Small Caps interview, page-2

Ok, breakdown time.

Again, apologies for the length, but it is mostly for me and I am happy to share my thoughts.

This is a great interview, and I really appreciate the way Kerry asks questions.

The first part of the video is a general intro to the company.

The interesting bits. Be advised that there are some interesting parts towards the end, but this breakdown is done chronologically.

• "Transcript is in the bullet points. This is interesting. This is REALLY INTERESTING"
• Kerry: prefix when she asks a question mid stream

My thoughts and comments


https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=242

• "We know from operations that produce DSO, they're low capital cost, low operating cost operations, and that's one of the beauties here, compared to other similar projects is we have a substantial amount of the DSO which will enable us to get started at a low capital cost, high margin which can then return money to share holders, but also fund any further capital to progress and build the business."

From what I understand from the announcement for the Northern and Central zones is that the announcement for the Southern zone will also include details for how much ore is suitable for DSO.

Mentions returning capital to share holders. Bring on those divvies!!!

Kerry asks about "low capex, high margin, can you expand on that?"

https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=283

• "It's too early for me to say what our operating costs will be, but let's just assume it will be in the middle range of operating costs of all those that produce iron ore today, so a number like $50 USD. The 62% iron price is $150 USD, so the margin is $100 per every tonne. So for a 2 or 3 million tonne operation - which is something like an organisation like ours could handle as a start up, that is potentially $200m of revenue (note: I think he means profit, as the revenues would include the $50 production costs) - that is sufficient to make a very good return to shareholders, but also to invest in additional equipment to grow the operating volume without having to get into debt or raise funds from shareholders"

Again he mentions returning funds to shareholders, but now he says "a very good return". Bring on those divvies!!!

Also showing they are very mindful of dilution. Like I said, if we can get to DSO with under 150m shares (currently sitting at around 77m shares fully diluted), I honestly think this will be $10 per share and $1 dividends which is a 10% yield on that share price (note that FGM pay about 15% dividends).

Kerry doesn't like dilution also, and also mentions that the path to production is still a few years away.

Who knows how quickly we could get things going? It depends, but I think 3 years is optimistic, and 4 years is realistic.

Based on this, I am hoping I will be able to stop working in 5 or 6 years!

https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=366

Kerry asks about Madagascar, support of the government, and what the government will charge in terms of royalties.

• "There are some significant players already in Madagascar, RIO and Sumi Tomo which is an $8B nickel laterite project, and the benefit for us has been they have trained up many people that have then gone on and started businesses, and we're using that experience to progress our operation - something that wouldn't have happened 10 years ago, so that's been beneficial. Mike Davis from Xstrata, he has a project looking for graphite. So there are opportunities."
• "During our exploration program last year we had a visit from the mining ministry, and they were very encouraged. They saw us to be a professional organisation and were very complimentary of us"
• "The other thing is, typically in mining jurisdictions, the state and federal government royalties are around 7% for iron ore, and if you've got a good project, you can and should wear that to give back money to community and society. In Madagascar at the moment it's 2%, and they've got discussions in parliament to double that to 4%, and we are totally supportive. If you've got a good project, a 4% royalty is a sensible thing, and a good project like ours could well and truly wear that, and we would be happy to pay that, and it is certainly better than 7% which is what is happening in Australia and elsewhere in the world"
• "It's a very poor country, Madagascar, people there are very keen to improve their standard of living, we've employed Masters Graduates in Geology to do work for us, super enthusiastic, they want companies like us there so they can have good jobs, and money flows into these communities to help them."

This has got me thinking... Size isn't everything.

Sure RIO, BHP and FMG have much larger operations and the economies of scale, but when you factor in things like a 3% difference on royalties, and the grade premiums we can expect from producing 65%+ ore, AKO would have to be making similar margins to these companies, especially FMG who have been producing lower grade ore and in turn receiving a lower cost than benchmark grade.

When you factor this in with shares on issue etc, the EPS could actually be in our favour as we start to scale production.

Looking at the FMG half yearly results


Please correct me if I am wrong, but in over simplified terms, it seems like FMG are producing for $15/t, but are only realising $96/t and are making about $80/t, whereas AKO will be making closer to $100/t.

FMG also have 3 billion shares on issue, whereas AKO currently have ~77m shares fully diluted, but with more (minimal) dilution to come in order to go DSO mining.

https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=649

Kerry asks questions about the maiden mineral resource - 84.5 mt. Explain the cost structure etc.

