Palladon PLL
September 22, 2009 - 2:45pm EST by
2009 2010
Price: 0.09 EPS NA NA
Shares Out. (in M): 170,000 P/E NA NA
Market Cap (in $M): 15,300 P/FCF NA NA
Net Debt (in $M): 38,000 EBIT 0 0
TEV ($): 53,300 TEV/EBIT NA NA

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Palladon Ventures Ltd. (PLL-TSX.V) - CDN$0.08 – 9/21/2009

The plot continues to thicken with PLL.  The last time I wrote this up was in March 2009, at which time I thought the stock represented a potentially interesting risk/reward scenario at CDN$0.15 (it was either a zero or multiples of the current value).  Please reference that write-up and prior postings for additional information.  The stock has decreased since that report and still represents a very significant value due to the potential of the Iron Mountain Project in Cedar City, UT, which is the largest and highest grade iron ore deposit in the Western United States.


Here is a brief summary of what has transpired since early 2009:


The Board replaced old management and is currently running the company.

The Board was able to negotiate a short-term extension on the debt with Luxor.  Subject to the company raising a minimum of $5 million by October 15, Luxor has agreed to extend the note through the end of 2010.

Management engaged SRK Consulting (“SRK”) and Hatch Management Consulting (“Hatch”), who are actively working to complete scoping, feasibility, and market studies for the project.  Both are respected experts in the mining and iron-ore industry.

The stock was halted for a few months while new management cleaned up the financials and complied with reporting requirements for the British Columbia Securities Commission and TSX Venture Exchange.  Trading in the stock resumed a couple of weeks ago.

The Company reported its first NI-43-101 compliant resource for the Comstock/Mountain Lion deposit and stockpiles on August 7, 2009.

Company announced that SRK will publish its Preliminary Economic Assessment report (“PEA” or scoping study) by Friday, September 25, which will provide technical and economic details for the project.  The PEA covers only the company’s current compliant resource (CML deposit and stockpiles), and does not include Palladon’s other significant historic resources, which will be brought into compliance in the near term.  Check out the company’s website,, which includes a PowerPoint presentation from SRK previewing the PEA (without the numbers—economic numbers will be added upon completion of PEA).


The stock continues to trade at depressed levels as another deadline for the deb t extension is looming.  In my last write-up, I thought any number of catalysts could occur by the original June deadline for the Luxor debt.  Instead, the engagement of SRK and Hatch has proved to be a slow process, which is often the case when you are dealing with engineering firms.  And the trading halt was not good for the stock.  Fortunately, the Board was able to extend the Luxor debt through October 15.  As such, potential catalysts for the stock have been pushed out, but are still expected to occur over the near term.  The stock has been trading very little volume at a low value, as the company has not yet communicated details of SRK’s scoping study with the market.  The current lack of information available in the market has created an opportunity to get in front of what is likely to be much more positive news flow going forward.  Also, most large existing investors may be restricted from buying in front of the pending financing as they review SRK’s financial analysis.  There is probably some concern over the debt extension on October 15th, but the $5 million minimum capital raise required to extend the debt through 2010 is a relatively small hurdle compared to the $38 million total debt.     


If the Company raises $5 million by October 15, then they will have enough money for SRK to complete a full bankable feasibility study for the project by late Q1 2010.  The PEA due out on September 25 will give us a preview of the project.  Attention is being focused on production of concentrate and/or alternate iron units (pig iron, DRI, and nuggets), which are higher margin, higher value products.  


Here are some potential catalysts for the stock over the next 1-2 quarters:


$5-8 million capital raise by October 15th extends debt through end of 2010 and should alleviate any near-term liquidity concerns

Potential addition of steel and iron ore industry talent to board and management team

Will add credibility and give investors confidence that company can take project into production on schedule and on budget 

Board meeting scheduled for November 16 in Salt Lake City could see new slate of directors with significant industry experience

Potential to sign off-take and/or marketing agreements with large Asian steel mills, domestic mini mills, or commodity marketing and logistics companies as company nears completion of feasibility study in Q1 2010

Concentrate plant can be up and running in 12-18 months for estimated $50-75 million in capex

Estimated margins at current prices of at least $20 per ton on 2 million tons per year or $40 million in cash flow per year (less than two year pay-back on $50-75 million capex)

Substantial cash flow potential compared to current enterprise value of just $50 million

$12 million in equity market value (US$0.075 price per share on 169 million shares outstanding) 

$38 million in debt

Note that current equipment and infrastructure at mine site is estimated at $50 million value, which represents the entire enterprise value of the Company with no credit being given to iron ore in the ground

