LST 0.00% $1.93 lion selection limited

lst may increase up to 9 times

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    E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 1
    11 December 2007
    Lion Selection (LST) In Brief
    Transformational transaction brewing!
    �� Newcrest has put its 70% interest in the Cracow gold mine out to
    tender; LST, which directly owns 30% (present value $58m), has
    a pre-emptive right. LST has said 100% ownership of Cracow would
    be a major strategic step in
    �� transforming the company from a NTA related basis to one based on
    earnings multiples. It is here we see a significant lift in value (mkt
    cap.) if LST is successful in obtaining 100%. The process is
    expected to start for LST in early February with a final investment
    decision around mid-2008.
    Presently, LST’s 30% of Cracow is valued at $58m which places a
    run-through value of $193m on Cracow. But, Dominion Mining, for a
    similar level of gold production/comparable costs and mine life, has a
    market capitalisation is $498m. We value DOM at $250m ($2.50 per
    share) and 100% of Cracow at $190m but attribute another $55m to
    exploration (see summary sheets attached – DOM, Cracow).
    �� LST says it’s serious about owning 100% of the mine. The value lies
    somewhere between –
    a) $156m (70% of $215m, a function of grossing up LST’s $58m
    value and inflating by 15% for a control premium).
    b) Our own valuation, including exploration upside, is $245m with
    70% worth $171m plus a premium for operatorship, say
    $185m.
    �� Well, LST is now an “operating” investment company which trades at
    a discount to its NTA, like most such companies. The present share
    price is $1.79 versus the most recent NTA of $2.03, ie a discount of
    13%. It has $67m in cash, boosted by $30m coming from the sale of
    its interest in Platmin and residual investments totalling $249m.
    LST has been liquidating some non-performing investments within the
    portfolio, eg Intrepid Gold. We understand it is selling other interests
    but is reluctant to nominate given market sensitivities. Should it sell
    all of its AGM shareholding (it has sold some) it would realise around
    $30m.
    So potentially, LST could, by the time it is required to make a
    pre-emption on the 70%, have over $100m in cash.
    �� Based on a pre-emptive price of $175m to $200m, this
    could/would leave a funding shortfall of $75m to $100m (at a mid
    point). LST has had numerous approaches about various
    alternative forms of financing in the event of a purchase. And
    there are those content to take a minority position (25% to 30%) in the
    total asset; paying a premium to get in.
    �� The Lion Selection Group has in its history been very frugal when it
    comes to issuing shares; we would only see the issue of shares as a
    last resort although not out of the question. It’s likely the shortfall in
    funding will be a mix of debt (say 70%) and equity.
    �� The attraction of owning Cracow in its entirety is that the market
    has only limited choices in this category of gold mining, ie
    +100,000 oz pa, cash cost of below A$375/oz, unhedged with
    exploration upside. We have referred to DOM and point out that at its
    present share price of $4.87 it’s selling on a prospective PER of 19
    times for 2007/2008 earnings.
    Recommendations
    Short Term: Speculative Buy
    Risk: Medium to High
    Price: $1.79
    Valuation Range: $2.54 to $3.08
    Snapshot
    Monthly Turnover (m) 6.6
    Market Cap (m) $340.9
    Shares Issued (m) 191.0
    52 Week High $1.90
    52 Week Low $1.34
    Sector Div. Metals & Mining
    Business Description
    Lion Selection Limited, is a resource investment
    company. LST invests in Australian mining and
    exploration companies with gold and base metal
    activities in Australia, Africa and South East Asia. It
    owns a direct 30% interest in the Cracow
    underground gold mine in Queensland.
    Investment Fundamentals
    Year end July FY07 FY08 FY09 FY10
    Reported NPAT ($m) 64.3 46.1 40.3
    EPS (¢) 32.4 19.5 17.1
    PE Ratio (x) 5.5 9.1 10.5
    DPS (¢) 10.5 5.9 5.1
    Dividend Yield (%) 5.9 3.3 2.9
    Spot Gold (US$/oz) 647 750 750
    Exchange Rate (A$/US$) 0.80 0.90 0.89
    Analyst Name – Ray Chantry
    61 3 9602 9219 [email protected]
    We estimate that LST could generate earnings of
    7.6 cps ($16m) from 100% of Cracow in the
    2008/09 year. Capitalised at a PER of 15 times
    (mid point between forward PERs of DOM and
    EQI) translates to $240m or $1.15 per share.
