AJM Initiation Dec012011.pdf

8/9/2019 AJM Initiation Dec012011.pdf

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Altura Mining Limited An emerging near term bulk commodity producer

AJM.ASX BUY

Thursday 1 December 2011

AJM is an emerging bulk commodity producer from its 100%interest in the Tabalong thermal coal project in Indonesia and its30% JV interest in the Mt Webber iron ore project in the Pilbara.

The companys board and management have extensive bulkcommodity project development experience.

Tabalong Coal project The Tabalong coal project in South Kalimantan, Indonesia is to

produce ~500ktpa of low ash high quality (6400kcal/kg GAR)thermal coal from the middle of CY2012 increasing to 750ktpawithin 12 months.

Capital costs are not expected to exceed A$10m with all mining,crushing and trucking conducted on a contract basis. FOB cashmargins are estimated to be ~A$40/t.

At full production the operation is expected to produce 750ktpa(from a 13.4mt resource). Further expansion plans are contingenton progressing JV talks to increase the resource base sufficientlyto support target Indonesian production of 3mtpa to 6mtpa.

The company recently received an upgrade of their IUPs (ForestryPermits still outstanding) to commence production by June 2012.

Mount Webber Iron Ore project Mt Webber iron ore project in the Pilbara is one of several assets

that JV partner Atlas Iron intends to develop on their path to15mtpa in FY15 and with first production expected in JQ13.

Mt Webber s current DSO JORC resource of 42mt @ 57.1% Fe isin line with other Atlas iron projects.

The completion of the DFS is expected MQ12 with the plan todevelop a 3mtpa mine by mid-2013.

We anticipate that the capital intensity for the projectdevelopment will be less than A$20/t. We estimate FOB cashmargins to Altura of A$50-60/t in the initial years.

Other Assets AJM are advancing their Pilgangoora lithium resource in the

Pilbara with the aim of completing a PFS by the end of FY12. We have valued the companys mining services business at a

conservative 5 times EBITDA.

Recommendation After the recent option conversion AJM are fully funded, with

current cash at A$28m, to development of the Tabalong and MtWebber projects to first production.

We initiate coverage with a BUY recommendation and a target

price of $0.27 (risked DCF). We value AJM at $0.33 per sharebased on our DCF valuation that includes a mine life of 10 yearsat Tabalong and 10 years at Mt Webber.

Price $0.16Price Target $0.27

Valuation $0.33 Valuation Method DCF GICS sector Metals & MiningMarket Cap* $m 69Shares on Issue* m 446.6Enterprise Value* $m 41Previous rating Initiating coverage

* Fully diluted for options

Year Ended June 30 11a 12e 13e 14e

Production - iron ore (30%) Mt 0.00 0.00 0.02 0.60Production - coal (100%) Mt 0.00 0.10 0.55 0.75Production - LiO Con (100%) kt 0.00 0.00 0.00 0.00Sales revenue $m 8.4 19.4 70.4 169.9EBITDA $m -1.0 3.5 22.4 69.5EBITDA margin % 18.3 31.8 40.9Reported NPAT $m -1.8 3.2 18.2 47.2

Adjusted NPAT $m -1.7 3.3 18.3 47.3

EPS adj c -0.5 0.7 4.1 10.6

EPS adj growth % na na 450 158DPS c 0.0 0.0 0.0 0.0Franking % 0% 0% 0% 0%

PER x na 20.8 3.8 1.5Dividend yield % na na na na

EV/EBITDA x na 11.7 1.8 0.6ROA % na 8 29 45ROE % na 5 22 36 Debt / Debt + equity % 0 0 0 0

AJM Vs Small Ordinaries (XSO)

ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART ADD CHART

Source: IRESS

Matt Baillie +61 (0) 2 8252 3275


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Altura Mining Limited Share Price 0.16$ Valuation 0.33$

Profit & Loss Market Measures

Year ending June 2011a 2012e 2013e 2014e Year ending June 2011a 2012e 2013e 2014e

