Small Caps | Oct 23 2012
– Amex to mine iron sands in Fiji
– Strong cash margins
– Offtake agreements in place
By Eva Brocklehurst
Amex Resources ((AXZ)), a small iron ore explorer, has stirred DJ Carmichael's interest with potential for the first iron mine to be developed in Fiji. AXZ owns the Mba Delta iron sands project on the Ba River on Fiji's main island, Viti Levu. Iron sands, the broker notes, are increasingly in demand as an alternative feedstock for use in steel making, as reserves of high grade conventional hematite diminish. For this project, Fiji's major commodity port of Lautoka is just 30 kilometres away. The company was granted its mining lease in June this year and has completed a robust Bankable Feasibility Study (BFS).
It isn't the company's only project. AXZ is also building an iron ore portfolio in Western Australia with Mount Maguire and Paraburdoo South. However, DJ Carmichael re-modelled the stock based on the Mba iron sands BFS. The capital expenditure, around US$80 million in the BFS, is accounted for by a combination of debt and equity within the broker's valuation. The main project funding is expected to be finalised this quarter and DJ Carmichael has assumed a $30m equity raising portion in its valuation. The broker has retained its Buy recommendation and raised its price target to $2.15 from $2.13 (last close $0.92), taking on board the estimated net present value (NPV) of US$387m (pre-tax) from the BFS and a 20-year mine life. The operating cost projected by the BFS is US$25.97 per tonne of product and positive cash flow is expected from year one. The broker models a corporate tax rate of 20% and royalties of 3%.
The prospects are very good for the production of a magnetite product commencing some time late in 2013. DJ Carmichael models production of 0.75Mtpa beginning in the second half of FY14. Production rates are expected to increase to 1.5Mtpa from the first half of FY17 onwards. There is also potential in the form of vanadium credits from this resource, which will counter any penalty for common deleterious elements to iron extraction, such as alumina. The presence of titanium in iron sands means a bit less iron in the composition compared with magnetite produced from hard rock, but this can be more than offset by the low costs of extraction. The ore is amenable to conventional treatment by simple magnetic separation, negating the need for crushing and grinding. DJ Carmichael notes that cost of production and the need to upgrade it to a saleable product are very important considerations for the strength of the project. The potential operating costs are under $30/t, putting AXZ in the lowest cash quartile of iron ore producers.
Despite receiving a discounted price due to the lower iron content (58%), AXZ will be operating on what DJ Carmichael believes are impressive cash margins of around $60/t spot equivalent, assuming a current iron ore price of $110/t. This assumes AXZ will receive 80% of the 62% CFR iron ore prices (US$80/t). The broker gives AXZ a credit for the extractable vanadium in the iron sands of $15/t. Another important consideration is the logistics involved in transporting the ore from the deposit to the iron ore buyer. On this basis this project is close to water and power and has no need to build a lot of new infrastructure.
The company has negotiated two offtake agreements. The first is with a Chinese steel mill for two thirds of the annual production of 750,000 tonnes of concentrate and the second is for 120,000t annually. According to DJ Carmichael Chinese steel makers are keen to have this iron sands concentrate to blend with their other sources. Pricing negotiations have been linked to the 62pc iron CFR China domestic spot price (US$80/t) with appropriate discounts and credits for variation in iron and vanadium content. DJ Carmichael also considers AXZ as an attractive target for either a larger iron ore company or purchaser such as a steel mill or commodity trader. The company has a tight register of shareholders and 76m shares on issue with strong connections to China. Its chairman is Xiao Qin, a former chairman of CITIC Industrial Bank.
Amex is not covered by any of the major brokers in the FNArena database.
See also Fiji Project Makes Amex Resources A Buy on November 25 2011.
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