article from minesite

August 12, 2008

AIM Resources Deserves The “Most Bad News Of The Year” Award, But Plans Are In Place To Get The Company Back On Track

By Rob Davies

Most junior resource companies have had a bad year, but AIM Resources must be eligible for some kind of award, for having an especially bad one. The last year has seen rain damage at the mine site at Perkoa in Burkina Faso, a collapse in the price of the metal it was seeking to mine (zinc), a significant error in a technical report, a lawsuit from a shareholder, the cancellation of a listing on Toronto, the resignation of the managing director, followed by a law suit against him too, and, the final icing on the cake, the mothballing of mine construction. With that sort of a story the fact that the share price has gone from 12p to 1.4p is perhaps not a surprise.
What is perhaps surprising is that the company has found someone of the calibre of Scott Lowe to come in as managing director to recover the situation and set the company on a new tack. Scott comes from BHP Billiton which, while it is riding high now, has had its share of troubles in the past, so he is no stranger to the trials and tribulations of the mining game. As Scott sees it he has three tasks: clean up the existing issues, improve the business position, and develop a longer term business strategy.

In terms of cleaning up the existing issues, most of them have actually already been resolved or corrected. However there isn’t much he’s allowed to can say about the lawsuit, which remains a matter before the Australian Supreme Court. Scott acknowledges that there remains a lot to set right about the current state of the Perkoa project, but emphasises that the company does have a “recovery plan”.

Minews put to Scott that Perkoa was simply too small to be viable, but he rebutted that by pointing out that Teck Cominco and Xstrata have closed the Lennard Shelf mine, which needs a zinc price of $2,200 a tonne to be viable. Scott says that Perkoa only requires a $2,100 a tonne life-of-mine average because the high grade offsets the disadvantages of its small size. Many observers expect other mines to close at these prices, around US$1,800 a tonne, because there is simply no point in selling metal for less than it cost to find, develop and mine it.

This is a lesson the industry ignored for too long while it focussed on cash costs and is one reason it consistently shot itself in the foot. Studies that have been made available to AIM Resources indicate that the supply response to lower prices will be sharp, but that demand will continue to grow. Citibank expects the zinc market to return to deficit by 2011, and that that will be the trigger for prices to move higher. Given that outlook, and the current weak equity and credit markets, selling Perkoa looks an unattractive option, so it makes sense to hang on to the deposit until it becomes viable again.

On paper AIM has a strong cash position. As at 1st August the company boasted US$45 million in the bank. But that will shrink to US$15m once orders and commitments for goods and services have been paid for. The Company is currently considering which strategic assets to keep on as part of its care and maintenance program, and which can be resold to maximise the cash position. Long-lead items, like the ball mill, may well be retained. Given that the current market capitalisation of AIM is only A$33 million, the market seems to be implying that the non cash assets have minimal value even though Perkoa has had US$63 million spent on it and it has a reserve of 6.3 million tonnes with a grade of 13.8% zinc. That’s not something you want to give away in a fire sale, especially with promising exploration potential in the region.

What the market also tends to forget is that there are three other AIM Resources assets in Africa: a suite of exploration permits in Burkina Faso, the Mumbwa gold-copper project in Zambia and the Mokopane platinum-nickel project in South Africa. A newly signed agreement with BHP Billiton now allows for a longer time frame for drilling and evaluating Mumbwa, and the major holds options to fully fund future phases if it wants to increase its shareholding. Moreover, AIM Resources has the potential to recover 150 per cent of its costs on Mumbwa if BHP Billiton elects to fully fund a prefeasibility study. The Mokopane project is longer-term, and AIM Resources and its black economic empowerment partners are currently waiting for renewal of a new order prospecting permit on the project. The company says all alternatives are being assessed for this asset and Minews guesses that it might well be sold, if someone offered the right price.

The last year has been difficult for AIM Resources, very difficult, and Scott does not pretend otherwise. He is coming to London later in August to talk to shareholders and face the music. He will also be laying out the company’s plans for the future in more detail. The direct approach he has taken so far at least suggests that the new strategy will be implemented in a sensible and straightforward way.