Sales 8.4 19.4 70.4 169.9 EPS adjusted cps -0.5 0.7 4.1 10.6

Op. costs 6.0 11.7 40.4 85.6 EPS growth % na na 449.7 157.8

Royalty 0.0 0.7 4.2 11.4 PE multiple x na 20.8 3.8 1.5

Corporate 3.4 3.4 3.4 3.4 CFPS cps -1.3 0.3 4.6 12.9

Exploration Writeoff 0.0 0.0 0.0 0.0 CF multiple x na na na 1.2

EBITDA -1.0 3.5 22.4 69.5 DPS cps 0.0 0.0 0.0 0.0

Dep/Amtz 0.1 1.1 1.9 3.4 Dividend Yield % na na na na

EBIT -1.1 2.5 20.5 66.1 Enterprise value $m 66.0 49.3 49.2 44.3

Net Interest 0.5 1.1 1.0 1.4

Pre-Tax Profit -1.3 3.5 21.5 67.5 Profitability & liquidity ratios

Tax Provision 0.4 0.2 3.2 20.3 Year ending June 2011a 2012e 2013e 2014e

Net Profit/(Loss) -1.7 3.3 18.3 47.3 ROE % na 5 22 36

Abnormals 0.0 0.0 0.0 0.0 ROA % na 8 29 45

Reported Net Profit -1.8 3.2 18.2 47.2 NPAT / Sales % na 17 26 28

EBITDA / sales % na 18 32 41

Balance Sheet Gearing (D/[D+E]) % 0 0 0 0

Year ending June 2011a 2012e 2013e 2014e

Cash 5.5 19.9 20.1 25.0 Valuation dr @ 10% dr @ 5%

Receivables 1.9 1.9 1.9 1.9 Equity A$m A$ps A$m A$ps

Fixed assets 23.6 38.8 59.8 111.2 Mount Webber 30% 56.4 0.13 71.8 0.16

Other assets 19.8 11.1 11.1 11.1 MRRT discount -5.6 -0.01 -7.2 -0.02

Total Assets 50.8 71.7 92.8 149.1 Tabalong 100% 47.2 0.11 55.6 0.12

Creditors 1.4 1.4 1.4 1.4 Pilgangoora 100% 7.3 0.02 13.2 0.03

Borrowings 2.2 0.0 0.0 0.0 Mining services 100% & 50% 13.4 0.03 13.4 0.03

Other liabilities 6.2 6.2 9.2 18.2 Exploration 10.0 0.02 10.0 0.02

Total Liabilities 9.9 7.6 10.6 19.6 Cash 29.1 0.07 29.1 0.07

Net Assets 40.9 64.1 82.2 129.5 Total Borrowings -1.4 0.00 -1.4 0.00

Share capital 55.2 73.3 73.3 73.3 Corporate/Other -8.5 -0.02 -9.5 -0.02

Retained earnings -14.1 -10.8 7.4 54.6 Total Valuation 147.8 0.33 174.9 0.39

Shareholders Funds 40.9 64.1 82.2 129.5

Production

Cashflow Year ending June 2011a 2012e 2013e 2014e

Year ending June 2011a 2012e 2013e 2014e DSO iron ore production (Mt) 0.00 0.00 0.05 2.00

Sales Revenue 8.0 19.4 70.4 169.9 Coal production (Mt) 0.00 0.10 0.55 0.75

Less Outflows -6.2 -11.7 -40.4 -85.6 LiO Concentrate (kt) 0.00 0.00 0.00 0.00

Prod. costs in exc. sales 0.0 0.0 0.0 0.0

Net interest 0.0 0.0 0.0 0.0 DSO iron ore cash cost (A$/t) 0.0 0.0 60.3 61.9

Income tax paid & other 0.0 0.0 0.0 0.0 Coal cash costs (A$/t) 0.0 53.5 60.1 63.2

Operational Cash Flow -0.6 4.0 23.0 59.7 LiO cash costs (A$/t con) 0.0 0.0 0.0 0.0

Exploration -2.6 -2.6 -2.3 -2.0

Capex -0.5 -13.7 -20.6 -52.8 Price Assumptions

Asset (Purchases)/Sales & other -8.8 8.8 0.0 0.0 Year ending June 2011a 2012e 2013e 2014e

C/Flow from Investing -11.9 -7.6 -22.9 -54.8 Exchange Rate (A$/US$) 0.99 1.07 0.96 0.86

Dividends paid 0.0 0.0 0.0 0.0 Benchmark FOB Fines (62% USc/mtu) 194 216 200 194Debt (Repay)/Borrowings 0.0 0.0 0.0 0.0 Newcastle benchmark ($US/t) na 127 125 116

Equity Raised 17.0 18.0 0.0 0.0 Assumed discount, FOB barge (%) na 16% 16% 16%

Other -0.8 0.0 0.0 0.0 LiO Concentrate price ($US/t) na na na 400

C/Flow from Financing 16.2 18.0 0.0 0.0

Cash at Beginning 1.9 5.5 19.9 20.0 Resources

Net Increase/(Decrease) 3.8 14.5 0.1 4.9 Company Veritas estimate

Cash at end 5.5 19.9 20.0 25.0 Mt % metal Mt % metal

Mount Webber Iron Ore 25.2 57.5 42.0 57.5

Directors Major Shareholders Tabalong Thermal Coal 13.4 6400kcal 20.0 6400kcal

James Brown Managing Director Pilgangoora Lithium Oxide 13.3 1.21 13.3 1.21

Dan O'Neill 5%

NPV valuation for Pilgangoora disounted by 70% due to the exploration nature of the project


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Investment Summary

We Initiate coverage with a BUY recommendation and place a price target of 27cps basedon our risk adjusted DCF of mining assets. The company has $28m (7cps) in cash andanticipates first cash flows from Tabalong production in JQ12 and Mt Webber in JQ13. Basedon our cash flow forecasts we see AJM currently trading at an EV/EBITDA of 1.8 timesFY2013 and 0.6x times FY2014.

At the Tabalong coal project (100%), capital expenditure to bring the 13.4mt Tabalongresource into production is estimated at A$10m, which can be funded from current cash. Aproject go-ahead requires Forestry Land Use Permits and negotiations with Pinang ServicesIndonesia (Noble group) for access to their haul road and barge loading facilities. Weforecast first production in JQ12 given the short time frame required to bring projects of thisnature into production. We expect the mine to ramp up to 750ktpa within 12 months andproduce at this level for 12 years based on the current resource base.

Management has a long history of bringing coal projects into production in Australia andIndonesia, where they were instrumental in the funding, mine and infrastructuredevelopment of what i s now Indonesias largest single coal mine , Adaro. The managementteam is looking to leverage their development experience by entering into JV agreementswith local companies to develop projects. The key objective is to transform AJM into amedium sized Indonesian coal producer (3-6mtpa) within the next 3 to 5 years.