    Then there’s the investment portfolio which LST
    intends to still aggressively pursue and after further
    rationalisation could still approximate $1.65 per share.
    So, base case, the LST share price moves up
    through $2.80 per share . . . that’s if it all goes to
    plan!
    We see negligible downside risk for LST given the
    strategic nature of its shareholdings in IRN and
    ALB and its other investment opportunities.
    E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 2
    Lion Selection
    Share Price LST $ 1 .79 $ 1 .79 $ 1 .79
    Year Ending . 31-Jul 2005/06 2006/07 2007/08 2008/09 2009/10
    Market Capitalisation $m 189.4 340.9 340.9 376.3 0.0
    Valuation $m 477.7 559.2 635.0 686.9
    Valuation per share $ 2.65 $ 3.01 $ 3.26
    Issued Ordinary Shares m 106.1 191.0 191.0 210.8 210.8
    New Issue " 14
    Options " 7.600 7.600 5.800
    Fully diluted 113.7 198.6 210.8 210.8 210.8
    ASSUMPTIONS
    Spot Gold $US/oz 527 647 720 750 750
    Spot Exchange Rate $A/$US 0.755 0.800 0.878 0.898 0.892
    Gold production 000oz 3 2 3 6 3 3 1 10 1 12
    Gold Resource m.oz 1.1 0.9
    Mkt Cap per resource oz 310 401
    Cash Cost 281 327 356 367 356
    Number of Shares m 113.7 198.6 210.8 210.8 210.8
    FINANCIALS
    Sales Revenue 22.6 26.1 28.2 95.8 97.4
    Other Revenue 56.4 51.6 52.1 40.6 30.2
    - Operating Costs 9.0 12.4 12.7 44.5 44.5
    EBITDA 13.6 13.7 15.5 51.3 52.9
    - Depreciation/Amortisation 2.6 2.6 2.5 8.4 8.4
    -Other 3.5 7.5 10.1 15.6 15.2
    EBIT 7.5 3.6 2.9 27.3 29.3
    Pre Tax 62.1 53.8 52.1 66.3 58.0
    Net Profit (pre Abnormals) $m 41.0 64.4 36.5 46.4 40.6
    -Half year result 1.2
    EPS cents 36.1 32.4 17.3 22.0 19.3
    EPS Growth % 4618% -10% -47% 27% -13%
    P/E ratio x 5.0 5.5 10.3 8.1 9.3
    Gross Cash Flow $m 16.2 37.4 28.6 44.0 41.4
    GCFPS cents 14.2 18.8 13.6 20.9 19.7
    P/GCF times 12.5 9.5 13.1 8.5 9.1
    Dividend $m 10.0 20.0 15.0 13.9 12.2
    DPS cents 9.4 10.5 7.9 6.6 5.8
    Dividend Yield % 5.9 4.4 3.7 3.2
    Net Cash Flow $m 9.0 32.4 23.6 39.0 40.4
    Discount rate % 8.5% 8.5% 8.5% 8.5% 8.5%
    Net Present Value Cracow $m 1 56.6 3 44.4 3 46.4 3 57.5 3 54.2
    Exploration/other (8.3) (14.0) (12.6) (12.6) (9.5)
    H/Office 4 .4 4 .5 4 .5 1 1.0 1 1.0
    Debt (9.0) (13.0) (68.5) (56.6) (44.7)
    Cash 7 3.0 1 02.7 2 8.5 7 4.8 1 15.0
    Investments 2 61.0 2 61.0 2 61.0 2 61.0 2 61.0
    Total Valuation $m 4 77.7 6 85.6 5 59.2 6 35.0 6 86.9
    NPVPS $ 2 .50 3 .25 2 .65 3 .01 3 .26
    E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 3
    Dominion Mining dom $ 5 .37 $ 5.37 $ 5.37 $ 5.37
    Market Capitalistion $m $ 5 43.3 $ 5 53.6 $ 5 53.6
    Valuation $m $ 2 33.4 $ 2 81.2 $ 2 68.3
    Valuation $ 2 .37 $ 2 .80 $ 2 .67
    Year Ending . 30/june 2004 2005 2006 2007E 2008E 2009E 2010E
