December 20, 2005 FORGET Macquarie Bank, the new millionaire factory is a lump of red rock called Shovelanna.
While the dispute over who owns the Pilbara iron ore deposit remains unsettled, the midnight peggers who seem to have outfoxed Rio Tinto have started capitalising on their prize.
Remember the story? On August 29, the sportingly monikered Cazaly Resources leapt on an administrative lapse by Rio Tinto, which had left open the ownership of an anonymous piece of the West Australian map called E46/678.
Contained within the boundaries of that exploration licence was a long-known but undeveloped iron ore deposit called Shovelanna.
Rio had the deposit slated for development some time in the next decade. But, courtesy of a courier stuff-up, the world's biggest miner failed to register the renewal of its licence. Which is when Cazaly's boss, Nathan McMahon, pounced.
To Rio's bitter consternation, Cazaly then signed BHP Billiton as a potential buyer of the Shovelanna iron ore, securing an automatic pathway to the global Australian's coastal ports and, just as importantly, its Chinese, Japanese and Korean customers.
The ore would be blended with BHP's nearby Ore Body 18 product, so Cazaly would not even have to market the stuff.
So, if Cazaly and its joint venture partner, Echelon Resources, have got it right, they are about three years away from owning a project which could generate income of $300 million a year. Nice work if you can get it.
On Friday, Echelon - very much the junior owner but the one now charged with preparing a mine design and finance plan - announced it was going to tap the market for $1.125 million in working capital. The company will issue 2.5 million shares at 45 cents each, a tidy discount to yesterday's market price of 53c.
Echelon's prospectus, which was released on the same day as Cazaly sent its second submission to the West Australian Government rejecting Rio's claim on Shovelanna, makes very interesting reading.
Echelon provides a lot of new detail on the Cazaly-Echelon deal with BHP and reveals, West Australian Government willing, Shovelanna mine may yet be developed directly by the global Australian.
The prospectus suggests that BHP's link with Shovelanna could eventually be deeper than it appeared at first blush. While repeating that BHP will take up to 5 million tonnes a year of Shovelanna ore, the company notes that BHP has signed to take a minimum of 100 million tonnes (which implies a 20-year deal, unless the off-take is faster).
Echelon then notes: "BHP Billiton and Cazaly-Echelon will work together in good faith to assess whether Ore Body 18 North (BHP's deposit) and Shovelanna should be developed as a single unified mining operation."
Obviously, that option would cut costs and remove any risk to the junior miners, a fact that would change the nature of Echelon's internal funding deal with the British-based investment firm Investec, reducing its capital requirements by one-third.
Echelon also notes that Cazaly has presented a Queen's Counsel opinion to the West Australian Government which says arguments presented by Rio Tinto in its objection to the transfer of the licence "cannot be taken into account by the Minister (for State Development)".
According to Cazaly's advice, Rio's pitch to the minister, which is not surprisingly based on the theme that it would more feasibly develop the Shovelanna deposit than two mining minnows, represents a "competing claim" argument. But the minister can decide only on the adequacy or otherwise of Cazaly's claim and therefore much of Rio's presentation should be ignored, according to Cazaly's legal advice. And given how things have gone so far, who is going to back against Cazaly?
The other thing made evident from the prospectus is that newly appointed boss, Matthew Rimes, is a man with impeccable timing.
A former iron ore miner with North Limited and then Rio Tinto, Rimes started as CEO at Echelon on June 13. The three tiers of his incentive package were approved at Echelon's AGM on August 11. Fifteen days later, Rio's renewal failed to find its way to the Marble Bar mining registrar and Shovelanna had a new owner.
The blue sky of Shovelanna has transformed the economics of Rimes's incentive scheme. Effectively, all 5 million options issued in August are already in the money at yesterday's closing price for Echelon shares of 53c. Rimes's first tranche of 2 million options, which must be converted on or before December 31 next year, have a trigger price of 25c each. The second tranche of 1.5 million December 31, 2007, options are priced at 35c while the third, 1.5 million December 31, 2008, options, are priced at 50c.
Talking of options conversion, there has been a bit of that happening at Cazaly over the past week or two. And every one of the 2 million or so 15.2c options which has so far been converted has bought a tear or two to the eyes of Cazaly's principals, Nathan McMahon and Clive Jones.
Why? Because they had to sell their almost 9 million 15.2c options in February to finance a capital injection into Cazaly through the conversion of some more expensive 35c options.
At it stands, there are another 6.6 million 15c options waiting for conversion before January 31 next year. And with Cazaly shares changing hands at $1.145, the little community of February punters is looking at a profit of $6 million on conversion.
bummer i can't find the Fat Prophets article.. will keep looking plus i sent nathan macmahon an email...
CAZ Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
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