The Mt Webber (30%) DFS is currently being undertaken by AJM s JV partner Atlas Iron andis due by the end of MQ12 as part of Atlas Pilbara iron ore operations . AJM anticipate thattheir share of capital costs will be less than A$20m with first production expected in JQ13,ramping up to 3mtpa within 12 months. The Mt Webber project JV development will covercapital costs to the mine gate and is to exclude the development of a centralised crushingand blending facility (required for AGOs Mt Webber and McPhee Creek projects) and privatehaul road which is to be funded separately by Atlas as part of their Pilbara iron oreoperations.

AJM also have an exposure to the growing lithium market with the advanced Pilgangooraexploration project in north-west WA. Ongoing drilling (extension and infill) is expected tosignificantly increase the low strip resource from 13.3mt at 1.21% Li 2O.

AJMs 100% and 50% interest in two mining services and exploration companies inIndonesia generates cash flows in excess of $2m per annum. This has provided sufficientfunds to cover corporate and administrative overheads.

Key Investment Drivers Near term producer of high quality Indonesian thermal coal

Minority JV exposure to Pilbara iron ore asset with a path to development

Management with extensive development experience in Indonesian coal assets

Fully funded, with $28million in cash and equivalents.

$28m in cash to funddevelopment of Tabalongand Mt Webber

Tabalong expected toramp up to 750kt perannum in FY13

Management haveextensive coal miningdevelopment experience

Mt Webber capital costswill be low. First oreshipment expected JQ13

Exploration is ongoing atthe Pilgangoora Lithiumproject


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A recent upgrade to the companys IUP (Izin Usaha Pertambangan) permits to OperationProduction status moves the company closer to first production. A Forestry permit will also

be required prior to the commencement of mining.

The company intends to mine, crush and truck the crushed coal 110km on designated haulroads to a third party barge loading facility on the Barito River where it will be sold FOB atan initial production rate of 500ktpa, ramping up to 750ktpa. A 30km section of road toPinang Services Indonesias (PSI) existing haul road will require upgrading, assesment andnegotiation (with PSI) is currently being undertaken. Mining, coal preparation, trucking andbarge loading will be conducted on a contracting basis.

Location

Source: AJM company presentation

Resource description

AJMs Indonesian coal tenements were acquired as part of the purchase of MinvestInternational Corporation in September 2007. At the time of the acquisition Minvest hadsecured options to acquire all the shares in PT Suryaraya Permata Khatulistiwa (SPK) and PT

Suryaraya Cahaya Cemerlang (SCC), each of which held a Kuasa Pertambangan (KP orMining Right) for coal in South Kalimantan.

In two distinct areas, AJM has defined Area A which consists of the SPK IUP in the north andSCC IUP in the south which holds the current Tabalong resource. Area B, to the east of Area

A is the second SCC IUP area and yet to have a resource defined.

The deposit comprises six seams (A to F) outcropping in the east of the IUP's and dippinggenerally around 30 degrees to the west. Seam B is the main target within the initial miningarea with seam thickness ranging from 1.0 to 18 metres.

This region of Kalimantan has been the focus on intense exploration for coal, resulting innumerous occurrences of coking coal products (to the north and west of Tabalong) and highenergy thermal coals. Analysis of Tabalong coal has to date identified the presence of high

Located in South Kalimantan, the

Tabalong Coal project sits withina highly prospective region ofKalimantan for thermal andcoking coal.

The Tabalong project lies 60kmnorth of the Adaro operation and110km by haul road to the BaritoRiver. Coal will be sold FOB atbarge, where it will travel~280km down river to be trans-shipped to Panamax vessels.

Source: AJM companypresentation

AJM have commenced theprocess to obtain requiredthe Forestry permits

Coal will be trucked to theBarito River and sold onbarge


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quality thermal coals. All coal samples recovered will continue to be analysied for cokingproperties.

Pre-development drilling is ongoing in the northern section of SPK to provide extended coalquality data for the initial mining area. This information will supplement marketing data toenable specific coal offtake arrangements.

Tabalong coal typical cross section

Source: AJM company announcement

Tabalong coal resource


Permitting

Both IUPs have recently been upgraded to Operation Production status. Subsequent to theIUP upgrade the company will require Forestry land Use Permits (Pinjam Pakai) from the

Forestry Minister prior to commencement of mining.Forestry Land Use Permits are the final permitting hurdle required prior to first production.

Production profile

The company aims to develop Tabalong as a stand-alone operation initially at a plannedannual production rate of 500kpta and up to 750ktpa of premium thermal grade coal, withfirst production in the June quarter of 2012.

The area surrounding Tabalong contains numerous other smaller resource areas that havethe potential to be operated simultaneously to provide increased tonnages and blended coalproducts. AJM is considering a number of potential adjacent projects that would likely beamalgamated and developed under a JV agreement. Ideally, we would see production growto 2-3mtpa in the Tabalong region.

