Northland Analys
2012-09-10 09:08Please note: Community posts are written by its members and not by Redeye’s research department. As a reader you’re always encouraged to critically analyze the content.
En utav dem mest omtalade aktierna i Skandinavien är Northland Resources. Ett företag hyllat av många analytiker. Som master uppsats valde jag att göra en omfattande analys för att genomskåda riskerna med att investera i företaget.
This thesis is written from an investor’s perspective to determine the fair value of Northland Resources share price as of the 20th of July, 2012. The valuation is supported by a fundamental analysis of the iron ore market’s forecasted supply and demand capacity.
For a long time the iron ore price has, been set in secretive meetings, not widely followed by banking analysts, and not been included in major commodity indexes. The iron ore price is highly leveraged towards the urbanization and industrialization phase of China. The economic prosperity of China has caused an exponential increase in commodity prices. This has led many people to believe in a new paradigm or a so called super cycle with sustained high commodity prices in the future.
Northland Resources is one of the largest industrial projects in Sweden at the moment. The company will start production of a high quality iron ore concentrate in Northern Sweden by the 4th quarter of 2012. The project has required a colossal investment of more than 5 Billion SEK and serves as a very important part for the socio-economic development. This project has the potential to reverse the declining population trend and generate economic growth for the greater region.
Many private investors have been amused by Northland Resources fantastic growth story. Private investors on internet forums have consistently been arguing in favor for investing in the company. Banking analysts and newspapers are also enthusiastic about Northland. The average target price for Northland by banking analysts is 15.67 NOK, which is more than a 200% upside to today’s price of 5 NOK. Analysts expect the iron ore price to remain high in the future. Despite that in the last 100 years, the iron ore price has only been above $100/ton in the last 2 ½ years.
According to my conservative analysis, the iron ore supply entering the market from 2013 to 2016 combined with a restructuring of the Chinese economy will gradually phase out the Chinese high cost producers to set a new price floor at $100/ton.
My prediction of the iron ore price and valuation of Northland is contrarian to many analysts’ recommendations. I consider a fair value of Northland’s share price to be 2.18 NOK or a 56.4 percent decline from the current market price of 5 NOK. I believe that there are strong indicators that Northland Resources will prove to be a value trap.
Many investors rely on simple P/E ratios on next year’s earnings or intuitive DCF valuations. A more reliable DCF valuation backed by fundamental supply and demand requires more details and is far less intuitive. Investors relying on simple DCF and P/E ratios are also probably less likely to understand the composition of GDP growth that drives the demand for iron ore and are thereby deluded to invest in Northland Resources.