Australia | Aug 18 2006
By Chris Shaw
With some of the speculative heat coming out of the resources sector in recent months, prices for many of the smaller capitalised stocks in particular have begun to drift, in some cases creating opportunities for investors happy to add a little risk to their portfolios.
One example according to Intersuisse is Territory Iron (TFE), which it rates as a Speculative Buy for the potential of its Frances Creek iron ore mine in the Northern Territory.
The project is not a new one, as it was previously a producer in the 1970s before the after-effects of Cyclone Tracy made the operation uneconomic. But the situation has changed since the establishment of the Alice Springs to Darwin rail line, which passes just 15km away from the mine site.
As a result the company has set itself to be back in production by January of next year, the plan being to open two new pits and re-open three existing pits, as well as doing some infrastructure work such as upgrading roads.
Intersuisse estimates the capital costs of the work will come in at about $15m, which should not be a great issue for the company given it has about that level of cash available after recently raising $12.6m through a share placement at 36c.
The mining plan calls for production of 1.5 million tonnes split 70/30 between lump and fines, with the company having in place a memorandum of understanding with two Chinese steel mills to take the output. One negative Intersuisse notes is on the initial 2.5 million tonnes of output the company will have to pay royalties to Arafura Resources (ARU) of $1.30/tonne for lump and $1.00/tonne for fine.
A further reason why the broker likes the company’s prospects is the recent addition to resources and reserves, which following an upgrade announced last month following successful drilling now stand at 8.6 million tonnes at an average grade of 60.3% iron and 3.86 million tonnes at an average grade of 61.1% iron respectively.
The broker suggests further increases are likely here as the company has an active exploration program planned, with the next round of drilling due to commence this month and a budgeted annual expenditure on exploration of $2.6m.
In line with the lack of interest in the smaller end of the resources market the stock has drifted back from levels of around 40c in April and a 12-month high of 47.5c to a current price of 31.5c. This is a gain of 0.5c today, leaving the stock well above the low over the past 12 months of 20c.