dri only part of the value, page-3

re: bhp interest in wim150 I had a rough go at an estimate of what APG’s WIM150 alone might be worth a couple of days back, but it was late at night and I wasn't all that sharp. My estimate there was that, if the guys at APG really have cracked the agglomeration technology to treat the deposit’s fine sands (which has frustrated commercialisation in the past), the deposit could have a value of around 70 cents a share.

Having thought about it a bit more, I realise I was a bit out. It is potentially worth a lot more than that!

The reasoning behind this conclusion goes like this:

The WIM150 deposit in the Murray Basin hosts around 1000 million tonnes of measured resource with about 5.9% of contained heavy mineral sands (about 5.3 million tonnes of which is zircon). The nearby Douglas deposit contains about 614 million tonnes of measured resource, and about 2.27 million tonnes of zircon. The Douglas deposit was ‘bought’ by Iluka in 2002 for $130 million (when it took over Basin Minerals for that amount). A crude extrapolation of that market transaction suggests that WIM150, with about 2.3 times more contained mineral sands, should therefore be worth about 2.3 times the price paid for Douglas. That suggests a ball-park value of about $300 million.

But since 2002, prices for mineral sands (ilmenite, leucoxene, rutile, zircon) have risen substantially. Zircon, for example, was around US$400 a tonne in mid-2002 but is now around US$750 (or 1.8 times higher). Adjusting the 2002 equivalent value for a simple increase in prices of this magnitude suggests WIM150 could have a market value of $300 million X 1.8 = $540 million. Given APG has approx 528 million shares on issue, this would suggest a market value for WIM150 of just over $1.00 a share.

Of course, the effect of higher prices means that a disproportionate share of any higher revenue falls straight to the bottom line, which in turn means the real value of WIM150 is potentially even more. For example, at $400 tonne for zircon a hypothetical margin might be $50 per tonne. If prices rise to $750, as costs would be largely constant, most of the higher price would end up as profit. Thus at $750 the margin might be $350 per tonne. In this simple case, the higher price would see profitability increase X7 even though prices have only increased by X1.8. Under this scenario it is reasonable to expect the underlying asset delivering the 7-fold increase in profit to increase commensurately in value (ie quite a lot more than just 1.8 times).

You can plug in your own discount, but if a multiple closer to the 7-fold profit impact is used rather than the simple 1.8 times price increase (say a multiple of 3) this would suggest the potential value of WIM150 might be closer to $300 million X 3 = $900 million. That would equate to about $1.70 per share.

In addition, the value of the agglomeration technology doesn't just stop at making WIM150 worth a motza. If the agglomeration technology developed by the wizards at APG works for WIM150, then it is reasonable to assume it has application on lots of other deposits around the world. That too has to be worth a bundle.

Of course, I admit there is a huge gap between potential value and actually realising anything like that value in the share price. However, this sort of exercise for just the WIM150 asset gives an idea of the enormous upside residing in APG.