Ferrum Crescent - Progressing Moonlight


Amid tough financing times in the LSE mining sector (the small cap sector in particular), there really are not many companies that I would deem to be of investment grade. Bushveld Minerals (LSE:BMN) and Serabi Gold(LSE:SRB) are two companies that I have noted to be exceptions to that rule. I reckon a third is Ferrum Crescent (LSE:FCR), a company listed on three exchanges: AIM, Australian Stock Exchange (ASX) and the Johannesburg Stock Exchange (JSE). The company has made good (albeit slow) progress at its operations in South Africa and has met all of my fairly strict criteria for assessing junior miners in the current market. Ferrum Crescent currently has a share price of 2.05p having been at sub 1p a few months back. With just over 375m shares in issue, Ferrum's market capitalisation stands at £7.73m - I reckon there is room for this figure to rise as the market reawakens to Ferrum's potential.

The technical position of the company is relatively bullish with a series of higher highs being made following a breakout of the long term downtrend. Also, the spike up to ~3.75p proves that there is good buying pressure. The other side of that coin is that there are a number of investors who are probably willing to sell out at a higher share price. That was somewhat influenced by a share placing at 1.8p that was announced in very early October. Therefore it is fair to assume a stream of selling pressure, although the only real resistance will be at 3p/4p where investors will be looking to take profits and set limit sells. The increase in volumes since September are a good indication that the market is taking notice of Ferrum, and that has been backed by an increase in liquidity. That means the current spread is far narrower than it has been historically. Nonetheless, the spread varies wildly depending upon when the quote is obtained, so it is definitely worth keeping an eye on. The bullishness is mirrored on Ferrum's other listings. Only one publicly available broker view exists - that is a speculative buy rating from Beaufort Securities. Given that Beaufort pretty much give all their shares a speculative buy rating, I wouldn't say that it holds much weight.

There have been a number of noteworthy share transfers since March. In April, Executive Director Edward Nealon purchased 1,000,000 shares at 1p. That has turned out to be a very fruitful move. The purchase took his interests up to 6.4m shares or 1.96% of the share capital. It's worth pointing out here that Nealon has a lot of industry experience having steered Aquarius Platinum (LSE:AQP) to an IPO near the turn of the century, a venture which he left in 2002 in order to pursue other mining interests.The fact that the main board member is willing to purchase shares in the market is a bullish sign especially considering most junior miners don't have directors who are willing to put their money where their mouth is.

In September, Investment Management company Rathbone Brothers upped their stake in Ferrum to 6.86%. Once again, for a company of Ferrum's market cap, that is a major vote of confidence. In addition, a private shareholder upped their stake to over 6% of the issued share capital. More recently in October, the directors were also happy to take shares in a placing. Managing Director Robert Hair and Edward Nealon took up roughly 3.4m shares between them at 1.8p. That backing can only be considered positive in particular because they are at the forefront of operations. It's worth noting that Ferrum does not have a CEO, so this is backing at the highest level within the company. On a purely technical basis, the shares look good for a run up to 3p and higher. That is backed up by the fundamentals.

In the opening paragraph I noted that junior miners (at the moment) have to meet a strict criteria on order for me to be interested in them. Those criteria include:
1. Undervalued assets comparative to peers
2. Decent cash position with no near term dilution
3. Positive chart position that provides plenty of room for upside. Normally investor interest is fairly low
4. Clear focus, in terms of asset portfolio, geographical spread and pathway to monetisation
5. Upside catalysts should exist in the near term

For this article, I also wanted to avoid precious metals miners due to their recent instability, and a lack of direction in the gold/silver prices. Admittedly there are some interesting plays within that arena that I may well look to cover once appropriate. For this article though, I kept a focus on the other metals. Disappointingly, even with the share price capitulations across the sector, I have to say that there really is not that much value amongst the small caps. Many have mothballed their operations and most have imminent cash needs. That means that they fail to meet most of my criteria and there is a huge amount of uncertainty that lingers over them. I'm therefore inclined to say that the sector decline has brought most companies back down to more realistic valuations. Many of them I still consider to be overvalued though, so it's very much about cherry picking those that have been brought down to these levels, unfairly. Ferrum should be able to check all of the criteria over the coming months. As shown via the chart above, I'd say criteria 3 is checked.

