After today’s drop, Northland Resources SA (NAU.TO) is getting interesting. At a shareprice of C$0.62, their market capitalization dropped to about C$320M, which isn’t very expensive if the company can reach its targets over the next 3-5 years.

As there is no recent news, the drop of 25% over the past two days is probably a delayed reaction on the drop in iron ore prices. Northland is a near-term producer offering considerable upside potential for investors who believe in higher iron ore prices in the future.

The company plans to start shipping ore in Q1 2013, ramping up to 4 million tonnes of concentrate with an average grade of 69% Fe by 2015. As this grade is relatively high, Northland will obviously get a higher price for its premium product, and should be able to receive about $20/t more than the 62%Fe-benchmark price. In our pessimistic scenario of $130/t for 69%Fe-ore, and total costs (including transportation from the Kaunisvaara mine site to China of $45/t) of $105/t, cashflow at full production should be around $100M per annum.

But should iron ore prices rise again towards $160/t, annual cashflow could be as high as $220M per annum, as the company is highly leveraged to iron ore prices.

Northland also expects to release a DFS on their Hannukainen-project by year’s end, which could add another 2 million tonnes per annum to their production profile from 2017 on.

Northland’s main hurdle is a $350M bond maturing in 2017, but if all operations run smoothly and iron ore prices start to go up again, they should have no problem to repay or refinance the debt.

Disclosure: The author owns shares of Northland Resources SA. Please see our disclaimer for current positions.

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