    Issued Ordinary Shares m 80.7 98.5 98.5 100.4 100.4 100.4 100.4
    Options " 2.150 0.300 0.000
    Unlisted Options " 2.000 2.100 2.700 2.700 2.700 1.500 1.500
    Fully diluted 84.810 100.870 101.170 103.100 103.100 101.900 101.900
    ASSUMPTIONS
    Spot Gold $US/oz 409 450 556 666 750 750 750
    Spot Gold A$/oz 626 616 736 832 855 835 841
    Hedged Price A$/oz 562 580 580 710 729 0 0
    Realised Price A$/oz 594 593 635 790 811 835 841
    Hedging as a prop. of production 50% 65% 65% 35% 35% 0% 0%
    Silver $US/oz 6.10 8.00 12.25 13.43 14.60 14.60 14.60
    Spot Exchange Rate $A/$US 0.653 0.730 0.755 0.800 0.878 0.898 0.892
    Gold production oz 60,813 43,477 108,017 108,329 111,257 110,938 109,829
    Silver Production 0 0 0 0 0 0 0
    Gold Reserve 000oz 298 293 293
    Gold Resorce 000oz 0.37 328 686 686
    Mkt Cap per oz OF RESOURCE 0 0 0
    FINANCIALS 2004 2005 2006 2007E 2008E 2009E 2010E
    Sales Revenue 36.1 25.8 68.5 85.5 90.2 92.6 92.4
    EBITDA 12.2 -1.6 15.5 61.6 51.9 42.6 45.8
    EBIT 6.7 -8.6 1.3 47.9 37.7 27.0 30.3
    Pre Tax 5.7 -9.1 0.9 47.9 37.7 27.0 30.3
    Reported Net Profit $m 5.7 -9.1 9.7 54.2 26.4 18.9 21.2
    NRI (included above) -8.8 -21.0
    Sust. Profit 18.5 33.2 26.4 18.9 21.2
    Half Yr $m 0.6 (3.6) 4.4
    EPS cents 6.7 -9.1 9.6 32.2 25.6 18.5 20.8
    EPS Growth % -235% -206% 235% -21% -28% 12%
    P/E ratio x -59.2 55.9 16.7 21.0 29.0 25.8
    Gross Cash Flow $m 14.2 0.8 28.9 75.9 48.6 42.5 38.7
    GCFPS cents 17 1 29 74 47 42 38
    P/GCF 32.18 699.42 18.80 7.30 11.39 12.87 14.13
    Dividend $m 0.0 0.0 0.0 16.1 12.8 9.3 10.4
    DPS c 0.0 0.0 4.0 8.0 27.0 13.1 9.4
    Dividend Yield % 0.0 0.0 0.7 1.5 5.0 2.4 1.8
    Franking % 100.0 100.0 100.0 100.0 100.0 100.0 100.0
    Net Cash Flow $m -4.8 -12.2 16.9 50.9 34.5 29.4 26.4
    NCFPS c -5.7 -12.1 16.7 49.3 33.5 28.8 25.9
    Net Present Value (8.5%) $m 91.0 118.5 215.4 216.8 184.3 165.5 150.2
    Cash 4.2 6.4 16.8 62.8 80.0
    Debt - (6.5) - - -
    Exploration 6.0 10.0 16.0 16.0
    investments - - -
    HO (12.0) (6.0) ( 8.8) ( 14.4) ( 12.0)
    Total Valuation $m 83.1 118.4 233.4 281.2 268.3
    NPVPS $ 1.03 1.20 2.37 2.80 2.67
    E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 4
    Cracow
    30% 30% 40% 100% 100%
    Period Ending Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
    Gold resources m.oz
    Total Project
    Total Ore Treated t 314 387 375 375 379
    underground 314 387 375 375 379
    waste 314 330 353 371 371
    Gold price A$/oz 795 920 882 829 829
    Head Grade g/t 11.4 10.2 9.8 9.8 9.8
    underground 11.4 10.2 9.8 9.8 9.8
    open cut - - - - -
    Recovery % 93 93 94 94 94
    underground 93 93 94 94 94
    open cut 93 94 94 94 94
    Recovered Grade g/t 11 10 9 9 9
    underground 11 10 9 9 9
