Buy London Mining (LOND) at 221p

A tip from SmallCapShares.co.uk

The team at Small Cap Shares first recommended shares in London Mining in the last month's newsletter at 214.75p per share. Investors who got in at that price are currently standing on a 6.25p gain but according to our analysts the shares remain a great free share tip as the share price is set to soar. For more long-term growth ideas click here.

The Business

London Mining's moniker is a little misleading. The company is not in fact digging up Trafalgar Square, Downing Street or the gardens of Buckingham Palace in search of riches. Instead, the firm has a range of iron ore projects located around the world, in Saudi Arabia, China, Sierra Leone and Greenland. The company also has a pair of fledgling coal assets in Columbia and South Africa.

London Mining was one of only a handful of firms to list on AIM during 2009. While the company did not raise any money for itself at the time of listing on 6th November, it did place 37.2 million of existing shares at 192.4p to a number of new institutional backers, including AXA and Black Rock. The company is also listed on the Oslo Axess, Norway's answer to AIM, which it joined in October 2007.

Founded in 2005 by Chris Brown, Graeme Hossie and Greg Barnes, a team of finance and mining professionals, the company has in just a few years delivered significant value to shareholders. In 2008 it sold its Brazilian iron mine to Arcelor Mittal for $810 million. On this deal the company made a 1,200% return on its initial investment after it increased the resources of the mine fourfold to 1 billion tonnes of iron ore. With plans to increase production to 24 million tonnes per annum (mtpa) by 2018 we believe that there are many more opportunities for value creation.

Projects

The company's longest held asset, acquired not long after its formation, is a 100% stake in the Isua iron ore project in Greenland. Located around 155 kilometres south of the Arctic Circle the asset, at the beginning of December, reported an estimated JORC indicated-inferred resource of 574 mt (million tonnes) at 37% iron. A pre-feasibility study is now due for completion by February this year and London Mining also plans to confirm that the high grade iron concentrate can be produced consistently, along with additional infill and extensional drilling. Unlike other mines in Greenland, which are affected by ice, Isua is close to a part of the Greenland coast which allows shipping all year round.

The most immediate focus for London Mining is its 100% interest in the Marampa iron ore mine in Sierra Leone. The mine was previously in production between1933 and 1975, reaching a peak production of 2.5 mtpa before being closed due to a low iron ore price. London Mining is now looking to process tailings at the site before moving on to the core ore body. Production of 1.5 mtpa is planned from existing tailings within 12-18 months of a construction decision being made. In mid-November the company said that it expected a JORC statement for enlarged tailings resource by end of 2009, however an update is now due this January. A JORC statement for the primary ore body is expected in the first half of the current year.

Though its interest in the Saudi London Iron joint-venture, along with the Saudi Arabian National Mining Company, London Mining owns 50% of the Wadi Sawawin iron ore project. Here the company plans to create an iron ore mining and pelletising operation to produce high grade pellets for the domestic market. A recently completed bankable feasibility study estimates a $1.6 billion capital expenditure for the 5 mtpa project, down $180 million on the pre-feasibility study. The current resource at the project will provide a mine life of 14 years but a further drilling programme is expected to confirm sufficient measured and indicated resources, to JORC standards, to support a 20 year mine life. The company has set a target for the project financing to be finished by the end of 2010, with initial production being aimed for in the second half of 2013.

Finally amongst the iron ore assets, London Mining, along with Wits Basin Precious Metals, has a 50% stake in China Global Mining Resources. The firm owns the currently producing Xiaonanshan mine and Sudan processing plant in the Anhui and Jiangsu Provinces of the People's Republic of China. The operations have a current capacity of 0.4 mtpa of iron ore concentrate. A drilling campaign to confirm historic data is expected to deliver a resource statement to JORC standards in 2010. The joint-venture has also entered into a memorandum of understanding to acquire other operators on the licence, which will provide an additional 0.3 mtpa of concentrate production capacity.

To the coal assets, and in Columbia London Mining owns a 20% stake in International Coal Company (ICC), a firm which is focused on acquiring concession interests in metallurgical coal districts. The company is currently in negotiations with ICC regarding the provision of limited funding of up to $5 million to develop the business plan for coke and coal production. In South Africa London Mining has a 28% stake in DMC Energy, a firm which has a 70% interest in the potentially open pittable Rietkuil project. A definitive feasibility study is expected to be released on the project ahead of DMC's proposed listing on the Johannesburg Stock Exchange in the second quarter of 2010.

Financials

Figures for the nine months to 30th September 2009, which are not really important in the context of the long-term investment case, showed a net loss of $23.5 million from continuing operations. Total group revenues of $5.9 million and gross profits of $2.2 million were derived from the company's 50% stake in its Chinese mine. On the balance sheet, net assets stood at $335.8 million (GBP209 million) at the period end, amounting to 90% of the current market capitalisation.

London Mining did not raise any money for itself when it listed on AIM as it was already well funded. As at 30th September last year the company held net cash of $230 million (GBP143 million), which at the current market price equates to around 60% of the market capitalisation. This should be enough to fund all near term milestones, including the tailings development in Sierra Leone, pre and bankable feasibility studies at Isua and other development work.

Valuation

So what is the company worth? Taking just one project, Wadi Sawawin, the recent bankable feasibility study gave a net present value of $225 million, or $282 million if power and water are provided by third parties. Further analysis, taking into account the company's views that a $75 million reduction in capital expenditure is achievable and of a $134 per tonne long-term iron ore price, the NPV rises to $668 million or $734 million if power and water is provided by third parties. There is further potential value still with a desktop study on the economics of a 10 mtpa pellet producing mine suggesting an NPV of $1.127 billion, or based on the further capital expenditure savings and expected long-term price, an NPV of $1.775 billion. With the company's current market capitalisation being just GBP235 million (circa $375 million) the upside (not even considering the potential of the other projects) is clear. BUY.

Key Data

EPIC: LOND
Market: AIM
Spread: 219p - 223p (1.79%)

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