Edison Investment Research issued a note on Baobab Resources (LON:BAO), making the case that the company is undervalued by the market.
Baobab reported earlier this week that drilling results are beginning to reveal the greater potential of the South Zone of the Tete iron-vanadium-titanium project in Mozambique.
Following the release of results from the first three of its five step-out, reverse circulation (RC) drill holes at South Zone in October, the latest results are from an additional five holes.
Drilling highlights included concentrate grades between 58.3 and 62.8 percent iron and between 0.62 and 0.69 percent vanadium, with mass recovery reaching up to 36.1 percent.
"The results to date are beginning to reveal the greater potential of the South Zone prospect,” managing director Ben James said on Monday. “Drilling currently underway in the northern portions of the area is delineating a substantially wider zone of mineralisation than anticipated that has yet to be closed off along strike and at depth."
Baobab plans to release an updated resource statement for South Zone in January 2011 to JORC standards.
“In the meantime, while we have left our estimate of the resource tonnage contained within the South Zone unchanged as a result of these five drill holes, we have increased our estimate of the average grade of the deposit from 28.5% to 29.2%,” the research house said.
Baobab’s shares are currently trading at a level that gives the company an enterprise value equivalent to US$1.81 per JORC-compliant resource tonne of iron based solely on its current resource of 47.7Mt at 25.3%.
“Simply being rated at the industry average valuation would imply an 81% increase in Baobab’s share price to 18.11p. This increases further, to 65.39p, in the event that the company increases its resources to 339.7Mt at 27.3% Fe at a (discounted) valuation of US$1.81/t Fe, and to 127.73p in the event that it re-rates to an industry average valuation. The 65.39p valuation reduces to 49p per share even taking into account likely dilution as a result of future equity issues,” Edison added.