Monday, January 9, 2012

AFF - Afferro Mining

I finally completed my AFF NFSC 2012 submission. Wish me luck. Links:
The text of the document appears below.

NFSC 2012: AFF - Afferro Mining

In April 2011, under a plan of arrangement, African Aura Mining split into two equal parts in order to “unlock the latent value” in both parts [3]; one of which is Afferro Mining.

AFF (Afferro Mining) is a TSX-V/AIM listed exploration and development company with iron ore projects in Cameroon and Liberia - both of which are in West Africa, for the geographically challenged people like me. It is ISA-able.

Some basic stats: based on a share price of 52.8p and 104m shares, the company has a market capitalisation of £54.9m. As reported for 30-Sep-2011 [1] , their equity amounted to $60.9m (£39.3m), with net cash $21.9m (£14.1m) [2]. They reported no turnover, and their  “comprehensive” losses for 9 m/e 30-Sep-2011 were $7.2m (£4.6m).

In December 2011, AFF sold its stake in “Putu” for $65m (£41.9m) cash, and a further deferred cash payment of $50m (£32.3m) [4]. The transaction requires shareholder approval and regulatory consents, but I am not anticipating any problems.

All told, the cash underpinning AFF is 77pps [5]. So, in the most simplistic of terms, for 53p, you get 77p in cash (albeit some of it is deferred consideration), and all the resources for free. For sure, AFF will need to plough that cash into developing its resources, so it’s a question of whether it can generate more value from the resources than it can by expending its cash. The company has stated that due to the divestment programme, it has sufficient resources to develop assets beyond 2013 [5]. Shareholders can therefore take comfort from the fact they are unlikely to be diluted in the near term.


DCF VALUATION -- In April 2011, Stockopedia published a report on AFF [6]. They cited Panmure Gordon’s note giving a DCF valuation before risk adjustment of 2047p per share, and a risk-adjusted value of 491p per share. Things have changed since then, but it’s worthwhile noting how things stood at the time, and just how favourable the discrepancy between price and value was.

COMPARATIVE BASIS -- A compelling valuation was provided yesterday by “j1nxed” posting on ADVFN [7]. The valuation method is relative, comparing EV/TFe (Enterprise Value over Total Fe) against a group of peers. Based on his figures, a fair value for AFF would be $4.37 - way above the current price of $0.81. By way of explanation, the beige box above the column is AFFs theoretical share price on the EV/TFe multiple for the comparator company. The black text inside the column is the EV/TFe (100% iron) for the comparator. Huh? Let’s take AFF, based on 103m shares at $0.81 ps with $78m in cash (ignoring the actual minimum Putu deal), Excluding AFF, the average EV/TFe for comparables is $0.579/t. Using that as a basis for AFF and TFe of 644Mt, that implies an EV of $372.876m, add on the net cash of $78m to give a fair market value $450.876m, divide by 103m shares to get a target share price of $4.37 (293p). AFF is currently trading at an EV/TFe of $0.008/t [9]

OUTRIGHT BUYER VALUATION -- As a further gauge on value, I considered the recent sale of Putu for £74.2m (=£41.9m cash + £32.3m deferred). According to AFF, the management target total resource is (greater than) 3.5 Bt. Mano River Holdings (owned by AFF) had a 38.5% stake, putting the value of an iron ore mine at  £55m/Bt (=74.2m / 0.385/3.5). Looking at the summary on ADVFN dated 13-Dec-2011, I notice that AFF has a 100% interest in the Nkout iron ore project, with a target of 4Bt. That implies a valuation for AFF of £220m (= £55m/Bt * 4Bt), or 211pps, which is about 4X its current market capitalisation. I have completely ignored the current cash position and the three prospects it also has in Cameroon (Ngoa, Akon, Ntem). Obviously, this is a very “finger in the air” valuation on my part, assumes “all things being equal”, which they are unlikely to be, and so on. But it does give you the distinct flavour that AFF is undervalued.

Summary of valuations:
* Current share price: 52.3p
* DCF basis: 491p - 2047p
* Comparative basis: 280p
* Outright buyer basis: 210p


da Silva, Luis - CEO and President

Evans, Dave - Independent Director

Granovsky, Boris - Independent Director

Netherway, David - Chairman

Pas, Guy - a non-exec director. At 13-Dec-2011, and RNS notice stated that director Guy Pas owned 6.2m shares, amounting to 5.89% of the company, or £3.4m.

Total board and management appears to be around 7.8m shares, which is 7.2% of the company. There are employee options of 7.3m shares, bringing the fully diluted number to 111.2m.


  • Nkout project is well located, with a 30km connection to Sundance’s planned rail line. Finance decision expected May 2012.
  • Cameroon has stable government for over 20 years. Democratically elected government since 2006. USD 16bn foreign direct investment in mineral, oil and agricultural sectors. Sustained UN and US commitment.
  • Nkout first production is as yet unknown.


BIF - Banded Iron Formation resource

DFS - Definitive Feasibility Study

DSO - Direct Shipping Ore

MRE - Mineral Resource Esitmate

PEA - Preliminary Economic Assessment

PFS - Pre-Feasibility Study


[1] Consolidated Interim Financial Statements for the 3 and 9 months ended September 30, 2011. (PDF)

[2] Cash and equivalents are the only interest-bearing items.

[3] Completion of arrangement; commencement of trading. 13-Apr-2011

[4] Sale of Putu Iron Ore Project

[5] Conference call 12-Dec-2011 (PDF)

[6] Afferro - An Iron Investment for 2011

[7] j1nxed - 5 Jan'12 - 12:45 - 11488

[8] Putu, Liberia, Overview

[9] Calculation of EV/TFe for AFF. Assuming a share price of $0.81, 103m shares, the market cap is $83m. Lop off $78m for cash (although the amount expected from the Putu is a lot higher), to give an EV of $5m.

Based on a 100% interest in inferred 2.0Bt at 32.2% iron at Nkout , that implies 644Mt at 100% (=2Bt * 32.2%).

Divide one by the other (5/644), giving $0.00776/t, or, as you round in your graph, $0.008/t.

Created: 19-Jan-2012

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