Why I bought LEGEND INTL HLDGS

29-Mar-2009 Price when published: $0.60 Post rating:

Quick Facts:

Controls 5.2 million acres of land in Australia’s Queensland and Northern Territory which is highly prospective for phosphate, diamonds, and base metals.
Is in the process of beginning a project to mine 5 million tones of phosphate rock at 34% phosphate concentrate per year on this piece of land.
Signed an off-take agreement with IFFCO (India’s largest fertilizer enterprise) to purchase 4 million tones of phosphate concentrate per year for the next 15-20 years.
Legend has 110 million dollars on hand with zero debt and is currently purchasing more land to expand its phosphate deposits.
Key shareholders include Atticus Capital LP, Soros Fund Management and IFFCO.
The Growth Story:

The world’s middle class is rapidly growing due to increasing income in the emerging nations such as China and India. With more money to spend, many of these people opt for protein rich diets. About 5 pounds of grain is needed to grow 1 pound of meat from suitable animals for consumption. Due to the changing of eating habits, more strain will be placed on farmers to grow the amount of crops needed to sustain the world population. The most efficient way to increase crop yields is through the use of fertilizers. Therefore Legend is strategically positioned to supply the increasing amount of phosphate that is needed to increase crop yields.

Strategic Positioning:

The company is in prime position to make it’s Queensland project successful. It already has a contract to sell 80% of its product to IFFCO. IFFCO also owns 20 million shares with the option to purchase 25 million more; thus, IFFCO has a strong incentive to make sure this project gets up and running. LGDI has 110 million dollars of cash on hand and zero debt, which gives the company the liquidity to pursue the best transportation and mining methods.

The two largest competitors in the fertilizer industry include Potash of Saskatchewan and Mosaic. These two companies are located in Canada, whereas Legend’s phosphate deposits are located in Northern Australia. This gives the company a competitive advantage by being much closer to the growing customer base in India and China.

More information can be found by accessing Legend’s presentation for Phosphate.pdf

Stock Valuation:

Due to the recent global credit crisis, Legend’s stock has been indiscriminately sold off with the broader markets. At one point, a share of LGDI was trading for 27 cents/share which was below the 50 cents of net cash on hand. A major insider, IFFCO, started to purchase shares on the open market. We believe this action from IFFCO is a major show of confidence in Legend’s plan of supplying India and China with its phosphate needs and a great opportunity for investors to get in. Before the global sell off, LGDI was trading for as high as $4.50/share.

According to a study conducted by an independent company, British Sulphur, the Queensland project should be able to produce 5 million tones of phosphate rock per year at a cost of $60 per tone. Using a tax rate of 40%, a conservative stock price multiple of 7, 226 million shares outstanding plus the additional 45 million available in options we can come up with the expected stock price for various levels of phosphate prices:

US $400/t rock- EPS = 3.75 Est Stock Price = 26.28

US $300/t rock- EPS = 2.65 Est Stock Price = 18.55

US $200/t rock- EPS = 1.55 Est Stock Price = 10.82

US $100/t rock- EPS = .44 Est Stock Price = 3.09

The current phosphate price is around $250/t, so even in an absolute worst case scenario the stock is severely undervalued.

Growth Timeframe:

LGDI plans to start production by the end of 2009, so start acquiring as soon as possible!http://lgdi.net/resources/i/docs​/Presentations/Appetite