Scoping study should demonstrate potential value of longer term option to upgrade iron ore to nuggets (98% Fe) or DRI (92% Fe) for sale to mini mills to supplement their scrap mix

Requires 2-3 years to permit and construct

Estimated production of 0.5-2.0 million tons per year of product at a very high margin

Estimated profit potential on 1 million tons of nuggets or DRI is $200 million per year

Pig iron grade nuggets would likely sell for at least $300-400 per ton with a cost of less than $200 per ton (pricing was over $800 per ton just one year ago, which would have yielded an annual profit of $600 million per year at 1Mtpa.  Yes there is risk until the debt issue is resolved, but there is also a very significant potential reward)

Midrex Technologies, world’s leading technology company for direct reduction of iron ore, is rolling out their new ITmk3 (Iron Making Technology Mark 3) nugget plant technology, and Palladon is evaluating the potential for such a plant at their mine site.  Midrex is located in Charlotte, North Carolina and is owned by Kobe Steel, Ltd. Capital cost for Midrex’s ITmk3 plant is estimated at $250 million for a 0.5Mtpa module (see for more information) 

An ITmk3 Pilot Demonstration Plant in Silver Bay, MN started in 2003 (25k tpy plant named “Mesabi Nugget”), which was a partnership with the State of Minnesota, Kobe Steel, Cliffs Natural Resources, Ferrometrics, and Steel Dynamics.  

Kobe Steel and Steel Dynamics formed a JV to build the world’s first commercial ITmk3 plant in Hoyt Lakes, MN, which is scheduled for start up in Q4 of 2009.  

The successful launch of this plant in Q4 will go a long way toward proving the upside potential for Palladon’s nugget option as Steel Dynamics is processing ore at ~ 30% Fe compared to Palladon’s average grade of 42% Fe.  So even though Palladon would likely have higher rail cost to get the nuggets to the Midwest, Palladon has the flexibility of accessing the Asian export market, which is the key industry growth driver for the future.

Kobe Steel and Cliffs Natural Resources also formed a JV and are working toward constructing the 2nd commercial ITmk3 plant. 

Here’s a link to an ITmk3 development stage project in Australia:

Communication of company strategy should increase investor awareness of the potential for the project as well as the upside that should be realized upon feasibility study completion in Q1 2010

Potential for newsletter write-ups from sites such as, who have written on the project in the past

Possible equity research coverage as company nears completion of feasibility study

Potential for sale of entire company to strategic buyer 

Opportunity to secure access to what is likely the most strategic iron ore resource in United States with access to both the domestic mini mill market for DRI or iron nuggets as well as the Asian export market for DRI or nuggets as well as concentrate

Chinese and other Asian steel companies have been very active acquirers of junior iron ore mining companies around the world

Company should secure larger project funding of $75-100 million over next 1-2 quarters as project transitions from scoping study stage to post-feasibility stage

Larger financing would take out or refinance debt, which would de-risk project funding and clarify production timing

New large financial partner would add credibility to project and increase valuation


There are obvious risks in any commodity-based enterprise, particularly when debt is part of the capital structure.  However, I still believe the stock represents a significant value here, trading at an enterprise value equal to just $50 million, which is the estimated value of its current infrastructure alone, with basically gives you a free option on the value of the significant iron ore in place of over 180 million tons.  So once the near-term liquidity issue is resolved and the story is effectively communicated to the market, the stock could see upside equal to many multiples of where it is trading.  Time will tell, but the risk/reward looks very attractive here given the potential for this project to be the major supplier of iron ore in the Western United States.  Also, $5 million in capital is all that is required to bring the project to post-feasibility status by the end of Q1 2010.  An investment here is particularly timely with SRK’s scoping study or PEA report due out by the end of the week.  If you believe the Company can get the minimum funding it needs, perhaps from existing shareholders who are motivated to protect their investment (they invested $60 million at $0.70 per share in June 2008) or from a strategic investor who wants to get their foot in the door at an extremely depressed valuation, then there is the potential to make a multiple return on your money in a relatively short period of time.  The Board has done a good job, but more seasoned management and additional Board talent will be required to successfully execute going forward (and I believe the current Board knows this).  Investors are certainly fatigued on this name, and lack of execution and direction have plagued the stock.  But at $0.08 per share ($12 million equity value, $50 million enterprise value), the risk/reward looks very appealing with multiple catalysts that can drive the stock much higher over time, starting this week with SRK’s report on the economic and technical merits of the project.  As a reminder, SRK’s report is due by September 25th and the interim $5 million funding is due by October 15th, so investors shouldn’t have to wait very long to see how this story plays out. 



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