Afferro Mining - Takeover Imminent?

Afferro Mining Logo

Afferro Mining (LSE:AFF) is an Africa-based iron ore explorer with assets in Cameroon that is listed on both the LSE and TSX. The company enjoyed a strong second half of 2012 and entered 2013 with a share price around 100p/share. Having shed around a fifth of this since, the company currently is an interesting investment proposition as firms have already showed an initial interest regarding a potential takeover. The outcome of this is currently unknown but should be revealed in coming weeks. Afferro has 105 million shares in issue and is capitalised at £85.33m with a current share price of 81.25p/share.

From a technical perspective, Afferro should retest 100p if the share price holds its current uptrend. This would require a 'bounce' upwards at or before 78p/share. The only potential problem is if takeover parties announce their withdrawal - this could negatively impact the share price and prevent this from occurring in the medium-term. The recent downward pressure means the chart is actually less appealing than what it could have been - that scenario would have required 85p to hold and form support. Aside from this, there is significant institutional support and a respectable series of director shareholdings.

courtesy of on flickr
So who are Afferro? Afferro is an iron ore explorer focused solely on its South Cameroon assets. Within Cameroon the company has four separate projects; Nkout, Ntem, Akonolinga and Ngoa. For the first three the company has a 100% working interest whereas they have a 70% interest in Ngoa. Each of these projects in relatively close to usable infrastructure and are highly prospective - they are found near the planned 'South Cameroon Iron Rail Corridor'. In addition, the nearby 'Kribi Deep Sea Port' will allow for the easy transport of extracted iron once production starts (although this will not happen for a long period of time). In addition, numerous power projects are planned including a gas-fired station at Kribi (to be commissioned this year). This straddles the planned rail corridor to the port and is located very close to Ntem.  Furthermore, Australian company Equatorial Resources announced its plans to help develop the area around Cameroon, Gabon and the DRC by creating regional rail networks.

The company's flagship project is Nkout that has already been defined as a high-quality magnetite resource. It has a post tax NPV and IRR of $4.6bn and 24% (at 35mtpa) with only 8.9km of the 20km anomaly analysed. Consequently there is definite potential for further upgrades. Nkout has 1.2Bt at 32.9% Fe Indicated, 1.3Bt at 30.3% Fe Inferred. The quality of the discovery is also good; drilling costs and levels of deleterious material (due to the geology) are both low. The only issue with these large scale projects is that huge amounts of funding are required post exploration. To achieve a production level of 15mt per annum $2.5 billion is required and payback is stated by the company at six years (at 35mtpa the resource will last for at least 25 years). Thus a partner/takeover is an essential to developing the asset. Funding is certainly not a problem in the short-term/medium-term. Consequently, due to the time scales, as with all large iron explorers, the state of the global economy will change the economic viability of this project. A significant fall in the price of iron could be detrimental if sustained in the long-run and could lead to the deferral of investment. Of course though, this is the catch with all these miners and not just Afferro.

The Ntem project has a strong strategic position in that it is much closer to the Kribi port, power station and proposed rail corridor. The first stage of drilling at Ntem was completed in early 2012 with all but 3 of the 34 holes encountering encouraging mineralisation. The company is expecting a finished review on the potential option for road haulage of iron to the port as a low-capex option to be issued in Q1 2013 - if this is deemed possible this would be a positive feat for the company. The company has noted that the "Strongly modelled magnetic signature has defined a new target, with magnetic amplitude of 26,200nT, higher than Nkout at 22,700nT."

The Akonolinga exploration project is located in the Akon hills to the North-West of Nkout. This project is in an earlier development stage with a planned two-part drilling program to be completed.
This project is slightly further from the rail corridor than Nkout or Ntem. Strong magnetic anomalies have been identified here, but this project is still in its early stages.

courtesy of CDEGlobal
Finally the Ngoa Project has had some drilling completed. The prospect has a mineralised zone of strike length 1km. Drilling highlights from 33 diamond drill holes over 1,790m:
- 11.0m @ 61.1% Fe from surface
- 8.8m @ 54.6% Fe from surface
- 12.8m @ 47.0% Fe from surface

Perhaps most appetising about Afferro in its current state is that it has a massive £64 million in cash reserves alone (as of December 2012), valuing the entire company reserves at just £21m. Thus its obvious why Afferro is a takeover target - any firm could get a mound of cash plus a series of assets at rock-bottom prices. It will be interesting to see if any firm goes ahead with a takeover and at what final price is achieved.

Afferro has released the following news since Q4 2012. The first piece of news referred to the results at the Ngoa project as above. CEO Luis da Silva commented:

"Drilling results at Ngoa are encouraging with multiple intersections from surface above 40% Fe and a number of down-hole length intersections in excess of 55% Fe. We believe Ngoa can become a satellite resource to support scalable mining of up to 35mtpa at Nkout, which is situated less than 5km to the north of Ngoa. The recent preliminary economic assessment showed Nkout to be a robust project; additional high grade resources at Ngoa will enhance the already attractive economics.