Ryk Neethling on flickr
Ferrum has a sole interest and that is in the Moonlight iron ore project in South Africa. That interest stands at 97% and is indirectly held through subsidiaries. That checks part of criteria 4 - there is one main asset in one part of the world. There has been no over-diversification - that is a problem I have with quite a lot of junior miners. Having projects across the globe is a problem for small companies in terms of efficiency and administrative costs. The Moonlight project is located in North, South Africa within the Limpopo province - a province with good infrastructure. The company has a mining licence that spans 30 years. There is an inherent risk with operating in South Africa, but ultimately there are a number of high profile companies who operate there successfully. Recently Ferrum completed a private placing for around £850k at 1.80p. That, combined with a strategic investment by a third party (I'll outline shortly), has reduced the need for any imminent funding. That should check criteria 2.

Moonlight itself has a JORC compliant resource of 308Mt with an average grade of 26.9%. Ferrum have noted that there is potential for this figure to rise. As it stands, the resource is sufficient to last 20 years of production. The iron cut off grade (i.e. not viable to mine below) is 16%. That's not the largest resource, nor is it the best grade resource, but at the figures it gives them a net contained resource of about 80Mt. The net resource split for that is 15.8/22/43.5Mt for Measured/Indicated/Inferred respectively. Once again, these figures aren't huge, but that is not a big problem. The update did actually see a decline upon previous figures. However:

"Based on these results, your directors believe that whilst the total average Fe grade has decreased slightly (previously estimated to be a JORC compliant Mineral Resource of 74Mt @ 33% Fe in the Indicated Resource category and 225Mt @ 29% Fe in the Inferred Resource category), the tonnage has increased proportionately along with a substantial increase in the confidence and classification of the Mineral Resource. Furthermore, your directors are of the opinion that the depth constraint of 250m (maximum) is conservative, particularly as the previous estimation was not constrained in this way." "The Mineral Corporation concludes that these results have identified targets on Moonlight Farm which could represent potential upside for the current Mineral Resources at a modest exploration cost. "

What is interesting is that Ferrum recently dotted an agreement with Anvwar Asian Investments (AAI), a business based in Oman. That is the fundamental news that sent the share price rocketing up towards 4p. That has changed the whole dynamic of Ferrum's play, and has placed a reference value upon it. The deal has not yet been completed, but AAI have completed their due diligence and the formalities have been agreed. A representative of AAI will join Ferrum's board. The deal is worth a total of ~£8m to Ferrum. It sees Ferrum sell a 35% stake in Moonlight, for roughly £6m. AAI will also contribute the first £2.14m to the Bankable Feasibility Study (BFS). In the simplest way, you can use the reference value to work out a rough value for Ferrum's remaining 62%. (£8.25m/35)*62 = £14.61m. Thus Ferrum's share is valued at an 89% premium to the current market cap. Hence afterwards, with the £6m and current cash of roughly £1.1m, that implies a market cap of £21.7m which is far in excess of the current market cap. However, a more detailed and perhaps, realistic valuation is shown below:

Note that Ferrum Crescent is debt free
This calculation attributes resource values to Ferrum's net contained asset using values that are relative to peers. Three scenarios are shown, although the base case is slightly lower than peers at £0.10/t due to the resource size and grade. What is does show is that the company is valued at a discount to peers despite having secured a strategic partner. That is unjustified. That checks criteria 1. Realistically, if momentum were to get behind Ferrum, that valuation could well exceed that, but it's best to remain realistic for now. After all, momentum rises/falls tend to ignore fundamentals in the short term. On that note, the BFS is set to be completed around the H1/H2 boundary in 2014. The company has made progress with the BFS after signing a process engineering agreement with an Italian firm back in February.

