Palladon Ventures: Great Update

CML (Palladon owns around 18% of it) provided an update yesterday on financing and operations. This is one of the best updates we have received from them in a while. All updates from CML have been good and getting better. This one, though, was good because of the details on the forward contracts to sell iron ore and cost of production. The most interesting aspects are the forward contracts and the cost of production, once the concentrator is in place.

The facility with Credit Suisse also required the Company to enter into certain hedging arrangements with respect to a portion of its 2012 and 2013 concentrate production. The hedges are cash-settled contracts in which CML has effectively sold forward the 62% Fe TSI Index as follows:

2012 690,000 metric tons $144 per metric ton
2013 1,200,000 metric tons $136 per metric ton

The forward contract gives you a good estimate of what the production could fetch in the open market.

And the cost of production:

Our current estimate for the fully delivered cost for our iron ore to China in 2012 is $68- 71 per DMT of concentrate, net of premium Fe grade bonus payments. This estimate is subject to change based upon ocean freight rates, diesel costs, Fe grade premiums and other commodities that affect our operating costs. See Appendix III for a more detailed description of our concentrate costs.

Our cost of production per ton of run-of-mine is lower than concentrate given the lower mining costs and lack of milling and processing costs, but the price we receive per ton of run-of-mine is substantially lower. We currently make EBITDA of $5-$10 per DMT on our 53% Fe ROM sales and expect a similar result in 2012.

So you have roughly a margin of $65 – 76 per ton (if we recall the interview with Jared Sturvidant, of O-Cap, he mentioned an EBIDTA of $60-80/ton). So management is on track with expectation. If we hit the 2M production expectation, we should be at $130M – 150M of EBIDTA. Jared mentions a recent transaction that sold at 6.5x EBIDTA. So put that multiple of Palladon’s 18% of CML and you are looking at multiples to current valuation.

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