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Gunson Resources gains Korean steel maker POSCO as investor in Coburn

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Gunson Resources (ASX: GUN) and major Korean steel producer POSCO will go ahead with the proposed joint venture partnership following approval by POSCO of its investment in Gunson’s Coburn Zircon Project.

POSCO, which boasts a $26 billion market cap., will earn a 40% interest in Coburn with an initial A$7 million payment and then contributing the first $21 million of Gunson’s share of mine development expenditure. 

POSCO’s investment in the project will be within an unincorporated joint venture structure, through a special purpose investment vehicle majority owned by POSCO, with a minority interest held by a Korean based resource investment fund.

The POSCO SPV’s investment in Coburn is contingent upon Gunson raising its 60% equity share of the mine development costs, less the $28 million earn-in expenditure by the POSCO SPV, by the end of 2012.

The most recent estimate of capital costs for the development of Coburn is $180 million.

Gunson is looking to raise its share of mine development costs through a combination of debt and equity.

Importantly, discussions with a number of banks are well advanced towards securing the debt component of the project financing.  

David Harley, managing director of Gunson Resources, told Proactive Investors today that Gunson expects to conclude the discussions with banks in the next couple of months.

The next step is for Gunson to turn to the equity market to raise the remaining funds for the development of Coburn.

A joint venture document outlining the financial and operational aspects of the Gunson-POSCO agreement is close to finalisation, and execution of this document is expected during the current quarter.


Terms of POSCO deal 

Each joint venture party will be entitled to its proportional share of the proposed production from Coburn, being zircon (estimated 65% of revenue), chloride ilmenite (20%) and HiTi90, a mixture of rutile and leucoxene, (15%).

Gunson will be project manager, with the POSCO SPV, represented by POSCO, to have equal representation on the Joint Venture Management Committee. 

While Gunson will have a higher percentage voting interest, all material decisions of the Joint Venture Management Committee will require unanimous approval.

The POSCO SPV’s investment in Coburn is also subject to the Korean fund’s formal approval, although its technical due diligence has been completed, with favourable results. 

Final approval from the Korean fund is expected in the coming weeks, prior to execution of the Gunson-POSCO Joint Venture Agreement.


FEED/Value Engineering study

While Gunson has been eagerly anticipating POSCO’s approval of the investment in Coburn, the company has made good use of its time by undertaking a front end engineering design (FEED)/value engineering study. 

The study, being undertaken by Sedgman Metals Engineering, is on track for completion in mid-September 2012.

Importantly, the study will provide a more definitive capital cost figure and construction schedule, with a reduction in the previously advised 85 week construction period likely. 

Once Sedgman Metals Engineering has finished its FEED/Value Engineering study, Gunson will move to complete its debt and equity financing package for the project by the end of 2012.


Coburn in a snapshot


Coburn is one of only a few advanced mineral sands projects in the world. It is strategically located, with regional infrastructure nearby including a major highway, natural gas pipeline and port, with the project 250 kilometres north of Geraldton, an established mineral sand port with available capacity.

The project will be the second largest zircon producer of the only three mines in the world that have a completed Definitive Feasibility Study and are fully permitted for construction, behind Grande Cote in Senegal. 

Coburn has an estimated net present value (8%) of $223.7 million and an internal rate of return of 28.3% on a pre-tax and pre-financing basis.

Not only has Gunson secured financing for Coburn through the POSCO deal, it has also executed an offtake agreement with the world’s largest pigment producer, DuPont, for its proposed share of chloride ilmenite production from the project over a five year period.  

Discussions with other potential offtake partners for the higher titanium dioxide mineral products and zircon are well advanced.


Analysis


Securing investment approval from POSCO is a major step forward for Gunson in the development of its Coburn Zircon Project – set to be the second largest zircon producer of the only three mines in the world that have a completed Definitive Feasibility Study and are fully permitted for construction.

This approval provides a catalyst for Gunson to secure debt and equity funding for its share of the development costs of the project.

Not only has Gunson secured financing for Coburn through the POSCO deal, it has also executed an offtake agreement with the world’s largest pigment producer, DuPont, for its proposed share of chloride ilmenite production from the project over a five year period.  

Zircon prices have remained above US$2,000 per tonne f.o.b., indicating considerable supply discipline by the three major producers, who have a combined market share of over 70%, despite a weakening in sales volumes for pigment, titanium dioxide mineral feedstocks and zircon.

Once current restrictive Chinese government credit settings are eased, long-term zircon demand growth is expected to resume, with the ongoing urbanisation and growth of the middle class driving demand for higher quality ceramics, paints and other products requiring additional zircon and titanium dioxide mineral feedstocks. 

Coupled with supply side limitations, industry commentators such as Iluka, TZMI and Goldman Sachs note that tight mineral sands feedstock markets could return in 2013.

Interestingly, it takes a long time to get an exploration prospect from discovery to commercial production, the lowest quoted average being 10 years.

This means a construction-ready project, like Coburn, is positioned well ahead of other projects in the pipeline.

This leaves Gunson well positioned to take advantage of future increased zircon demand as the company approaches production in 2013.

With definition from POSCO on the financing front and an offtake agreement secured with the world’s largest pigment producer, DuPont, the current valuation of Gunson Resources could look exceedingly light. 


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