Strandline’s mineral sands project earns a well-deserved mention in annual list of leading undeveloped assets

14th December 2018
Barry FitzGerald

Owning one of the best-undeveloped minerals projects (BUPs) is no guarantee of success. But it stands to reason that it helps.

Screening all of the projects out there for their BUP candidature is a major task for the average investor. Thankfully though, the analysts at Argonaut do all the hard work on an annual basis.

Their 2018 review of the BUPs is now floating around and the over-riding theme was that there are fewer of them around this year because of the lag between exploration expenditure rising and discoveries being made.

Argonaut’s ‘bottom-up’ assessment of the BUPs is commodity and management-agnostic and has five key selection criteria: the projects considered for inclusion are at the development stage between scoping study and pre-commercial production, they must have an internal rate of return of more than 25%, they must demonstrate the capacity to be profitable through all market/commodity price cycles, they must have a high likelihood of achieving more than $100m project valuation within 24 months and they must have a market cap of less than $5 billion.

It is well worth a read. But today’s interest is in Argonaut’s inclusion of the mineral sands developer Strandline (STA) in its “special mention projects” that sit in the second tier of the firm’s assessment of who has the BUPs.

Argonaut has a 20c price target on the stock after applying a 30% discount to its 28c a share valuation of Strandline’s start-up Fungoni project in Tanzania and its other interests in the country as well as its much larger Coburn project in Western Australia.

The target price is kind of interesting given Strandline is currently trading at 9.8c. Like the other mineral sands players, it has come under price pressure in the past couple of months because of overblown concerns with rutile prices.

Forgetting for a moment that Strandline’s projects are skewed more to zircon than rutile, the sell-off is despite the advice from the local king of the business, Iluka, that while prices might be softening, the rutile market remains particularly tight.

Prices for both zircon and rutile remain substantially ahead of the 2017 averages – as good a signal as there is that the end-users want to see more supply coming into the market, doubly so for zircon.

It is against that backdrop that Strandline continues to advance Fungoni to the starting stalls. The last major de-risking event is financing for the $US32m development. A diary note suggests a financing package for the development can’t be too far off now.

No surprise in that, given Fungoni boasts an IRR of 61% on updated mineral sands prices and a payback period of 1.7 years.

Strandline is much more than Fungoni, which is really aimed at introducing the mineral sands business to Tanzania.

While there have been some gasps over the country’s overhaul of its mining laws, it remains intent on repeating the wealth-creating mineral sands success in neighbouring Kenya to the north and Mozambique to the south.

Other resources Strandline has in the country, and those it is working up in a joint venture with Rio Tinto, will be the main game in years to come, with the ready-to-go Coburn project in WA giving the company a foot print in two jurisdictions.

Argonaut described Fungoni as a boutique, high-grade, high-margin, zircon- rich project. “However, we see the Tanga project to the north as the real prize for the company,” Argonaut said.

It includes the Tajiri South deposit, 30km from the port of Tanga, and 80km from the Kwale mineral sands operation of the $270m ASX-listed Base Resources (BSE) in Kenya.

Nusantara

History has shown that there is no point trying to advance a minerals project in Indonesia – or holding on to one - without a strong local partner in tow.

When one is secured, it stands as a major de-risking event, given Indonesia’s penchant for resources nationalism.

Gold developer Nusantara (NUS) has known that from the day it picked up the running of the Awak Mas gold project in the country, and it can be said that the market’s valuation of the stock has been held back pending the arrival of a local partner/investor.

It has just delivered on the de-risking event by introducing Indika Energy as a 19.9% shareholder through a share placement at 23c, a 43% premium to the pre-placement price of 16c.

At the same time, AustralianSuper increased its Nusantara stake from 10% to 14% at the same price, taking to $10.2m the all-up equity raising.

Nusantara’s share price has marched from its pre-placement price of 16c to 20c on the news, with Cathy Moises at Patersons for one reckoning that there is more to come. Moises has a 43c target price on the stock.

That sort of fits with something said here back on October 11 when Nusantara was trading at 20c: If Awak Mas had a WA address, the stock would likely trade at more than twice its current level.

A previously-released DFS into the development of Awak Mas as a 100,000 ounce-a-year producer from a 1.1Moz reserve (within a 2Moz resource) came up with a 20.3% IRR using a gold price of $US1,250/oz.

The post-tax NPV was put at $US152m for the $US146m project which comes with an initial mine life of 11 years. None of that captured the upside suggested by infill drilling (it has been indicating higher grades), and extensional drilling at the two main deposits and nearby/regional opportunities.

Importantly, Nusantara earlier this year secured a new contract of work which gives it secure title to 2050 and a 10-year holiday on a mandatory divestment of a 51% interest to Indonesian partners in the CoW.

The divestment requirement dovetails neatly with the current mine life, and it is notable that the arrival of Indika on the scene comes with an understanding that it will acquire an interest in Awak Mas at some point, at the project or corporate level, and at fair market value determined by independent valuation.

Nusantara’s next task is to secure financing for the project, something it now sets out to do with the strength of its new look share register. Assuming all goes well, first production would be possible in 2021.

Genesis Minerals

Genesis Minerals’ October announcement that the gold resource at its Ulysses project near Leonora had soared to 760,000oz in quick fashion ushered three change factors into the company.

Perhaps most importantly for the short-term, the resource upgrade allowed Genesis (GMD) to shake off the tougher market for capital raisings to pull in $5m from a placement at 2.8c a share to fund exploration to make Ulysses bigger still.

Then there was the more telling longer-term impact of the resource upgrade’s underpinning role in a scoping study that pointed to attractive economics for an initial standalone development producing 358,000oz over four years at $A1,000-$A1,100 oz.

But the sharper reality is that the resource upgrade made the third change factor - the likelihood of merger and acquisition activity surrounding the company - all the more likely.

Ulysses sits adjacent to the Goldfields Highway and the 3.3gpt grade of the resource means it could comfortably be trucked to any one of the treatment plants owned by others in the region

Historically at least, ore from shallow pits on either side of the highway at Ulysses were treated at St Barbara’s Gwalia operation and Zijin’s Paddington mill.

Other mills in the region include Dacian’s Mt Morgans and Saracen’s Thunderbox.

There is no certainty that operators in the region will look to acquire Ulysses either to fill their mills or to increase their optionality around ore sourcing as a derisking exercise.

What is more certain is that based on recent M & A activity, any bid would have to be at a big premium to Genesis’ current 3.1c share price, by any metric you could care to look at.

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