Low-cost miners avoid being left high and dry
JOHN BEVERIDGE HERALD SUN APRIL 09, 2015 12:00AM
ONE of the great lessons to be learnt from Australia’s iron ore boom and subsequent gloom is the importance of being a low-cost producer.
During a price boom, the difference between a low-cost iron ore producer such as Rio Tinto or BHP Billiton and a higher-cost one is lost in the wash.
Indeed, the higher-cost companies can produce better shareholder returns for a while because of their extreme leverage to the price and often through debt as well.
However, when the price tide goes out — which it inevitably does — the high-cost producers are suddenly revealed to have been swimming without their togs on and have nowhere left to hide.
Meanwhile the low-cost producers might suffer a blow to their profits but are still able to keep producing and paying their bills on time until the next price boom arrives.
It might be in a totally different mineral but South Boulder Mines looks set to become not just a low-cost potash producer but a globally significant one as well.
Its Colluli potash deposit in Eritrea has now come through a pre-feasibility study with flying colours and a definitive feasibility study is under way and due to report in the third quarter of this year.
Colluli has several very attractive dynamics, including a very long mine life, a massive resource of 1.29 billion tonnes, proximity to the sea for transport and piping water, conventional open-pit mining and a very favourable mix of potassium salts.
Unusually for a potential potash mine, Colluli has a large proportion of the rare kainite, making production of value-added sulphate of potash much more straightforward.
The long-term dynamics for potash look particularly positive, with an increasing world population and a finite amount of arable land set to drive higher fertiliser usage well into the future.
I also like the staged approach being taken by South Boulder’s chief executive, Paul Donaldson, which keeps capital and operating costs lower and reduces risk.
The first stage would produce 425,000 tonnes a year and cost about $575 million, including mine construction, a 75km haul road to the port and construction of an export terminal and processing plant.
The second stage is cheaper at $366 million for a further 425,000 tonnes a year and there is potential for a third stage down the track producing a variety of high-value potash products.
Some risks you can’t erase and the location of Eritrea may put off some investors but I think the fact this is a joint venture with the government’s ENAMCO is a positive that should help the company hit production by 2018.
A speculative buy.
South America is an emerging hot spot for gold projects and Orinoco Gold’s advanced Cascavel development is looking very promising.
With a one for four non-renouncable share and option entitlement issue set to raise almost $2.7 million and a recent $10.5 million gold sharing deal with Singapore group Chancery Asset Management, Cascavel is close to being fully funded with first production due later this year.
The innovative Chancery deal means this canny investor is very confident that the 70 per cent-owned Cascavel will be able to supply the minimum required 16,000 ounces of gold from the high-grade deposit.
A gold sharing deal is also less dilutive for shareholders and should see Orinoco successfully make the jump to becoming a self-funded gold producer.
Received on Wed Apr 08 2015 - 09:51:50 EDT