    open cut - - - - -
    Gold Produced ozs 108 118 110 110 112
    Silver Produced 95 101 108 113 113
    underground 108 115 111 112 112
    open cut - - - - -
    Operating Cost $/t 96 100 105 108 110
    underground 96 100 105 108 110
    open cut
    Operating Cost $/oz 281 327 356 367 373
    Operating Cost $m 30 41 42 41 42
    underground 30 39 39 41 42
    open cut 0 0 0 0 0
    Amortisation & Depreciation $/t 39 27 27 54 54
    Amortisation & Depreciation $/oz 115 75 75 175 175
    Amortisation & Depreciation $m 13 9 10 20 20
    Royalties $m 1 2 2 2 2
    Total Cost (ex royalties) $/t 135 151 144 143 143
    Total Cost (ex royalties) $/oz 403 438 492 567 574
    Total Cost (ex royalties) $m 43 50 51 53 53
    Total Sales ozs 32 36 33 110 112
    Hedging ozs 30 30
    Spot sales ozs 2 6 33 110 112
    Spot Gold price $A/oz 795 920 882 829 829
    Gold Price Achieved $A/oz 664 664
    REALISED Gold PRICE 664 785 882 829 829
    Financials
    Sales Revenue $m 21.9 25.0 29.2 91.5 92.5
    Site Operating Costs - - - - -
    Mine Operating $m 9.0 12.4 12.7 40.5 41.7
    Inventory Change/stripping/devel. - - - - -
    Total Mining 9.0 12.4 12.7 40.5 41.7
    Royalties/Other 1.1 1.2 1.5 4.6 4.6
    EBITDA 11.7 11.4 15.1 46.5 46.2
    Amortisation & Depreciation $m 2.6 2.6 3.0 20.3 20.5
    Exploration spend 1.1 1.1 1.1 1.1 1.1
    Administration $m 1.0 1.0 1.5 1.5 1.5
    Income from Operations 7.0 6.6 9.4 23.6 23.1
    Other Expl. $m
    Profit before Tax & Abnormals $m 7.0 6.6 9.4 23.6 23.1
    Income Tax $m - 0.7 2.8 7.1 6.9
    Profit before Abnormals $m 7.0 6.0 6.6 16.5 16.2
    Period Ending - - -
    Profit before Abnormals $m 7.0 6.0 6.6 16.5 1 6.2
    E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 5
    Disclaimer
    This document has been prepared and issued by E.L. & C. Baillieu
    Stockbroking Ltd. Australian Financial Services Licence No
    245421. Participant of ASX Group.
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    Contact Details
    E.L. & C. Baillieu Stockbroking Ltd
    A.B.N 74 006 519 393
    Website: www.baillieu.com.au
    Melbourne Office
    Level 27, 360 Collins Street, Melbourne Victoria 3000
    PO Box 48, Collins Street West, Melbourne Victoria 8007
    Ph (03) 9602 9222 Fax (03) 9602 2350
    Email: [email protected]
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    Level 18, 1 Alfred Street, Sydney NSW 2000
    PO Box R1797, Royal Exchange NSW 1225
    Ph (02) 9250 8900 Fax (02) 9247 4092
    Email: [email protected]
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    Cnr Bridge & Baxter Streets, Bendigo Victoria 3550
    PO Box 40, Bendigo North Victoria 3550
    Ph (03) 5443 7966 Fax (03) 5442 4728
    Email: [email protected]
 
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