Coal seams dip at 30 o . Thestrip ratio is forecast to be11 to 1

Upgrade to the IUPs havebeen received this quarter

First production is expectedJQ2012

The company is activelypursuing JV opportunities togrow resources andultimately production


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Capex, Costs and margin

The current cost of production estimate (FOB barge, including royalty) is US$60 per tonne.Thermal coal prices have firmed in Indonesia during the year with coal of similar qualitiesselling for US$115-120/t (FOB equivalent). Initially, AJM intend to sell coal at the barge loadout point to a third party. We estimate that marketing costs will be US$2/t andbarging/trans-ship costs $US15/t leaving an operating margin of $US38-43/t.

Capital costs for land acquisitions, pre-production earthworks, site infrastructure, roadupgrades and barge load out facilities have been estimated at $US10m. Volumes of productwill initially be small and all mining, crushing and transportation will be conducted on acontract basis keeping capital requirements down, however this figure is not definitive andsubject to change.

Offtake ContractsWe view Tabalong coal as an excellent high quality export product. In our view this willmake it highly desirable for existing coal export groups to blend with other high quality coalor to sweeten shipments of lower Kcal Indonesian coal of which there is no shortage. AJMare currently negotiating access to Pinang Services Indonesia s private haul road and bargeloading facilities on the Barito River, in our opinion Noble would be the logical buyer ofTabalong coal. The company has indicated that initially they would sell coal at the bargeloading point (FOB barge).

Commodity pricing/market

The Tabalong Coal Resource indicates a marketable product with high energy, low ash andlow to medium sulphur characteristics. A significant proportion of the measured resource iscategorised as Indonesian Coal Index (ICI) Type 1 coal. Index pricing for this coal adjustedto typical Tabalong district coal CV is in line with Newcastle spot prices and provides apromising outlook for Tabalong as it moves to production.

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C o a l P r i c e

( U S $

/ t F O B

)

Newcastle 6700 Price ICI-1 6322Kcal/kg (GAR)

Source: Bloomberg, Veritas

FOB barge costs of US$60/testimated. FOB barge priceexpected ~US$100/t

Capital costs will be low.Mining, coal prep andtrucking conducted on acontract basis

Tabalong coal expected toprice in line with Newcastleon a US$/t basis

The discount to Newcastlespot price has closed up in2011


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Drill testing of the first Mt Webber DSO targets commenced in May 2009 with the firstsignificant intersections returning up to 66 metres at 58.5% Fe from surface. The projectnow has a combined mineral resource estimate for the project of 41.9mt at an averagegrade greater than 57.1% Fe. Exploration of other prospects in the area is ongoing.

Source: Atlas Iron, 4 August 2009 Maiden Resource for Mt Webber DSO Project

The Ore Reserve estimate represents a very high conversion of over 97% of the Indicated

Mineral Resource at the Ibanez deposit located within the Mt Webber project area (seeTable below).


Resource estimate of 41.9mtat 57.1% Fe

Deposit is a flat lying, lowstrip banded iron formation

Ibanez deposit resource toreserve conversion of 97%


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The latest MineralResource estimate

(prepared by Atlas Iron)was completed in June2010.

The subsequent OreReserve estimate of 25.2million tonnes @ 57.5%(also prepared by Atlas)was completed in August2011 (see table above).

The August reserve

upgrade was the result ofan infill and evaluation

drilling program conducted on the Ibanez and Gibson deposits. Further upgrades areexpected following additional drilling programs on the Gibson and Fender deposits duringthe current financial year. Exploration of other prospects in the area is ongoing.

Capex costs and margins

Atlas Iron estimate FOB cash costs of $42-45/t for FY2012. As AJM iron ore will betransported from mine to ship by Atlas Iron an asset utilisation fee will be charged to thecompany. Company estimates of $15-20/t for this fee (we view this as conservative)increase expected cash costs to AJM of ~$60/t. With current benchmark pricing for iron ore

in excess of $150/t AJM should enjoy robust cash margins.

The DFS and final capital costs are yet to be released. Using previous capital costs onPardoo ($18/ annual tonne) and estimated stand-alone capital costs for Abydos (up to$20/annual tonne) it is likely that the capital costs for Mt Webber as a stand-alone operationwill be in line/above these figures (plus inflation). We estimate capital costs of $18-$23/annual tonne or $54-$69m. We estimate capital expenditure of $60m in our modeling ofthe project as it is likely that all crushing and screening capital will be provided by Atlas,

AJMs capital requirements may be lower than assumed.

Production profile

Production of iron ore from Mt Webber is likely to commence in CY2013, subject to receivingall necessary approvals, negotiation of operating and offtake agreements, and completion ofa favourable DFS. When fully operational, Mt Webber will have an initial production rate of3mtpa (AJM share 900ktpa).

Offtake agreements

As AJM is the 30% JV partner to a larger group operating multiple mines, processing andblending facilities, the logical buyer of AJM s share of Mt Webber iron ore is Atlas Iron. Thecompany has indicated that, subject to agreement, AJM s share of production will be sold atmine gate to Atlas at the FOB price.

Reserves are expected to

grow from 25.2mt withfurther infill drilling of theGibson and Fender deposits

Capex estimate of


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Iron ore pricing

We have modeled declining iron ore pricing through to 2015 from US$116/t in 2013 toUS$83/t in 2015 on the basis of strong supply growth and forced closure of low gradeChinese iron ore producers. What we cannot forecast is the percentage of forecastproduction growth that will not be brought on in the next few years.

Benchmark iron ore has priced well above US$150/t CFR North China for the majority of thepast 12 months, dipping sharply in the past six weeks to $117/t.

