Pluton Resources Limited (ASX:PLV) 108mt of Waterfront Product Should Not Be Overlooked, An Investec Bank (Australia) Ltd Research Report

Perth, Aug 23, 2010 AEST (ABN Newswire) - Pluton Resources Limited (ASX:PLV) resource upgrade during the quarter was better than expected and significantly reduces the resource risk at the Irvine Island project. The current resource is sufficient to produce approximately 108mt of beneficiated product at 66%Fe and 2.5% SiO2, with the Company targeting ~200mt of product by the end of the drilling program.

PLV carries the risk of single commodity exposure and an undeveloped project, but unlike other iron ore juniors has no infrastructure risk. Following the resource upgrade, the revised project economics are now extremely robust, and we believe PLV deserves a place in any iron ore portfolio. We maintain a Buy recommendation, with a price target of A$1.26/share, in line with our risked NPV.

We highlight that we rate this stock speculative risk; thus, it is suitable only for investors with significant risk tolerance.

Recent newsflow: PLV increased the resource of the Yampi member to 90mt at 49%Fe, from 54mt previously. PLV also released an initial resource estimate for the low-grade overlying Wonganin Sandstones of 204mt at 23%Fe. Based on CSIRO testing this combined resource represents ~108mt of product at 66%Fe.

The Company recently returned from Japan, where meetings with end users were very well received. PLV has now signed confidentiality agreements with several Japanese and Chinese parties. The pending closure of Cockatoo Island has increased the significance of PLV for certain end users.

Negotiations with the local Mayala people are also progressing well with both parties targeting a mining access agreement in the final quarter of 2010.

Key issues: Environmental and Native Title approvals are now key milestones, and represent key risks to the project. The market will need to understand the beneficiation process better and be comfortable that project milestones are achievable.

Catalysts:
- Ongoing resource upgrades, Isthmus DSO target
- Native Title Agreement with Mayala People - Dec Q'10
- Agreement to access Cockatoo Island Shiploader
- Corporate deal to partially (or fully) fund project capex

Project scales up - leverage increases

The inclusion of the overlying Wonganin Sandstones in the latest resource upgrade has led to a revision of the assumed project scale. Previously we modelled sales of 4.3mtpa, with 30% of those sales being DSO ore, for LOM sales of 54mt from the Hardstaff Pensinsula. We no longer assume DSO sales from the Hardstaff project as this may prove too complicated from a mine scheduling point of view. We now assume all ROM ore is beneficiated, and we model sales of between 4.7mtpa and 6.9mtpa, for LOM sales of 94mt at 66%Fe. We assume recoveries of 75% (CSIRO testing suggests 84% is achievable), cash costs of ~A$38/t and capital costs of A$415m (~10% above PLV's estimate) and a long term iron ore fines price of US$57/t. We have delayed first sales until DecH'13E. Under these scenarios our unrisked valuation for the project has increased substantially from A$268m to A$418m. We continue to risk weight this value by 50% in our NPV for PLV, at least until we have firmer details on capital cost and timing.

Project leverage is substantial with a US$10/t increase in our long term iron ore price lifting the project NPV to A$714m.

Cockatoo Island infrastructure access

Cockatoo Island is due to close in approximately 18 months. We believe there is potential for PLV to secure the use of the Cockatoo Island shiploader on reasonable terms, as this would defer the payment of ~A$15m in environmental liabilities for the current owner (Cliffs). Access to the shiploader could allow PLV to barge DSO ore the short distance from the Isthmus project to the Cockatoo Island shiploader, enabling sales prior to the completion of PLV's own facilities. We continue to assume first sales from the Isthmus in Dec'13. While there may be potential to bring this forward, PLV point out that environmental studies and Mining Lease approvals may take 1.5-2years.

Beneficiation is not a dirty word

The Hardstaff Pensinula iron ore will be beneficiated to produce a 66%Fe concentrate with low impurities. While SiO2 is elevated in the ore, it is relatively discrete, with the iron grade increasing to the mid 50%Fe levels during simple crushing and screening prior to beneficiation, as the silica quartz pebbles in the ore are simply liberated. Beneficiation is likely to consist of magnetic separation and a flotation circuit. It is proven technology, and one investors will need to come to grips with as known, high grade, DSO ore deposits are consumed at ever increasing rates. The market's avoidance of iron ore projects requiring beneficiation is unwarranted in our view and is similar to avoiding coal projects that require a washplant. Fine grinding will not be required at Irvine Island, so the energy costs of beneficiation will be low.

Corporate interest could de-risk

There continues to be strong end-user interest in the project, with management confident they will be able to secure an agreement leading to the partial or total funding of the project capital cost, with minimal shareholder dilution.

Definition of research ratings - Expected 12m performance---------------------------------------------------------         Australia / United Kingdom     South Africa---------------------------------------------------------           Expected total returnBuy           > 10%                      > 20%Hold          -10% to 10%                10% to 20%Sell          < -10%                     < 10%---------------------------------------------------------

Investec bases its investment ratings on the stock's expected total return over the next 12 months (with total return defined as the expected percentage change in price plus the projected dividend yield). To take account of differences in costs of capital, risk premia and required rates of return between developed and emerging markets, different ratings bands are applied in the Australia, United kingdom and South Africa respectively (as shown above).

A Speculative risk stock is one where a company appears to offer compelling value, but where risk is elevated by virtue of the early stage of project definition and/or time to first cashflow. Speculative risk stocks are recommended only for investors with significant risk tolerance.

Coverage History: Initial coverage 19 Feb' 2010, Buy (Speculative Risk); 19 April 2010, Buy (Speculative Risk); 13 July 2010, Buy (Speculative Risk). Update reports are produced quarterly.

For the complete Pluton Resources Research Report produced by Investec Bank (Australia) Limited, please refer to the following link below:
http://www.abnnewswire.net/media/en/docs/63571-ASX-PLV-investec_securities-research-report.pdf

Contact

Tony Schoer Managing Director and Chief Executive Officer Tel: +61-411-232-711 Email: tschoer@plutonresources.com www.plutonresources.com