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Labrador Iron Mines price target slashed by Stonecap Securities, but sees significant potential cash flow ahead

Last updated: 18:26 19 Feb 2013 GMT, First published: 19:26 19 Feb 2013 GMT

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Stonecap Securities analyst Michael Goldberg has maintained his outperform rating on Labrador Iron Mines (TSE:LIM) but sharply reduced the price target on the company to $1.75 from $2.70 previously. 

Last week, the iron ore producer reported fiscal third quarter results that were in line with the analyst's expectations and consensus estimates. 

Adjusted loss per share was 13 cents, versus Stonecap's 13 cent expectation and 16 cent consensus loss estimate.

Operating cash flow per share was negative 12 cents, compared to Goldberg's 8 cent forecast, and consensus estimate of negative 11 cents. 

LIM sold 425,000 tonnes of product in the quarter, with realized pricing coming in at $107 per tonne CFR China, and revenues of $25 million corresponding to $58/t FOB Sept-Iles. 

Cash costs for the company continued to be high during the quarter, at $77 per tonne or $69, excluding take-or-pay penalties. 

"Despite LIM’s struggling operations, spot iron pricing is currently at a level where LIM can generate significant cash flow," says the analyst. 

"The stock offers great torque to the commodity and we believe it remains oversold at current levels. We maintain our outperform recommendation."

LIM finished the quarter with $10 million in cash, but the analyst notes the company could require more cash in the spring to restart operations even after including the $29 million from the recent financing and receivables. 

The target price of the company was reduced after including 22% dilution from the recent equity financing done at a discount to net asset value. 

Stonecap, however, continues to expect LIM to require iron ore pricing above $115/t to be profitable.

"With prices now ~$150/t, LIM could start to generate positive cash flow when production resumes in 2013."

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