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/ D M T , C F R N o r t h C

h i n a

62% Fe CFR China 58% Fe CFR China

Source: Bloomberg

Pilgangoora Lithium project, WA (100%)

Project Summary

Pilgangoora is an early stage hard rock lithium project located in the north of the Pilbara. AJM has identified an initial JORC Mineral Resource estimate of 13.3 million tonnes of

mineralised spodumene pegmatites at 1.21% Li 2O, containing 160kt of lithium oxide (Li 2O).The company continues to explore and develop this orebody, with an exploration target of18-25mt. Following the current exploration program the company anticipates completion ofa PFS by the end of FY2012.

Location

The Pilgangoora project is located in North West WA (North Pilbara) 80km south-south eastof Port Hedland.

Robust iron ore pricing willprovide strong cash flow to

AJM

Pilgangoora advancedLithium exploration asset

Located between Mt Webberand Port Hedland


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Cross section of the Pilgangoora deposit (C1)


The Pilgangoora deposit is characterised by thick open-ended mineralised pegmatitesoutcropping at surface. Grades typically range from 1.3% to 1.6% Li 2O. The shallow natureof the deposit will result in a low strip ratio and enhances the economics of the project.

The drilling program to date has identified several mineralised pegmatite zones, namely C1,E1, N1 and S1. All of these zones have been shown to be highly prospective. AJM currentlyhave 1 rig on site.

The focus of recent drilling was to establish the pegmatite resources for the S1 area and toestablish the geological continuity with the C1 area located 500m to the north. In addition to

this activity, drilling will continue to prove up the down dip resources for the C1, E1 and N1areas.

AJM recently signed a two year option agreement over the lithium rich pegmatites thatextend from AJMs E45/2758 tenement into tenement E45/2363 (Atlas).

For the remainder of CY2011, further drilling will be undertaken at the site to expand theresource. AJM intends to complete all feasibility and mining applications for the project priorto the end of CY2012.

Based on the successful completion of the previous stages and subject to statutoryapprovals and permitting, AJM intends to commence development of Pilgangoora in FY2014,

with first production expected in FY2015.

Capex costs and margins

This project is pre-PFS and as such no official cost estimates have been provided by thecompany. As a comparison and for valuation purposes we have assumed an 800ktpa plantsize (80% of the Galaxy s Mt Cattlin plant) and operating costs in line with the Mt Cattlinoperation per Snowdens 2010 Independent Technical Expert Report.

Using an assumed strip ratio of 1:1, average mining costs of A$4/t, crushing and separationcosts of $A18/t, administration & transport charges of A$10/t and a recovery of 80% wecalculate a concentrate (6.5% Li 2O) cash cost of A$250-275/t. Lithium concentrate is a smallmarket and as such there is no public pricing. AJM believe that the current price for Li

2O

concentrate is in the vicinity of US$400/t. At this price we model an operating margin of 31-38%.

Resource outline

Cross section (S1, east-west)

Source: AJM companyannouncement

Exploration drilling ongoing.

PFS will commence towardsthe end of CY2011

Capex estimated at $50m,operating costs of $250-$275/t. Operating margin of31-38% modeled


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In the 2010 Independent Technical Expert Report for the Mt Cattlin mine Snowdenestimated a capital cost of $60m for a 1mtpa processing plant. We are modeling an 800ktpa

plant based on the current resource and exploration upside for a 14 year mine life.

Production profile

Initial metallurgical testing and processing show a concentrate of 6.5% to 7% lithium oxideis possible. Current resource estimates support a production capacity of over 100,000 tonnesper annum of lithium oxide concentrate for 14 years with first production possible in FY2015.

Li2O concentrate pricing

The market for lithium concentrates is small, with little transparency. In our view a price ofUS$400/t is achievable (and have modeled the asset using this price), with some market

participants quoting prices as high as US$450-550/t being mentioned.

Mining Services, Indonesia AJM owns two Indonesian mining service companies, acquired as part of the 2007 MinvestInternational acquisition; PT Asiadrill Bara Utama (100%) and PT Velseis Indonesia (50%).

Indonesia is experiencing strong growth in the coal sector and AJM's Mining and ExplorationServices division is well placed to capitalise on this growth.

Asiadrill has long-term coal exploration and drilling services contracts with a number ofmajor mining companies in Indonesia. The company owns and operates a fleet which

includes 16 large drill rigs, 15 man portable rigs, truck and track mounted drills, heli-lift andman-portable units for environmentally sensitive areas, and associated support vehicles. Thecompany employs a permanent workforce of 50 people and up to 100 contractors.

AJM also owns a 50% interest in PT Velseis Indonesia, which conducts geophysical servicesincluding seismic and wireline logging. The company currently has 11 wireline units and apermanent staff of 24.

Revenue from these two business is expected to be A$8-9million for FY2011 with anoperating margin of ~30%. Historically 85-100% of revenues and currently 100% ofcontracted capacity has/is being derived from third party contracts.

ValuationBalance sheet

With $28 million in cash on the balance sheet following the 95% take up of the 129.5m 15cent options, AJM is fully funded for the development of their first project. Capital costs forTabalong are expected to be at most $10m. Remaining cash, supplemented with cash flowgenerated from the coal operation is expected to be sufficient to cover AJM s share of thecapital costs for the Mt Webber JV. We have assumed a capital cost of A$50m for thedevelopment of the Pilgangoora asset within our model, funded with cash flow from MtWebber and Tabalong.

