We are initiating coverage of Aspire Mining Ltd. (AKM: AU) and assigning Speculative Buy rating with target price of A$0.65. Our target price is based only on DCF valuation of Ovoot project of AKM and represents 62% upside to the current market price of A$0.40. The valuation model assumes discount rate of 15.93%, a mine life of 23 years, and long-term premium coking coal price of US$200/t. AKM is an early stage exploration company with mining assets in Mongolia and Western Australia. In Mongolia, AKM holds exploration licenses in five projects. Ovoot Coking Coal Project is the most advanced and focused project for AKM and located in Khuvsgul province of north-west Mongolia.
Potential to increase resources. AKM has a strong upside potential to increase its JORC compliant resources of Ovoot project as it has only drilled 20% of the license area. AKM has 330.7Mt of JORC resources (93.3Mt Measured, 182.4Mt Indicated and 55Mt Inferred) and plans to announce upgraded resource and reserve estimate in March 2012. Coal analysis demonstrated high indicative yields from washing the coal, with the washed product being a high vitrinite and low ash coking coal. The company also plans to conduct additional work on the other projects.
AKM plans to develop the Ovoot Project in 2 Stages. In Stage 1, starting from 2013 we expect that the company would truck annually 0.5Mt to 1Mt of coking coal from the Ovoot Project to the Erdenet rail station in Mongolia from where it plans to ship via railway to customers in Russia and in Asia-Pacific region. In Stage 2, we expect that the company completes railway construction by 2018 and reach full production capacity of 12Mt of high quality washed premium coking coal by 2020. We estimate that the total capital expenditure including railway infrastructure (US$1.1bn) and washing plant (US$336mn) will be about US$1.5bn.
Risks. Downside risks to our forecasts include downward pressure on coking coal prices and higher transportation costs. The company specific risks include the ability of the management to raise moneys for the project and to develop the project on time and on budget.
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