Rana Gruber is selling at PE of 3.

Summary of SpareBank research published today:

We initiate coverage of Rana Gruber, a Norwegian iron ore producer with likely the world’s most environmentally friendly iron ore concentrate, with a Buy recommendation and target price NOK80/sh (~NOK3bn market cap).

The company is generating super profit in the current market, and we estimate that it trades at 2x EV/EBITDA and 3x P/E, which we find to be too steep discount vs peers at 4x and 7x. In our view, the iron ore market will stay strong through at least 2022, as low cost Brazilian supply is side lined, and based on the forward curve, RANA should be able to pay 36% of its market cap in dividend over this period.

» Rana Gruber is a Norwegian iron ore producer that has 60 years of operational track record. The asset has 100 years worth of
resources, and high quality ore that requires only simple processing. Hence, the company has a low cash cost of ~USD40/t, and will on
our estimates be in dividend position above USD65/t.

Being located in Norway, RANA has a very low carbon footprint and expects to be the first CO2 neutral iron ore miner by 2025 – which we expect will be an advantage against Canadian and Brazilian supply when
competing for European customers. A 100% offtake agreement is in place with Cargill, and the balance sheet is essentially debt free.
» Transition to 65% Fe underappreciated as it will ensure super profit for longer, and protect the downside.

We estimate that Rana Gruber will be in dividend position at above USD65/t benchmark 62% Fe iron ore price – current spot ~USD168/t, and forward curve indicating USD150/t for 2021. This compares well to an historical average iron ore price of USD90/t, but it is fair to note that iron ore moves in cycles, in which bear cycles typically tend to sit in the USD60-75/t range. Hence, it is in our view, important to the investment
case, that the company will be able to improve the quality of its main product to Fe65%, which historically has given a premium of
USD15/t (currently USD31/t premium), as this will add robustness to the cost base and improve its standing with customers as the steel
industry moves towards electrical furnaces with lower emissions that requires higher quality iron ore. The company expects to be a fully
65% Fe producer by 2024.
» The strongest iron ore market of a life time. Super profit is abound among the iron ore producers, with the current spot price sitting at
USD168/t. Our estimates for 2021-22 of USD150-113/t are based on the forward curve, while the USD80/t in long-term assumption is
based on a discount to the historical average of USD90/t. The current market is driven by reduced supply of low cost/high quality ore
from Brazil, at the same time as Chinese demand is sky rocketing following government infrastructure stimulus, which has caused a “Call
on Chinese production” that has high marginal costs and low quality ore. The perfect storm. The questions ahead are: 1) when will the
low cost Brazilian supply come back to the market, and 2) will demand have increased sufficiently to still cause a Call on China, or will the
equilibrium fall within the low cost producers? We believe Brazilian supply will be hampered at least through 2022, and that 2021-22 will
remain at elevated iron ore prices.
» Rana Gruber is generating super profit. At the current NOK62.5/sh, we estimate that Rana can pay 36% of the market cap in dividends
over the next two years.
Moreover, we estimate 2021 EV/EBITDA of 2x, and P/E of 3x – substantially below peers at 4x and 7x. At our
NOK80/sh target price, the combined dividend yield for 2021-22 is 28%, and next year EV/EBITDA and P/E of 4x and 7x. Our target price
also implies 6% dividend yield and mid-cycle EV/EBITDA (5.4x) multiples at our long-term USD80/t price assumption.

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