Consolidated Thompson CLM CN
November 10, 2009 - 10:04pm EST by
2009 2010
Price: 5.20 EPS -$0.09 $0.32
Shares Out. (in M): 224 P/E N/A 16.2x
Market Cap (in $M): 1,179 P/FCF N/A N/A
Net Debt (in $M): 0 EBIT -22 192
TEV ($): 931 TEV/EBIT NA 4.8x

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Company Background/Thesis:  Consolidated Thompson is an iron-ore mining company.  The company has been building out infrastructure over the last several years to start mining iron ore at its Bloomlake mine in the Labrador trough in Canada.  Consolidated Thompson is now at an inflection point where it will start producing iron ore for the first time in Q4 2009 and begin shipping the ore in Q1 2010.  The company has excess cash, no debt and no need for additional financing.  Furthermore mine development is almost complete and most of the operational risks associated with developing a new mine are now past.  Yet, despite having little operational or financing risk, the company trades at 1/4 the valuation of peers that are currently producing iron ore.


The company has several structural elements that provide it with downside protection while still offering upside potential, in particular:


1)      The company has contracted out 7mtpa out of the 8mpta it expects to produce under a 7-year agreement.  Of this 4mtpa are dedicated for Wuhan Steel on take-or-pay basis for remaining of mine life.  Wuhan is the third largest steel company in China and currently owns 20% of Consolidated Thompson and 25% of the Bloomlake mine

2)      The company is in lower quartile of the cost-curve with estimated cost of production in the $24-25/ton range.  The current cost-curve has the fourth quartile non-Chinese cash cost of production at $60-70/t while the Chinese cash cost of production exceeds $100/t

3)      The company has no debt and has excess cash that provides it with ample liquidity to complete capex program, pay for all operational expenses and still maintain a cash balance greater than $150m (more than 15% of current market cap)

4)      Company has plans to double production from 8mpta to 16mtpa in the 2011/2012 time frame.  This would instantly double EBITDA and will be financed via internal cash flows.


Valuation:   The table below sets out the math for EBITDA.  The company trades in the 2-4x EV/EBITDA multiple as compared to 8-10x multiple for peers like Cliffs, Vale, BHP and Rio Tinto.   Furthermore, even if one were to assume the trough iron ore prices settled in midst of financial markets collapse; one is still creating the company at attractive valuations.

Iron ore prices(1)










EBITDA (8mpta) (2)





EV/EBITDA (8mtpa)






(1) Prices in 2009 between Japanese steel companies and Brazilian ore producers were settled at $65/t for iron ore fines.  Current spot prices are ~$95/t

(2) EBITDA is based on 2011 projections and calculated as (price/ton - cost/ton) x tons produced x 75% (ownership interest of Consolidated in the mine).  Note tons produced should double from 8 to 16 in 2012









FCF (m)




EBIT (m)




All figures are based on 65/ton Iron Ore prices and net of Wuhan ownership of (25%)



Conclusions/risks:   While I have strong conviction in ability of company to generate strong free cash flow, macro trends may dictate stock price movements in the short to medium term.  I would recommend shorting a basket of iron-ore miners (Vale, BHP, RIO) against this position to hedge macro risk.  The primary limitation on position sizing here will be liquidity as shares do not trade much.  As such having a position size greater than $10m-$15m would make it very difficult to enter/exit position within 10 days 




Consolidated is a relatively new company in the iron ore space and is not well known to investors nor is it extensively covered by sell-side analysts. Hence I believe the EBITDA potential for this company is underappreciated by the market and once the company starts selling iron-ore in 1H 2010 and the cash potential becomes clear, the company will see a re-rating of valuation.
The stock price declined from $10/shr to $1/shr when credit markets froze and investor's feared company will be unable to finance project completion. However, Consolidated was able to sell an equity stake to Wuhan and received the financing needed to complete project. The financing risk is now gone however stock price has not recovered from its shock


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