• "Potentially we can see a 150 - 160 million tonne resource for Bekisopa. Because I project has both Magnetite and Hematite, but predominantly Magnetite at depth.
• "75 micros is fine, but it is coarser than pretty well any other project that's currently operating or looking to be developed. That also means potentially the operating and capital costs will be less relative to others"

Don't forget that his 150mt of ore for the maiden resource is only for 30% of the 6km strike.

https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=888

Kerry wants to talk numbers. Market cap ~$20m, listed 15 months ago at $0.25c

• "We listed at $0.25c and currently at $0.38, so we've done very well."
• Kerry: "If we do the numbers, off that maiden resource, of $0.60c or $0.70c per tonne, you've got 84mt, that's around $59m, and your market cap is about $23m, so there's a disconnect there, would you say?"
• "I would say so. I think one of the ways to value a company like ours would be the cost per exploration tonne in the ground, and while that figure may vary between the highs and the lows of the iron ore price cycle, using a number like you said, $0.60c or $0.70c AUD is realistic I believe, others have used that, which should mean our market cap should be $59m, so double what it is today, so yes, there is a disconnect."
• Kerry: "And then when you bring in the Southern zone, look, I'm not putting words in your mouth here, I'm just trying to understand where the value is, for me it is all about the investment thesis and gettiing people to go - it's almost back of the envelope stuff here, because when you bring in the ore from the Southern zone and that's about 160 million tonnes, then we're talking about $100m - $110m market cap"
• "If it all comes together as we expect, and the North, Central and Southern zones add up to 150 - 160 million tonnes at $0.60c or $0.70c like you're using, that means $111m dollar value for the iron ore in the ground, so that's 4X where our present market cap is, and we hope to announce that resource in the coming weeks, so there is a disconnect"

I used $0.50c when I did my estimates on what the market could value the iron ore in the ground at once proven up, and they have suggested ~$0.65c is reasonable.

That is good, but we are nowhere near that at the moment.

Again, I want to re-iterate that we have only drilled 30% of the 6km strike, so there could be 400mt (or more) of ore once the whole of the resource has been drilled, and we also drill to understand how deep the resource goes.


https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=1053

• Kerry: "Do you think that is partly due to Madagascar? Where are your customers? One of the things is cost of shipping"
• "People say iron ore is a logistics activity. From the mine to the port. From the port to the customer. From the port on the west coast of Madagascar that we'd be looking at, our nearest customers are the Middle East and India. India has plans to grow their steel industry significantly, making them a significant iron and steel producer in the world. The Middle East is a target for us as they have an abundance of Natural Gas from the oil operations, and that's what is used to convert the high grade iron ore to steel, so the 67%, and that's already happening now with the pellet operations. So they are near neighbours to Madagascar, and the shipping cost has the potential to be relatively low compared to most who are shipping long distances to China, Japan and other places around the world. So there should be a shipping cost advantage from Madagascar"

I asked the question about off takes in an earlier investor presentation, and Paul said there have been discussions about this, but we need to prove up the resource before anything could be formalised.

Perhaps there have been additional discussions around this since then as he makes the point multiple times in relation to costs of shipping and customers in India and the Middle East.

Obviously this is pure speculation on my behalf, but I can't think of another reason as to why he would bring it up. We know China are looking to wean themselves off Australian iron ore, but no real mention of China.


https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=1144

Kerry talks about pathway to production, mentions 3 - 4 years. Do you see any hurdles, or are you confident this will be a mine?

• "Now that we've proved up the resource, we are in a position to do some scoping studies, which we have planned for this year."
• "First off logistics. Mine to port. Port infrastructure. Where is the best place for us to send our product to? What will be the mining and processing activities, what is the magnitude of that? What are the potential dollars and people numbers? We've got those studies planned for this year, and that will give us a very good indication of the way forward in the next 6 - 9 months and the costs of doing that."

Kerry promises to get the company back on at some stage in the future.

https://youtu.be/t65lHxHukCo?list=TLGGrpkke4L0VB4yNzAzMjAyMg&t=1217

Kerry asks for 3 reasons for people to invest in AKO

• "Low capex, high margin start up that will become a mine"
• "Nearby customers in India and Middle East with low shipping costs. We've proven we've got the quality, so we're gonna have the demand, I believe"
• "Our market cap at $20m is undervalued, there's lots of upside, we've got the Southern zone to be announced soon, and I believe the is an opportunity for people to get involved with Akora now, and ride the next wave which should be exciting."

Paul says "that will become a mine". Very strong language here.