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Edison Investment Research notes Baobab’s progress at Tete project

Published: 10:52 27 May 2010 BST

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In a research note on Baobab Resources (AIM: BAO), Edison Investment Research highlighted that Baobab has a favourable EV (enterprise value) to resource ratio from an investors' point of view when compared to its peers, with an EV per tonne (EV/t) of US$2.04, compared to US$3.53/t for the industry as a whole. Furthermore, Edison believes that the project has potential for a large resource upside and for a refinement operation.

Additionally, the company research specialist said that Baobab is seeking a farm-in development partner to take on the development of the project. “In our discussions with the company, it was suggested that a development partner was to be sought prior to the start of the bankable feasibility study," it said in the note.

The company now has sufficient funds to complete scout exploration on the Tete project in Mozambique, where it is working towards the completion of a pre-feasibility study by mid-2011 and a bankable feasibility study by early 2013, Edison noted.

Based on the results of an aeromagnetic survey, Baobab has an exploration target of between 300-700Mt. The 12,000m scout drilling campaign initially began late in 2009, and recommenced on 10 March 2010 - after the rainy season. So far, in 2010, Baobab has completed nine holes for 2,076m, and the top analytical results from the early stages intercepted 44.5m grading 60.2% Fe and 0.58% V2O5, with 18.9% mass recovery.

According to Edison, the Tete iron-vanadium-titanium project is in a good location - close to the Cahora Bassa hydroelectric dam, and two substantial coal projects which are being developed by Vale (NYSE: VALE) and a Tata-Riversdale JV. The IFC is also leading a redevelopment project for rail and road in the area, which will provide operational benefits when Tete comes online.

“Being in the shadow of two large-scale coal projects and with cheap hydroelectric power on its doorstep, Baobab is looking to increase the scope of its project by adding a refinery. While this increases capex from c US$500m to over US$3,000m, it also increases net present value from US$462m to US$4,257m, based on an iron ore price of US$0.90/dmtu and a long steel price of US$1,000/t”.

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