Testing indicates aconcentrate of 6.5-7% Li 2O

is possible

The current resource wouldsupport an operating life of14 years to produce 100ktpaof product

Coal mining servicesbusinesses in Indonesiaprovide valuable cashflow to

AJM

95% takeup of August 15coptions provided $18m cashto fund developmentprojects


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DCF Valuation

Our price target is based on a risked sum-of-parts DCF (10% discount rate) for the miningassets and an EBITDA multiple of 5 times for the mining services businesses. Our productionassumptions and risk discount for each asset is as follows:

Tabalong We have assumed that AJM receives the required forestry permits priorto the end of CY 2011, with first production in the June half of FY2012, ramping upto full production of 750ktpa within 12 months. As there remains a degree ofuncertainty surrounding the timing of final permits and the eventual capital(expected to be up to a maximum of A$10m) and operating costs, we have applieda discount of 40% to our NPV.

Mt Webber Development and production schedules will be determined by AJM s

70% JV partner, Atlas Mining and a definitive capital cost and commitment to mineis yet to be set. Atlas requires this asset to be in production in the near term tomeet their forecast 12mtpa production rate so we view the risk of significant delayas low. We have modeled the project using a $20m capital cost and expect firstproduction in the June half of FY 2013 and ramp up to 3mtpa within 12 months.We have applied a 20% discount to AJM s 30% JV exposure to Mt Webber.

Pilgangoora AJM have indicated the commencement of a feasibility study in early2012 following the current drilling campaign, with potential first production inFY2015 probable. We have assumed a throughput of 0.8mtpa and production of~120kpta Li 2O concentrate. Given that this project (which in our view appearseconomic) is in an advanced exploration stage we have applied a discount of 70%

to our NPV.

NPV/Sum of parts analysis

We have used a DCF methodology to value the mining assets of AJM using a discount rateof 10%, valuing the assets of the company at $147m or $0.33/share on a 1 times NAV basisfor the coal and iron ore projects. We have used a conservative 5 times EBITDA multiple tovalue the mining services businesses and a discount of 70% for the exploration stagePilgangoora asset. Our risked valuation on which we base our price target of AJM is $118mor 27 cents/share.

Risked valuation Un-risked valuationDiscount NAV NAV NAV NAV

Mount We er 20% 45.1 0.10 56.4 0.13MRRT iscount 20% -4.5 -0.01 -5.6 -0.01Ta a ong 40% 28.3 0.06 47.2 0.11Pilgangoora 70% 7.3 0.02 7.3 0.02Mining services 5x EBITDA 13.4 0.03 13.4 0.03Exp oration 10.0 0.02 10.0 0.02Su Tota 99.6 0.22 128.6 0.29Cash 29.1 0.07 29.1 0.07Total Borrowings -1.4 0.00 -1.4 0.00Corporate/Other -8.5 -0.02 -8.5 -0.02TOTAL 118.7 0.27 147.8 0.33

Source: Veritas Securities. As Pilgangoora project is in the exploration stage of developmenta discount of 70% has been applied to both our risked and un-risked value.

Unrisked valuations

Tabalong: $47m

Mt Webber: $54m

Current EV: $39m

AJM is currently trading at aP/NAV (risked) of 0.60


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Production/cost assumptions

Production summary 2012 2013 2014 2015 2016

Mount Webber

DSO Iron Ore (100% basis) 000t 50 2,000 3,000 3,000

Cash costs A$/t 60.3 61.9 61.3 57.3

Price received A$/t 120.7 127.1 104.2 81.3

Cash margin A$/t 60.4 65.2 42.9 24.0

Tabalong

Thermal coal 000t 100 550 750 750 750

Cash costs A$/t 54 60 63 65 66

Price received A$/t 103 108 112 97 91

Cash margin A$/t 50 48 49 32 25

Pilgangoora

Li2O Concentrate 000t 80 128

Recovery % 80 80

Cash costs A$/t 257 262

Price received A$/t 471 471

Cash margin 214 209

Cash flow summary 2012 2013 2014 2015 2016

Operating cash flow A$ (mill) 4.00 23.00 59.72 37.64 26.21

Investing cash flows A$ (mill) -7.55 -22.90 -54.80 -8.80 -8.80

Net cash flow A$ (mill) -3.55 0.10 4.92 28.84 17.41

Currency assumptions

AUD/USD 1.07 0.96 0.86 0.85 0.85

Risks AJM Mining is exposed to the normal risks associated with resource companies in adevelopment stage. The following are key near term risks to development of the two assetsthat underpin the value of the company:

Permitting: A recent upgrade to the companys IUP ( Izin Usaha Pertambangan) permits toOperation Production status moves the company closer to first production. A Forestry permitwill also be required prior to the commencement of mining.

Access agreements: Tabalong requires access to Noble Groups haul road to transportcoal to the Barito river. This agreement is currently being negotiated. As Noble are the mostlogical buyer of Tabalong coal we view this risk as small.

Assumed decliningcommodity prices


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Capital costs: Capital costs are yet to be determined for Tabalong or Mt Webber (DFSpending). If significant increases in the capital requirements or changes to the timing of

these occur, these may have funding implications for the company.

