DEUTSCHE ROHSTOFF AG - GOLDINVEST.de

27 January 2011 Deutsche Rohstoff AG
DEUTSCHE ROHSTOFF AG
GERMANY / RAW MATERIALS
Frankfurt
Bloomberg symbol: DR0
ISIN: DE000A0XYG76
FIRST BERLIN
Equity Research
RAISING PRICE TARGET
DEALS TO GENERATE FURTHER UPSIDE
We have raised our fair value estimate for Deutsche Rohstoff to
€24.0 (previously: €20.0) to incorporate the Tulip Oil deal and the
likelihood of near-term positive newsflow involving the tin and high
tech metals assets. We also discuss forthcoming resource estimate
upgrades at the Georgetown and Wrigley properties. The rating
remains Buy.
Tulip Oil deal brings cash and additional oil/gas expertise On 17
January DRAG and the Dutch company, Tulip Oil Holding BV, announced
that Tulip Oil had taken a 75% stake in DRAG’s oil and gas subsidiary, Rhein
Petroleum. Tulip Oil is an upstream development and production company
founded in July 2010 by Barclays Natural Resource Investments and former
senior executives of Shell. In the transaction DRAG reduced its shareholding
from 80% to 25% while Herzford International sold all its 20% stake. Rhein
Petroleum’s shareholder structure is now Tulip Oil: 75%; DRAG: 25%.
Tulip pays €11.8m for DRAG’s 55% stake in Rhein Petroleum Tulip
Oil has already paid DRAG €6.7m in cash for its 55% stake in Rhein
Petroleum and has agreed to pay a further €5.1m once certain milestones
are achieved. In addition Rhein Petroleum will repay DRAG shareholder
loans of €0.5m. We estimate the book value of the assets sold to Tulip Oil at
€1.9m. We expect DRAG will book a tax-free profit of at least €4.8m on the
deal in its 2010 accounts.
Investments of €20m planned DRAG and Tulip Oil plan to invest over
€20m in Rhein Petroleum’s properties in Bavaria and the Rhine valley over
the next two to three years. A key element of the partners’ strategy is the
application of modern exploration and production technology in order to
increase the productive potential of Rhein Petroleum’s assets. Seismic
technology has developed greatly over the past twenty years but the
generally low level of exploration in southern Germany since the end of the
1980s has meant that the latest techniques have not so far been deployed in
the region. The partners have agreed on extensive seismic testing in 2011
and 2012 over parts of the license area. Drilling and test production will
follow from 2012.
Commodity price increases place tin, high tech assets in play The
tin price has climbed from below US$20,000/tonne to over $27,000/tonne
over the past six months. Prices for high tech metal assets (indium, gallium,
rare earths) have recorded similar rises driven partly by worries over
security of supply following the imposition of Chinese export restrictions.
RISKS
Risks include negative movements in raw materials prices, higher than
expected operating costs, loss of key personnel, failure of exploration efforts.
DRAG
27 January 2011
RATING: Buy
PRICE TARGET: €24.00
RETURN POTENTIAL: 40.4%
RISK RATING: Speculative
COMPANY PROFILE
Deutsche Rohstoff AG (DRAG) is a resources
company with a portfolio of properties in gold,
oil/gas, base metals and so-called high tech metals
such as indium, gallium and rare earths. The business
model is based on production of reserves in well
explored areas in politically stable countries. Based
in Heidelberg, Germany, DRAG had 22 employees as
of 30 June 2010.