The transaction dates have been set back by a month or so but there is no indication that AAI will pull out, so it seems a near certainty at this stage. The first payment of £610,000 will be made to Ferrum in January, with the remaining £5.50m set to be received in late February 2014. Being ASX listed, the company is obliged to release quarterly operational and financial reports. That is a move that some investors like as it provides greater clarity. Cash flows aren't huge especially since Ferrum aren't in an exploration stage. During the entirety of 2012, the net cash outflow amounted to ~£1.3m. That figure will rise this year on the back of the BFS and increased activity (last year was a year of slow progress), but it remains a modest expense. Below are the quotes from the due diligence completion announcement:

Ed Nealon, Chairman, of Ferrum Crescent said: "The conclusion of the due diligence by AAI allows both groups to complete structuring agreements and secure funds that will allow the Moonlight BFS to be concluded. Working with AAI we shall look to progress the BFS in early 2014 and move towards our goal of creating a new high-grade iron-ore product source located near infrastructure in Northern South Africa."
Mr Anvwar Al Balushi, Chairman of AAI ,stated: "The Moonlight Project is in some ways a different investment from ones that Anvwar Asian Investment has made in the past. Through this transaction and our relationship with Ferrum Crescent, however, we know there will be significant benefits to the owners, South Africans and also importantly for us to Omanis, as our strategic plans are carried out."

The introduction of AAI sets Ferrum on a clear pathway to monetisation. It's first step involves completing the BFS in order to prove that the asset is economically feasible (and worthy of being passed onto a bank for financing). Beyond that the company has plans for Moonlight to produce 6Mt/year. 4.5Mt/year of that has already been found a home, with Swiss-based Duferco signing up. They can also take care of the remaining 1.5Mt/year should the iron not be sold within South Africa. A financing arrangement is set to be undertaken in 2014/2015, with mine construction in 2015-2017. Production is scheduled to start in 2018. The agreement with AAI should mean that the funding requirements are lessened. There is no escaping the case though that the CAPEX required to be raised after the BFS, stands at £379m net to Ferrum. Upside catalysts could also take the form of further agreements with companies who provide services that will be required for production, such as power.

Nonetheless, that checks criteria 4 in its entirety. All that remains is criteria 5 - there should be an upside catalyst. The obvious upside catalyst in this case is the receipt of the funds from AAI. That will give Ferrum a strong financial position for next year and that would sit it heads and shoulders above most of the junior miners at the moment. The advanced stage of the project also reduces some of the uncertainties with regards to government and operational obstacles.

Ferrum has announced a few important agreements in recent months that cannot be overlooked. The AAI deal helps to reduce any financing needs for short term working capital and it also brings on board another party to help take some of the costs. In the long run the CAPEX requirement is large, but there are a number of short/medium term price drivers that should materialise before that. The receipt of the cash combined with any infrastructural announcements should help lift the shares. Directors have been actively adding to their holdings which is a further positive. What is pretty clear is that £7.73m is a very low market cap for the resources they have, and the progress they have made. As per the 5 criteria, the technical position is good, there are no immediate cash concerns, they have a path to monetisation, have assets which are valued at a discount to peers and there are upside catalysts in view. For those reasons, I have put Ferrum Crescent as a buy at 2.05p targeting north of 3.25p. The company is high risk due to the nature of operations, but it is lower risk that most junior miners at the moment. On a comparative basis, Ferrum seems more attractively placed than most.

UPDATE (19/02/14) - I have moved Ferrum Crescent from Buy to No Rating after an RNS release which says that the payment from AAI will be staggered. That removes the catalyst for the share price, unfortunately. I have therefore locked in gains at 3.05p which is shy of my initial target, for a 49% profit


  1. Thanks. Its very difficult to pick through miners now

  2. Super reasearch

  3. Very thorough and u r right, Ed Nealon does know the mining and politics of South Africa like the back of his hand. There are not many Junior miners able to obtain the quality of (non dilutive) funding which Mr Nealon has manged to secure, at the moment.He made a personal fortune out of Aquarious and is seeking to do this again with Ferrum.

  4. Cheers el1te. Its a bit annoying with the AAI lump payment going. Lukcily I needed funds for MONI yesterday :) so I had much reduced my holding anyway, not that MONI is going great!