This is the conclusion of research house First Columbus, which this morning initiated coverage of the Mozambique-focused iron group with a buy recommendation and 39 pence a share price target (current price 17 pence).
The research assessed the economic potential of an operation producing 2 million tonnes of low impurity pig iron, an intermediary product used in steel production, from its 727 million tonne Tete project.
The recent pre-feasibility study (PFS) has already established Baobab can become one of lowest cost producer of pig iron in the world, if not the lowest.
“The combination of hydro power, cheap thermal coal, cheap labour and low strip ratios give Baobab an estimated operating cost of US$224 per tonne of pig iron,” First Columbus analyst James Rose said
At 2 million tonnes the project carries net present value of US$2.4bn and would generate underlying earnings (EBITDA) of US$565mln, according to the latest PFS.
The model also implies a capital spend of US$1.98bn and a payback period of three to four years.
Co-production of ferro-vanadium would add significantly to the revenue stream, representing a by-product credit of US$66 a tonne of pig iron using a price of US$25 a kilogram for the alloy.
“The project is also of significant strategic value to a steel major who wishes to construct a vertically integrated steel facility on site,” Rose pointed out.
“Baobab could save a steel producer around US$527m a year meaning that, at current input prices, they could be purchased for up to £502m and still deliver a steel producer a healthy industry standard internal rate of return.”