TRADING DATA
Closing price (26.01.11) €17.09
Shares outstanding 4.35m
Market capitalisation €74.41m
52-week range €6.70 / 19.10
Average volume (12 months) 13,071
STOCK OVERVIEW
20.2
18.2
16.2
14.2
12.2
10.2
8.2
6.2
May 10 Aug 10 Nov 10
1
Deutsche Rohstoff NMDP Index
COMPANY DATA (as of 30 June 2010)
1050
1000
Liquid assets €3.20m
Current assets €0.10m
Intangible assets €0.09m
Total assets €11.02m
Current liabilities €0.00m
Shareholders’ equity €11.01m
SHAREHOLDERS
Analyst: Simon Scholes, Tel. +49 (0) 30 - 91 68 41 05
Titus Gebel 17.0%
Thomas Gutschlag 10.9%
BASF-VC 7.3%
Others 64.8%
950
900
850
800
750

27 January 2011 Deutsche Rohstoff AG
Real Option Valuation of Rhein Petroleum Exploration Efforts
Using Datar-Mathews Method (€m)
2
Scenario Initial Barrels In Situ Value Discovery Probability NPV
Investment Discovered (m) per Barrel (€)* Value
1 -20.0 0.0 21.2 0.0 12.5% -20.0
2 -20.0 0.0 21.2 0.0 12.5% -20.0
3 -20.0 2.0 21.2 42.5 10.0% 22.5
4 -20.0 4.0 21.2 84.9 15.0% 64.9
5 -20.0 6.0 21.2 127.4 15.0% 107.4
6 -20.0 8.0 21.2 169.9 15.0% 149.9
7 -20.0 10.0 21.2 212.3 10.0% 192.3
8 -20.0 15.0 21.2 318.5 5.0% 298.5
9 -20.0 20.0 21.2 424.6 2.5% 404.6
10 -20.0 50.0 21.2 1061.6 2.5% 1041.6
Probability weighted mean value of positive outcomes 121.0
Probability of positive outcomes 75.0%
Real option value total project 90.8
DRAG's 25% share 22.7
* Based on values published by Canaccord
Table1 Source: DRAG, First Berlin estimates
Negotiations on tin/high tech assets proceeding At current price levels production
would be economic at DRAG’s tin and high tech metal properties in Saxony. At the end of
October, management stated in the press that negotiations were being conducted with an
international mining company with a view to the conclusion of a farm-out deal with respect to
the Storkwitz rare earth property (41,000 tonnes rare earths, 8,700 tonnes niobium). We
gather that these negotiations are continuing. We also believe that DRAG is conducting
negotiations with respect to the Geyer and Gottesberg tin properties.
Resource estimate upgrades forthcoming at Georgetown and Wrigley During
Summer 2010, over 40 holes totalling 3,100 metres were drilled at the Georgetown
goldmine’s Red Dam and Electric Light properties. The aim was to upgrade known resources
from inferred to indicated and also to discover new resources. Management tell us that the
results have been positive. We expect DRAG to publish a resource estimate upgrade for
Georgetown by the end of Q1. Our current enterprise valuation for Georgetown of €16.4m
assumes the new resource estimate will show a ratio of indicated to inferred gold resources of
57:43. The ratio in the current resource estimate is 13:87.
Under the terms of the farm-out agreement concluded in July 2010, Glencore is carrying out a
4,500 metre drilling programme. The NI 43-101 compliant resource estimate commissioned by
Devonian Metals in H1 2010 identified an orebody of 3.1m tonnes with 9% zinc/lead.
However, this estimate covered only part of the known orebody at Wrigley. In 1974 Cominco
estimated the size of the orebody at 10m tonnes. We expect the results of the current drilling
programme will allow substantial upgrades to the current NI 43-101 resource estimate. Our
valuation of €8.8m for DRAG’s stake in Wrigley is based on double the current resource
estimate.
Tekton is a promising oil/gas start-up On 24 January DRAG announced the foundation of
Tekton Energy LLC together with two US oil and gas industry managers, Jerry Sommer
(previously President of Source Energy and COO of Aspect Energy) and Earl Norris
(previously Chief Geologist at Vantage Energy and Head of Exploration at Aspect Abundant
Shale). DRAG will hold 57% in the new venture and Messrs Sommer and Norris 43%. The
business plan is to add value to existing oil and gas properties through use of recent
innovations in oil/gas exploration and production technology. Management tells us that the
company’s initial share capital will be US$1.2m. It is likely to be at least 6 months before the
company acquires any substantial assets. The first asset the company acquires is likely to be a
producing field which Tekton will be able to finance through debt. As Tekton is currently
without assets; we have not included the business in our sum of the parts valuation.

27 January 2011 Deutsche Rohstoff AG
Sum of the parts yields fair value of €24.00; Rating stays at Buy We have valued
DRAG’s oil and gas business based on the payments received from Tulip Oil and our
assessment of the real option value of Rhein Petroleum’s exploration efforts (see table 1). Our
overall valuation of DRAG is based on sum-of-the-parts methodology (see table 2) and yields
fair value per share of €24.0. We retain our Buy rating.