JV agreements: Failure to negotiate a favourable Joint Operations Agreement with AtlasIron for Mt Webber would delay the project. Terms that are less than favourable to AJM areunlikely to be agreed, however the final terms of agreement and the infrastucture chargeapplied may have a negative impact on cash flows and our valuation.

Management teamThe management team was responsible for the successful development of the Adaro mineand port facility in Indonesia, developed as a NHC JV to 25mtpa (now a 45mpta producer oflow Kcal, high moisture coal). In our view this team, with the addition of the right JV partner(local connections and resource base) has a high probability of success.

The company has stated that their desire is to grow to a 3-6mtpa coal mining operator inIndonesia from 2-3 operations within the Tabalong area.

Board Structure

Source: AJM company presentation

James Brown, Managing Director

James is a mining engineer with more than 25 years' experience in the coal mining industryin Australia and Indonesia, including 22 years at New Hope Corporation. James wasappointed as Managing Director of AJM in September 2010 and was previously Group

General Manager since December 2008.

His coal development and operations experience includes New Acland (4 Mtpa), Jeebropilly(2 Mtpa) and New Oakleigh (0.75 Mtpa) in South East Queensland, PT Adaro (25 Mtpa) andPT Multi Harapan Utama (2 Mtpa) in Indonesia and Blair Athol (13 Mtpa) in the Bowen Basin.

Paul Mantell, Executive Director

Paul has more than 30 years' corporate experience as an accountant in mining andassociated industries, including 27 years at New Hope Corporation.

Pauls project finance operations experience includes the funding and financial managementof New Hopes coal operations in South East Queensland, PT Adaro (25 Mtpa) and PT MultiHarapan Utama (2 Mtpa) in Indonesia and PT Indonesia Bulk Terminal and Queensland BulkHandling (Brisbane) facilities.

Management have coal minedevelopment experience in

Indonesia via thedevelopment of NHC JV

Adaro


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He was appointed a director in May 2009.

Allan Buckler, Non-Executive Director

A qualified mine manager, Allan joined AJM in December 2008, bringing with him over 40years' experience in the mining industry both in Australia and Indonesia, with specificexpertise in the coal business.

Allan had lead roles in the establishment of several leading mining and port operations inboth Australia and Indonesia.

He is a former Director and Chief Operations Officer of New Hope Corporation Limited andhas lead the development of significant operations including PT Adaro Indonesia, PTIndonesia Bulk Terminal and PT Mult Harapan Utama in Indonesia.

BT Kuan, Non-Executive Director

BT is a mechanical engineer with considerable experience in bulk handling and terminaloperations, including responsibility for the development and management of the IndonesiaBulk Terminal at Pulau Laut in South Kalimantan, Indonesia.

He also has experience in Indonesia, Malaysia and Singapore with other minerals and softcommodities including tin dredging operations, managing rubber, palm oil and cocoaprocessing factories, and managing palm oil bulk terminals. BT was appointed a director inNovember 2007.

Dan O'Neill, Non-Executive Director

Dan is a geologist with over 30 years' experience in the mining business globally, havingworked across Australasia, Africa, Asia and North America.

Dan has held positions with a number of Australian and multinational exploration companies,as well as managed exploration programs in a diverse range of environments and locations,including Botswana, North America, South East Asia, North Africa and Australasia.

During his career, he has held executive management positions with ASX listed companiesand has worked on a range of commodities including diamonds, gold, base metals, coal, oiland gas. Dan was appointed a director on 18 December 2008.


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Industry Comparison

Company Code Share Price Mcap Enterprise Project Marketable EV

20/05/11 Diluted Value Status Resources Fe SiO 2 Al2O3 P A$/t

(A$) (A$m) (A$m) (Mt) (%) (%) (%) (%) Hematite

Altura Mining Limited AJM 0.16 70 42 Feasibility 12 56.8 6.56 2.25 0.09

Mount Gibson Iron MGX 1.29 1,399 1,055 Production 103 61.5 8.21 1.26 0.03 10.2

BC Iron BCI 2.36 225 213 Production 53 54.1 4.28 3.57 0.02 4.0

Atlas Iron ** AGO 2.99 2,993 2,597 Production 1,034 56.5 6.5 3.0 0.10 2.5

Sundance Resources SDL 0.39 1,144 1,084 Feasibility 521 60.7 6.90 2.30 0.10 2.1

Centaurus Metals * CTM 0.53 80 56 Feasibility 50 65.2 4.10 0.92 0.02 1.1

Murchison Metals MMX 0.38 173 216 Production 111 56.9 7.4 0.70 0.06 2.0

Fortescue Metals Group FMG 4.74 14,801 17,011 Production 11,420 56.7 6.19 4.54 0.07 1.5

South American Ferro Metals * SFZ 0.16 74 71 Production 78 65.5 4.00 1.00 0.05 0.9

Gindalbie Metals * GBG 0.52 598 765 Development 1,027 68.6 4.75 0.10 0.01 0.7

Golden West Resources GWR 0.40 81 51 Feasibility 130 60.0 7.40 2.40 0.06 0.4

Richmond Mining * RHM 0.24 20 16 Development 44 67.5 2.75 1.00 0.01 0.4

Brockman Resources * BRM 1.97 294 254 Feasibility 696 61.0 6.25 2.75 0.02 0.4

Centrex Metals CXM 0.29 90 8 Feasibility 55 67.8 4.50 0.30 0.03 0.1

Iron Ore Holdings IOH 1.30 225 188 Feasibility 934 57.2 7.00 2.44 0.15 0.2

Red Hill Iron RHI 2.33 102 99 Feasibility 472 56.6 6.03 3.75 0.07 0.2

Industry Average 1.78

Notes: * SFZ, BRM, CTM, GBG. and RHM are beneficiated resources. ** Incorporates 100% of FerrAus

