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Ferrex's Anglo American deal 'win-win', says MD Reeves

Last updated: 17:05 19 Dec 2013 AEDT, First published: 18:05 19 Dec 2013 AEDT

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Ferrex’s (LON:FRX) tie-up with mining giant Anglo American (LON:AAL) removes the exploration and financial risk of its high-grade Mebaga iron ore project in Gabon, according to managing director Dave Reeves.

He believes the deal is a “win-win” for the AIM-listed exploration junior, which under the terms of the earn-in agreement with Anglo and its associate, Kumba Iron Ore, will see the resource developed over the next two years.

If a major direct shipping ore deposit is uncovered, then Ferrex will likely be bought out of the project, Reeves said.

However, if the property doesn’t have the scale required by one of the world’s leading mining houses, it will be handed back to Ferrex, which will develop the smaller-scale operation it first planned.

And it will do so with most of the exploratory work completed at no cost to the company.

Not only does this exempt investors from having to fund a drilling programme, the involvement of Anglo provides resounding third-party validation of Mebaga.

“Anglo is looking at the very big picture – something a lot bigger than we’d be looking at,” Reeves told Proactive Investors.

“If they don’t find it, Ferrex will be looking to rapidly develop a smaller operation.

“Where we are going with this is they [Anglo] will have two years to explore the area – and at the end of the two years, if they have found something interesting, they would look at acquiring our share of the project.

“In essence we get all the exploration done at someone else’s expense with no dilution for shareholders.

“You can then be taken out of a substantial project at a decent price; or get it back substantially de-risked with all that funding being put in place. Either way it is win-win.”

Although the agreement with Anglo is binding, the full terms of the earn-in won’t be published until February – the month assigned for completion of the all the paperwork and checks.

“It is now a case of finalising the due diligence and getting the binding legal agreements together, which are the shareholder agreements, and getting government approval,” said Reeves.

“All things being equal we would have in the term-sheet February for approval. That is achievable, though the government [sign-off] is the one element out of our control.

“The government met Anglo previously so they are well aware of what’s going on.

“I think they are very excited that a major is coming in, but understandably they want to do their own due diligence.”

A recent review of Mebaga pointed to a potential 90 to 150mln tonnes of ore at 35-65% iron content and a far larger 550 to 900mln tonnes at 25-40% iron.

The smaller, oxide target incorporates direct shipping and beneficiate before shipping ores.

Mebaga is one of three major projects the group has in its portfolio.

The most advanced is the cheap-into-production Nayega manganese property in Togo.

A scoping study indicates it could produce 250,000 tonnes per year of concentrate at 38% manganese with an initial capital expenditure of under US$15mln. Ferrex is awaiting a mining licence to take Nayega into development.

Elsewhere, the Malelane iron ore concession in eastern South Africa has huge potential.

At 1.8mln tonnes a year of production, the initial investment is estimated at US$139mln and payback on that spend would be just under two years.

“At some point and depending on funding we will have to advance Malelane towards a pre-feasibility study,” the Ferrex boss said.

“That is a very attractive project with all the infrastructure in place.

“We hope the market will react more positively to that project next year.”

Unlike many of its rivals, all Ferrex’s assets are close to infrastructure and will be ultra-low cost to bring online.

The board – which includes Brian Moritz, Russell Lamming and Dave Reeves – has an incredible track record for building and selling mining companies and has hit home runs with Zimplats, Afplats and Chromex.

A recently completed £700,000 share placing means the group is well funded for the foreseeable future.

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