Winston’s Growth Stock Report

Your Source for High Potential Stocks

West African Iron Ore (WAI, TSXV) Initiating Coverage

Issue 19, May 13, 2011

Summary

Though most investors have probably never been involved in an early stage iron ore deal, this segment of the junior mining market went on a tear earlier this year when the fundamental picture for this commodity showed that a classic supply/demand crunch is building. A number of junior iron ore companies saw their market caps increase by 50% or more in a matter of weeks.

I believe that a position in WAI at this early stage could provide investors with similar excitement as they move toward turning this green exploration play into bankable reserves.

As usual, it’s China that’s the driving force behind iron ore demand and the future success of WAI will hinge on the continued strong buying from China’s building boom.

WAI’s ultimate goal is to prove up a 3-5 billion tonne resource at their Forécariah property. Short term, they want to prove up a compliant resource of at least 750 million tonnes by this fall.

The short history of this deal is that the previous owner Sky Alliance Ressources Guinée S.A., was hamstrung. They knew they had a prospective property but they had to raise some money to get this project going and they were also saddled with debt.

Some of the biggest names in exploration mining and financing also liked this project and WAI is the public vehicle which will drive this project forward. The theoretical target here is not insignificant and with the fundamentals of the iron ore business looking very robust, some of the pro investors involved with this deal read like the who’s who of the exploration mining business.

Robert Friedland, is and investor in this company and is also the founder, Executive Chairman and CEO of Ivanhoe Mines. Ivanhoe Mines is developing giant copper-gold and coal reserves in East Asia, especially Mongolia. Forbes has estimated his personal fortune to be about $2 billion made from various mining projects around the world which also include the famous Diamond Fields nickel discovery at Voisey’s Bay. That was our first big winner back in 1995 when that penny stock took a strong run up to $130 dollars.

Mr. Sam Magid, another shareholder who was one of the co-founders of Salman Partners in 1994 and currently the Principal of Peninsula Merchant Syndications Corp., a private merchant bank, controlled by Magid.

Frank Giustra holds a significant position. He is the former head of Yorkton Securities and went on to create Endeavour Financial which helped create many of the success stories we have followed the most notable being the penny stock Wheaton River which morphed into to Goldcorp.

Paul Matysek is a director of WAI. Mr. Matysek always seems to be in the right place at the right time. He is a true visionary in predicting the next hot sector of the commodities market. Matysek foresaw the uranium run up, and merged Energy Metals Corporation with a major uranium producer in a deal valued at over $1.8B early in 2007. He also created one of the first public potash companies which we all cashed in on with his Potash One stock when it was bought out for $4.50 per share last November. Now he’s bringing his Midas touch to WAI.

Recently I sat down with Guy Duport, the CEO and Bill Hayden, the President & a Director of the company. Guy has been intimately involved with the Forécariah property for several years as the head of Sky Alliance Ressources Guinée SA where he owned 49.8% of the company. Sky Alliance received US $1 million and 24.5 million shares for vending in the project with WAI in addition to having $2.87 million in debt paid off.

Guy is a rather unique individual having a Masters degree in European commercial law, is a member of the Society for Mining Metallurgy and Exploration in Colorado, has consulting offices in Hong Kong and Beijing where is fluent in Chinese, and has close political ties with the leaders in Guinea. You would be hard pressed to find a more perfect man to run an up and coming iron ore company in Guinea where the ultimate buyers are likely Chinese.

Bill Hayden is the president and director of WAI. He’s an old hand geologist having spent an extensive time of his 36 professional years working in Asia and Africa. He has had a close working relationship with world’s top mining financier’s, Robert Friedland. Bill was the founder and president of Ivanhoe Nickel and Platinum (formerly known as African Minerals) and currently is the president of Ivanhoe Philippines Inc., a wholly owned subsidiary of Ivanhoe Mines.

The WAI management team are focused on building up economic minable resources of iron ore in Guinea which has become an area play for this type of mining.

Given WAI’s highly prospective property, well financed project and depth of management experience we could see a stellar growth opportunity with this play.

The Iron Ore Market

Iron ore is used to make steel and because steel production has been strong, particularly in China,

iron ore inventories have dropped faster than production can maintain. As a result, steel mills will be paying record high prices in Q2. Analysts believe iron ore demand will continue to stay strong throughout 2011 and beyond thus keeping the prices high.

This means that profitability for iron ore producers has been spectacular. The world’s top three miners of the commodity, BHP Billiton, Vale and Rio Tinto have reported record profits thanks largely to their iron ore sales.

The CFO of Vale, Guilherme Cavalcanti, said these supply constraints could continue for a long, long time. "This is the greatest moment for the company so far but the best is yet to come."

