Australia | Jun 01 2007
By Chris Shaw
Grange Resources (GRR) requested a trading halt on Wednesday and today the company has explained why, announcing Japanese firm Sojitz will take a 30% stake in its Southdown iron ore project.
The agreement will see Sojitz, a trading company with annual revenues of more than $50 billion, pay US$4 million for an initial 10% stake, earning a further 20% interest by spending US$10 million on pre-commitment development.
The deal is structured so that Grange shareholders retain a majority interest in the project while also receiving royalties from Sojitz on the sale of pellets from that company’s share of total production. The royalties will kick in when average pellet prices are at least US$60 per tonne and are set on a sliding scale up to 3.5%.
Grange management notes the agreement also leaves open the possibility of adding another partner to the entire project or only the mining or pellet plant side of the total operation.
On the company’s latest estimates the Southdown project will have capital costs of around US$1.175 billion and a forecast mine life of more than 20 years, generating around US$700m in annual revenues based on current iron ore prices.
The Southdown project is well placed geographically given it expects to be able to supply key customers within three days, while a recent management presentation to investors showed the iron ore should be low in phosphorus, a plus given recent increases in demand for such pellets.
The FNArena database shows no coverage of Grange Resources, which is not a surprise given the company’s market capitalisation is just over $200m. Assuming the Southdown project gets up and running this should change though, as US$700m in annual revenues would imply a higher multiple for the company.
Shares in Grange have not reacted to the news as at 12.25pm the stock was down 2c at $2.06, which compares to a trading range over the past 12 months of $1.17 to $2.29.