Treasure Chest: Buying Opportunity In NRW

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Moelis believes contractor NRW Holdings did not deserve to be sold off with the iron ore price, and upgrades to Buy.

– Sell-off misguided
– Expansion projects not affected by price volatility
– Other opportunities to enhance earnings

By Greg Peel

The iron ore price has fallen from its lofty heights of near US$95/t earlier this year to under US$60/t today. The extent of the rally surprised many, but consensus among analysts remained steadfast that US$60/t was a more realistic target.

The price is down -23% from the beginning of 2017 and in the same period, the share price of mining contractor NRW Holdings ((NRW)) has fallen around -19%. Moelis & Co makes the assumption the sell-off is directly related to NRW’s contracts with the big iron ore miners, irrespective of exposures to other metals and minerals.

The assumption is the lower the iron ore price, the less likely NRW is to win work on mine expansions or new developments. However, the broker points out that NRW’s customers sit well down the cost curve, meaning they are producing ore at a much lower price than others. At US$60/t, margins, and thus earnings, remain healthy.

The big miners are also not in the business of running for the hills every time there is volatility in spot iron ore pricing. New development decisions are made on a long term basis, and hence long term assumptions are built into to projections. Enquiries by Moelis suggest a long term price of US$50-60/t is currently being assumed.

Potential sustaining production volume projects in the offing include Fortescue Metals’ ((FMG)) Eliwana-Flying Fish and Nyidinghu, BHP Billiton’s ((BHP)) South Flank and Rio Tinto’s ((RIO)) Koodaideri.

NRW is well placed to benefit from the expected development work required for these major projects, Moelis believes, given strong relationships with the miners and a proven track record of successful delivery of bulk earthworks in the WA iron ore sector. Beyond iron ore, NRW’s earnings from FY18 and beyond are expected to be also driven by opportunities in gold, coal, copper and lithium.

The broker has upgraded its recommendation to Buy with a 73c target, suggesting 35% upside.

NRW is no longer covered by brokers in the FNArena database.

 

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