We bought a position in Rana Gruber yesterday and today. It went down in the US market sell off. The thesis is simple. Rana is now earning half of its market cap per year. If you believe that due to the reopening the current high Iron ore prices will prevail, than each year Rana will earn that much and pay it out as dividends.

For me this could be a short term play. Buy at 64 sell at 75, where it was trading last week.

DNB Bank today issued a 18 pages report on Rana. It has a buy rating with price target of 85 NOK. Front page summary of the research is below:

We initiate coverage of Rana Gruber with a BUY and NOK85 target price. As one of the marginal producers of iron ore, with a break-even price of USD70/t, we believe it is well positioned to benefit from a continued booming iron ore market. In combination with a best-in-class ESG profile, high cash returns, and an average estimated P/E of 6.3x over the next three years, we believe the stock offers positive risk/reward.Highly correlated to the iron ore price. The current iron ore futures curve is steeply backwardated (from USD165/t spot to USD70/t in the tail), meaning P/Es rise from just 3.4x in 2021e to 29x in 2024e. Historically, the futures curve has been a bad predictor of the spot iron ore price, and thus we believe the iron ore price is equally likely to either overshoot expectations by remaining at USD165/t (suggesting an equity value of NOK200/share), or drop below USD70/t (suggesting an equity value of close to zero).

As ESG-friendly as a miner can be. Rana Gruber’s iron ore production stands out from the crowd, as it uses no chemicals in the extraction phase, has the lowest CO2 footprint of any comparable miner/extractor, and has a CO2 footprint from transportation substantially lower than peers since a primary end market is the European steel industry. We believe this could improve its relative position on the cost curve at a later stage. 
Bull and bear case scenarios have fairly equal probabilities in our view. We see the bull case scenario warranting a 4x higher valuation over a relatively short period, while the bear case implies losing 1x the investment. Thus we believe the risk/reward is positive for investors that can tolerate high-beta market risk.

We initiate coverage with a BUY and NOK85 target price, based on an average of P/E and EV/EBITDA for its peer group, and a wide range of price scenarios (USD59–170/t). With our earnings estimates based on the iron ore futures curve (industry practice), we believe Rana Gruber should trade at a discount to peers (on 2021e–2022e P/E and EV/EBITDA) due to its higher cash cost of production (USD70/t versus peer average of USD40/t). There is no consensus available at this point. With a best-in-class ESG profile, high cash returns, an average estimated P/E of 6.3x over the next three years (based on the futures curve), and the potential to earn half of its market cap each year if current iron ore prices prevail, we initiate coverage on Rana Gruber with a BUY.

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