say that Khuvsgul Province is rich in bulk commodities including coking coal, phosphate, iron ore and molybdenum. Aspire is a member of the Northern Mongolia Rail Alliance (NMRA) along with several other mining companies and the Khuvsgul Government, all with a common interest in developing rail infrastructure to Khuvsgul.
Initial discussions with various levels of government have been encouraging, however at this early stage there can be no solid commitments as we need to develop a mine and infrastructure plan first. This is our goal over the coming 18 months – 2 years. “
Frontier Securities : “How much is the cost of wide gage rail per km and how many potential financiers like Aspire are there for Khuvsgul rail?How profitable can be tourism rail and can it be shared with your coal and other minerals? How do you expect to deal with congestion on TMR, Russian tariffs and private Russian port facilities? How competitive will be your FOB pricing?
Aspire: “There is no reason a tourist train couldn’t use the rail built for ours and other projects including broad acre crop export from Khuvsgul.
There are at least 5 other large projects in Khuvsgul that need rail to proceed.
The costs of rail per km is dependent on a number of issues which will be resolved initially at scoping and then definitively at pre-feasibility level, as will be FOB pricing, Russian tariffs, etc.
However the congestion on the TMR will require the forecast completion of a doubling of this line by 2015 as previously announced by Government.”
Frontier Securities: “Based on statement by Minister Battulga, we understand that Iron Mining International operates their over 100 km wide gage rail link from their iron ore mine in Bayangol village of north-western Selenge province built in record three months as praised by the Minister. Did they get officially their rail permit?”
Aspire: “We can’t comment on other companies’ rail permit status.”
Frontier Securities: “How applicable is law on mining ban in river basins and forest reserves to your asset?
Aspire : “Our resource is not affected by forest and river issues.”
Frontier Securities reiterates its view of Aspire as highly undervalued and believes in tremendous valuation upside based on coking coal characteristics and positive infrastructure developments.
Frontier Securities will issue equity research note on Aspire shortly.
By Dale Choi(Erdenedalai Choinkhor), Editor/Analyst, email@example.com
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