Mr Michael Zhu global director of sales for Vale weighed in by saying that that "There will be no additional supply coming to the market this year and Chinese demand continues to grow as its steel production expands."

Here’s how a small upstart exploration company like West African Gold can capitalize.

The organizers of The Inaugural Africa Iron Ore Conference 2011 are saying that West Africa is the world's last great unexploited deposit of iron ore. “With a potential West Africa production increase from near zero to more than 300mt per annum by 2015, the African continent is set to become the next Pilbara.” Pilbara in case you are wondering is an area in Australia known for its vast mineral deposits, in particular iron ore. Indeed, blue chip iron ore companies are projected to be spending up to $14 billion to develop projects in West Africa. However organizers also point out that there are challenges with West Africa including the obvious political instability, but also lack of infrastructure and shipping. These are key elements which I will touch on.

Guinea is considered to be the hub of the iron ore activity in West Africa. Luckily WAI is well positioned in that country in such a way as to address the three major issues of miners operating in West Africa.

Instability in Africa is a common theme. Stability in my opinion does not exist so what we have to consider is the level of instability. In the case of WAI operations in Guinea, it is Guy Duport who gives shareholders a big ace in the hole.

In my meeting with Guy he showed me a number of pictures of the project as well as him with the Prime Minister and the Minister of Mines. When operating in Africa, having the ear of key politicians is crucial in moving a project forward with a minimum of risk.

Infrastructure and shipping are also potential deal breakers in Africa. Again, WAI is in good shape.

The Forécariah property is just 90 Km east of the capital city of Conakry and has good road access. Rio Tinto is currently developing a mine in Guinea with a proposed rail line which crosses over the Forécariah project. Guy Duport hypothesized that WAI could perhaps hook in to that rail line which would be a huge coup for the company. However because of the close location to the shore, a belt system could also be used to transport the ore to a deep water port.

As an interesting aside, and to demonstrate China’s eagerness for iron ore, last year the Chinese announced they would invest US$2.7 billion in a 286 km railway and port facilities in return for 100% off take of Bellzone Mining’s (BZM, LSE) ore. Again, a deal with the Chinese to piggy back their rail and port facilities are ideas which Duport is considering. This is where his language and Asian business presence comes into play.

Forécariah iron ore project

West African Iron Ore’s lead play is the Forécariah iron ore project in Guinea, which is in the green stage of its development but which management believes can be proven up to a billion tonne deposit in fairly short order.

The Forécariah property is a massive series of exploration permits totaling 1,468 sq. km. Historical geological data suggests four separate areas where the key elements magnetite quartzite and magnetite schist are found in thicknesses ranging from 30 to 400 meters and mineralized strike lengths of 3 to 11 kilometers. In March of 2010, Sky Alliance did a 9,464 line airborne survey a series of target zones with the largest showing a 1500 meter width and a strike length of over 16 kilometers.

SRK Consulting has been hired to provide a compliant 43-101 resource report on the project which they hope to have completed by this August. Initially the WAI is speculating that they can prove 750 million tonnes in short order. Based on preliminary findings, SRK is theorizing that the iron ore deposit here could be a massive 5 billion tonnes or more spread over 10 target areas and that the mineralization could extend to 200 meters from the surface. Of course this conceptual target can only be proven out by drilling. To that end $3.5 million will be spent on a phase I drilling program this spring and summer. To facilitate this, the company is well cashed up with $17 million in the bank.

Preliminary exploration work by Duport’s previous company Sky Alliance established three main targets: Kalyadi, Sitafaya and Sambalama - form a semi-continuous north-northwest-oriented zone of prospective iron mineralization with a strike length of about 16 km.

Interestingly, old Soviet data estimated that the Sambalama deposit contains an estimated 710 million tonnes. However SRK is recommending that the Kalyadi target should be focused on first as they believe a potential resource of 2.3 billion tonnes could be outlined.

Conclusion

The Forécariah Project has been given a projected deposit size of 5 billion tonnes. Given that iron ore is selling for about $160 per tonne, the Net Present Value of this project may turn out to be rather breathtaking. However it will take a lot of drilling to prove up.

By this fall, about 50 drill holes will be completed leading the way for their first compliant resource estimate. A phase II drilling program will immediately follow to test other targets while adding additional resources to the phase I target by December. The management hopes to outline 3 to 5 billion tonnes by year end.

West African Gold is well cashed up with $17 million in the bank so drilling and further exploration is expected to continue non-stop.

The depth of management involved in this play is quite impressive. With Guy Duport leading the charge with his Chinese linguistic and business connections I believe WAI stands an above chance of cashing in on this Pilbara styled play.

WAI closed today at 32 cents, down sharply from its recent 64 cent high. I suspect that this summer it could soften up further to the 25 cent level prior to their first resource calculation. Accumulate slowly on dips.