maybe ready to run soon, page-12

re: intersuisse report Full acknowledgement to Intersuisse, doing some good reports these days. From Tuesday.

Aztec Resources (AZR)
December Quarter Activities Report
Speculative Buy
$0.19

Koolan Island edges closer to development go-ahead
AZR has released its quarterly report, showing a busy period of activity on its Koolan Island iron ore project, which is moving closer to development.

Exploration drilling is ongoing and continues to identify significant widths of iron ore mineralisation at four main deposits - the Main, Eastern, Mullet and Barramundi deposits.

Preliminary pit optimisation studies and mine layout options have been developed using the revised resource estimate that was announced late last year of 39.5mt @ 64.8% Fe. These results show that a proposed 2.0m tpa operation could be supported for 15 years.

In addition, pre-feasibility work shows that based on a 2.0m tpa operation and assuming an iron ore price rise of between 20% and 30%, AZR could generate an EBITDA of between $32m and $38m annually, compared to EBITDA of $20m annually at current prices.

In terms of upcoming milestones, the Bankable Feasibility Study is expected to be completed in April 2005, while all statutory and financial pre-requisites are expected to be finalised by the end of July 2005. This would enable development and construction to commence immediately thereafter.

Memorandums of Understanding were concluded with two key potential customers, relating to the supply of iron ore and the provision of project finance. These MOUs so far cover the supply of more than 0.8m tpa of iron ore, with negotiations continuing on the supply balance.

AZR also boosted its cash holdings during the quarter by completing a $5m placement with Australian and European institutions in December.


Impact
To reiterate, AZR owns the former BHP-owned C

Koolan Island iron ore mine, situated offshore the Kimberley coast of WA. Geologically, it represents effectively an extension of the same iron ore resource at PMMs Cockatoo Island deposit, a little further offshore to the northwest. BHP abandoned mining operations at Koolan Island in 1985.

AZR announced an initial JORC-standard resource in 2003 of 25m tonnes @ 66.96% iron. The bulk of this resource represents the old pit mined by BHP, which is now filled with seawater. Rather than drain the pit, AZR has been conducting drilling along the previously untested 6km strike extensions of the pit, as well as untested satellite deposits previously identified by BHP.

The aim of this work is provide AZR with a mineable reserve and allow completion of the Bankable Feasibility Study, with mining to commence potentially in late-2005, enabling the company to take advantage of strong iron ore prices.

Completion of the Bankable Feasibility Study is the next major milestone and Societe Generale has agreed to provide a $3m loan facilty for this purpose.

From a leverage perspective, Koolan Island offers an iron ore exposure that is second-to-none. Based on current iron ore prices and a 2.0m tpa output scenario, forecast annual EBITDA is around $20m. Assuming a 20%-30% price rise, this figure jumps to between $32m-$$38m annually. At the same time, if AZR could prove up sufficient additional

reserves to support a 4.0m tpa operation, based on 20%-30% higher iron ore prices, EBITDA would jump dramatically to between $68m-$80m annually. Given AZR's current market cap is $69m, the company is very reasonably priced.

By iron ore standards capital funding requirements should be relatively modest at around $40m to $50m, given there is no necessity for large capital items such as railway construction. Koolan Island possesses significant cost advantages over other iron ore operations, as there is no requirement to transport ore by rail to port. We estimate these transport benefits are worth between $10 to $15/tonne. Furthermore, jetty and shiploaders studies indicate that Koolan Island could receive and load large capesize vessels, which would provide cost advantages. Importantly, no dredging of the shipping channel or jetty site would be required to receive these vessels.

Major shareholders in AZR include Societe Generale, major Chinese iron ore player CITIC, Asian commodities group Sinom, and China's MinMetals.

We maintain our SPEC BUY recommendaton. Unlike most other emerging iron ore plays, AZR has a defined resource, which is being upgraded through drilling. Product quality is high and it retains significant production cost advantages over its rivals. AZR could not be commissioning its Koolan Island project at a better time to take advantage of strong iron ore prices. It represents our best pick in the bulk commodities sector for 2005.