In November, more results from Nkout were released. "Assays returned from a total of 77 diamond drill holes totalling 4,872m of drilling. Assays currently outstanding from a further 108 holes, totalling 6,434m of drilling." "These excellent results from our on-going exploration programme identify further DSO resource at Nkout. In particular, the results indicate a separate DSO zone in Nkout East, with wide intercepts grading up to 55% iron. Metallurgical testing has indicated that material with a 50% cut-off should be amenable to processing with a DSO plant.

Following the publication of Q3 results, the company released a statement in November that it was in discussions with multiple parties regarding either a strategic investment or acquisition of the entire share capital in the company. This sent the share price on an upward path. Further to this. more good news was released. The company had agreed to pay ~$10m to the government of Liberia following tax claims arising from the sale of its Putu project.  Almost immediately after this the company had expedited its payment at the request of Afferro. Consequently Afferro was paid $50m which is what significantly strengthened the balance sheet of Afferro.
courtesy of BruceTurner on flickr

"Encouraging" DSO metallurgy tests were received from Nkout in mid-December. Luis da Sivla commented: "The quality of the DSO we have identified at Nkout further enhances the viability of the project and underlines our confidence in its continuing development. "The testwork implies that the first stage of DSO production at Nkout should be low-cost, with low capital intensity, yielding a high-grade product of 63.4% iron with low deleterious materials."

The takeover situation was complicated in late December with a confirmed bidder coming into action. IMIC (International Mining and Infrastructure Corporation) was in very early discussions with Afferro that could lead to an offer between 115p and 140p/share made up of cash and shares in IMIC. Considering IMIC only has a market cap of £17m, this is a very interesting position. IMIC's shares have been very illiquid historically with little overall movement, thus the addition of new shares would boost liquidity and probably help IMIC. However, the initial offer proposals look to undervalue Afferro (on a resource value basis) despite offering a 70% premium at the top range of the unconfirmed offer. The problem is that Afferro's share price would not reach such a level as the offer would involve shares and is only partly cash.

In mid-January the company announced the following:
Further to the announcement of 31 December 2012, the Board of Afferro Mining Inc. ("Afferro", TSX-V & AIM: AFF) confirms that the period of exclusivity that Afferro had entered into with a potential offeror has now expired. Discussions with this party are continuing however following the expiry of the exclusivity period Afferro is now in a position to commence formal discussions with other parties who have expressed an interest in making an offer for the entire issued and to be issued share capital of Afferro.

The fact that a number of firms are interested bodes well and as mentioned earlier, the very high cash to market cap ratio makes Afferro a very attractive takeover target to a wide variety of firms. On January 17, the company revealed that Jindal Steel & Power was interested in the company following media speculation that included Bloomberg learning from sources that Jindal was to withdraw citing expensive rail development costs, a day earlier. Despite this, Afferro fell 10% on the news.

Shortly after, results from Akonlinga were released as below:
-  Four drill targets identified, with a total of 50 magnetic anomalies discovered
-  Surface sampling identifies high grades of up to 58.5% Fe
-  Pits and trenching identify mineralised intersections with grades up to 55.9% Fe

IMIC then acquired further shares in Afferro amounting to a further 1m at 90p/share. IMIC now holds 5,243,342 Common Shares representing 4.99% of Afferro's issued share capital and has voting control over a total of 7,107,642 shares, representing 6.77% of the Company's issued share capital. This is an interesting strategic move from IMIC as they could benefit from a risng share price if the company is taken over. Alternatively they may be trying to acquire shares prior to a takeover move. Other firms including Rio Tinto and Sinosteel have been loosely linked to a takeover.

Afferro is clearly at a pivotal point in its development cycle. Despite having share price targets of  279p, 125p and 107p from Panmure Gordon, SP Angel and Investec respectively, it will be the outcome of the current takeover situation that will define the future of Afferro. A sensible strategy may be to take a 30% position in Afferro prior to the outcome of the takeover. In the takeover scenario profit it to be made even if it means disposing of the shares after the offer (in case it is rejected, when the price may fall). Alternatively Afferro may benefit from the start-up of a joint venture with another company - this will likely also help the share price. On the contrary, if no offer is forthcoming, the share price will likely fall - once the drifting has ended it may be well worth investing some of the remaining 70% into Afferro. For example, at 70p/share Afferro is only capitalised at £73.64m, which is almost all made up of cash and hence is an excellent risk/reward opportunity. Even at the current price, the long-term picture here is very positive and a ~ £120m - £130m market cap is probably more representative of this company at the current point in time.


  1. Yeah but no but yeah but no......

  2. nice write up thanks, subscribed

  3. The question is whether Jindal require Afferro's operations

  4. IMIC's proposed valuation 115-140p and its own financial position, would seem to be only a front for another entity with deeper pockets (ie. Chinese)
    Now 3 weeks past end of the exclusivity period (Jindal?), why no IMIC Formal Offer?
    Some analyst value Affero at 280p, my own conservative valuation 188p based only on cash and 5% NPV Nkout.
    We trade at 82p? Quite the range, as even 280p is quoted cheap by some when compared to other companies in this industry!

    1. Very true, the ~£125m valuation I give it could easily be surpassed, but only in the long-term (assuming no takeover offer). The value of the assets will increase closer to production/value realisation.

  5. 188p lets go for that

  6. Nice! RNS just released. good stuff from nkout

  7. This is a very nice article, definately reading more.