Source: Company Reports, Veritas estimates, Nov 2011

Av. Resource Grade

Iron Ore Producers & Near Term Producers

Coal Producers & Near Term ProducersCompany Code Price Mcap EV Status Reserves Resources EV/ EV/

(Dil.) (Dil.) Resources Reserves

($m) ( $m) ($t) ($t)

Altura Mining X AJM 0.16 70 42 Advanced Exploration 0 20

New Hope Corporation & NHC 5.97 4,957 4,863 Production 648 2048 2.4 7.5

Adaro ADRO (IJ) 0.21 6,818 7,768 Production 938 4400 1.8 8.3

Sakari Resources SAR (SP) 1.52 1,724 1,905 Production 130 1510 1.3 14.7

Gloucester Coal GCL 6.92 1,415 1,358 Production 275 1512 0.9 4.9

Coal of Africa ** CZA 0.81 447 471 Production 53 527 0.9 8.8

Coalspur # CPL 1.89 1,303 1,243 Pre-DFS 260 1460 0.9 4.8

BUMI** BUMI (IJ) 0.23 4,719 8,402 Production 2900 12900 0.7 2.9

Stanmore Coal SMR 0.78 111 99 Exploration 94 328 0.3 1.1Realm Resouces X RRP 0.09 25 9 Feasilbilty 0 30 0.3 na

Cockatoo Coal COK 0.38 402 478 Production 74 1752 0.3 6.4

Continental Coal CCC 0.22 103 120 Production 64 565 0.2 1.9

Bandanna Energy # BND 0.85 456 318 Pre-DFS 147 1534 0.2 2.2

Kangaroo Resources KRL 0.16 555 553 Production 442 3146 0.2 1.3

Endocoal EOC 0.39 68.6 58.9 Exploration 0 349 0.2 na

REY Resources REY 0.17 63 57 Development 18 535 0.1 3.2

Resource Generation RES 0.51 136 113 Development 745 6400 0.0 0.2

Mantle Mining MNM 0.07 14 13 Exploration 0 0 na na

Industry Averages 0.7 4.9

#Marketable Reserves, actual Reserves are: CPL 521.7mt, SMR 117.4

**non-JORC reserve/resource

&Includes 100% of NEC Resources

X

Resource Target Source: Company reports, Veritas estimates Nov 2011

AJM is currently trading at anenterprise value (EV) of $44m,including two mining servicescompanies which we value at$13.4m.

In our view the most directcomparison in valuing AJMs 30%of the Mt Webber project (oncein production) is BC Iron whichrecently commenced operationsat their Nullagine DSO project.The operation is currentlyramping up towards 3mtpa(50/50 JV with FMG).

BCI is currently trading at A$4.0/resource tonne.

On a margin basis Indonesiancoal producer Sakari Resourcesprovides a reasonablecomparison to AJMs Tabalongasset (once in production).

With an extensive resource baseSAR is trading at $1.30/resourcetonne.


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20

Sales

Robert Scappatura +61 2 8252 3240Tony Bonello +61 2 8252 3230

Andrew McCauley +61 2 82523260Patrick Ford +61 2 8252 3211Sam Streeter +61 2 8252 3235

Willem Ter Avest +61 2 8252 3270Clay Melbourn +61 2 8252 3220Bryce Reynolds +61 2 8252 3215

Stephen Murphy +61 8 9380 8351

Research

ResourcesPiers Reynolds +61 3 8601 1196

Mathew Baillie + 61 2 8252 3275

Industrials

Brent Mitchell +61 3 8605 4830Levi Hawker +61 3 8676 0689

RATING

BUY anticipated stock return is greater than 10%

SELL anticipated stock return is less than -10%HOLD anticipated stock return is between -10% and +10%

SPECULATIVE High risk with stock price likely to fluctuate by 50% or more

This report has been issued by Veritas Securities Limited A.B.N. 94 117 124 535, Australian Financial Services Licence Number 297043.

Disclaimer. The information contained in this document is general information only and is not financial or investment advice, and does not take into account your specificfinancial situation, particular needs and investment objectives. This document has been prepared from sources which Verita s Securities Limited (Veritas) believes to bereliable, but none of Veritas, its directors, employees and associates (Veritas Parties) give or make any representation or warranty that any such information is accurate,complete, reliable or up-to-date, and Veritas disclaims all liability for loss or damage, direct or indirect, suffered by any person arising from any use of or reliance on suchinformation. Veritas recommends that you consult your financial adviser before making any financial or investment decision. Veritas does not accept any responsibility toinform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document.

Disclosure of interest. Veritas Parties may receive or may have received fees, commissions and brokerage by acting as corporate adviser or broker for companies describedin this document, and may hold directorships or other offices with such companies. Veritas Parties may hold an interest in securities or financial products described in thisdocument, may benefit from an increase in the price or value of them, and may effect or participate in transactions which are inconsistent with any statement made in thisdocument.

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Documents

AJM Initiation Dec012011.pdf