DRAG Sum of the Parts by Asset
Asset €m Notes
Georgetown 16.4 Based on Canaccord in situ values (Au: US$152/oz; Ag: US$1.78/oz) for 153,000 oz Au
and 159,000 oz Ag. Additionally assumes resource is 53% indicated, 47% inferred post
expected forthcoming (Q1 2011) results estimate upgrade
Kiefernberg 0.0 Not valued due to uncertainty as to viability of heap leaching technique
Wrigley 8.8 Based on Canaccord in situ values (Zn: US$79/tonne; Ag: US$1.78/oz) for 300,000 tn Zn
and 1.2m oz Ag. Multiplied by 2.0X on basis of expected (Q1 2011) resource estimate upgrade
Tin/Rare Earth 37.0 Based on 0.5% of finished product value at Geyer, Gottesberg, Storkwitz properties
Delitzsch not included in valuation
Oil/Gas 34.6 €12.3m cash and milestone payment for 55% stake in Rhein Petroleum
Enterprise Value 96.7
+ €5.6m implied valuation of retained 25% stake in RP
+ €22.7m estimated real option value of exploration efforts
- €6.0m assumed transferred to liquid assets
Cash 7.8 mostly from Tulip transaction
Market Cap 104.5
No shares (m) 4.4
Value per share (€) 24.0
Table 2 Source: DRAG, First Berlin estimates
3

27 January 2011 Deutsche Rohstoff AG
4
FIRST BERLIN RECOMMENDATION & PRICE TARGET HISTORY
Report
No.:
Initial
Report
Date of
publication
Previous day
closing price
Recommen-
dation
Price
target
22 July 2010 €7.45 Buy €13.20
2...2 ↓ ↓ ↓ ↓
3
24 September
2010
€9.10 Buy €13.70
4 8 October 2010 €9.84 Buy €13.70
5 18 November 2010 €14.18 Buy €20.00
6 Today €17.09 Buy €24.00
Disclaimer
Simon Scholes
First Berlin
Equity Research GmbH
Mohrenstraße 34
10117 Berlin
Tel. +49 (0) 30 - 91 68 41 05
Fax +49 (0)30 - 80 93 96 87
info@firstberlin.com
www.firstberlin.com
FIRST BERLIN POLICY
In an effort to assure the independence of First Berlin research neither analysts nor the company itself trade or own securities in subject
companies. In addition, analysts’ compensation is not directly linked to specific financial transactions, trading revenue or asset
management fees. Analysts are compensated on a broad range of benchmarks. Furthermore, First Berlin receives no compensation from
subject companies in relation to the costs of producing this report.
ANALYST CERTIFICATION
I, Simon Scholes, certify that the views expressed in this report accurately reflect my personal and professional views about the subject
company; and I certify that my compensation is not directly linked to any specific financial transaction including trading revenue or asset
management fees; neither is it directly or indirectly related to the specific recommendation or views contained in this research. In
addition, I possess no shares in the subject company.
INVESTMENT RATING SYSTEM
First Berlin’s investment rating system is five tiered and includes an investment recommendation and a risk rating. Our recommendations,
which are a function of our expectation of total return (forecast price appreciation and dividend yield) in the year specified, are as follows:
STRONG BUY: Expected return greater than 50% and a high level of confidence in management’s financial guidance
BUY: Expected return greater than 25%
ADD: Expected return between 0% and 25%
REDUCE: Expected negative return between 0% and -15%
SELL: Expected negative return greater than -15%
Our risk ratings are Low, Medium, High and Speculative and are determined by ten factors: corporate governance, quality of earnings,
management strength, balance sheet and financing risk, competitive position, standard of financial disclosure, regulatory and political
uncertainty, company size, free float and other company specific risks. These risk factors are incorporated into our valuation models and
are therefore reflected in our price targets. Our models are available upon request to First Berlin clients.
Up until 16 May 2008, First Berlin’s investment rating system was three tiered and was a function of our expectation of return (forecast
price appreciation and dividend yield) over the specified year. Our investment ratings were as follows: BUY: expected return greater
than 15%; HOLD: expected return between 0% and 15%; and SELL: expected negative return.
ADDITIONAL DISCLOSURES
This report is not constructed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer
would be illegal. We are not soliciting any action based upon this material. This material is for the general information of clients of First
Berlin. It does not take into account the particular investment objectives, financial situation or needs of individual clients. Before acting on
any advice or recommendation in this material, a client should consider whether it is suitable for their particular circumstances and, if
necessary, seek professional advice. The material is based upon information that we consider reliable, but we do not represent that it is
accurate or complete, and it should be relied upon as such. Opinions expressed are our current opinions as of the date appearing on this
material only; such opinions are subject to change without notice.
Copyright © 2008 First Berlin Equity Research GmbH. All rights reserved. No part of this material may be copied, photocopied or
duplicated in any form by any means or redistributed without First Berlin’s prior written consent. The research is not for distribution in
the USA or Canada. When quoting please cite First Berlin as the source. Additional information is available upon request.
FIRST BERLIN DISCLAIMER