aust. article

Cazaly's up there, turning a $1779 cheque into $300m

November 24, 2005
IT is every midnight pegger's dream. Early on August 29 the Marble Bar mining registrar received a cheque for $1779 from Nathan McMahon. It was to pay for an exploration lease over 40 square kilometres of rocky red earth in the Pilbara.

Just before 2pm on Tuesday, McMahon walked out of a meeting with BHP Billiton with an agreement that potentially transforms the investment into a billion-dollar mine and places McMahon and gold mining mate Clive Jones on the cusp of instant and serious wealth. McMahon and Jones run Cazaly Resources. The pair of football fanatics, who named the company after South Melbourne legend Roy "Up There" Cazaly, own about 22 per cent of the company.

Three months ago Cazaly was a gold miner with modest prospects. Today, it is a ministerial decree away from becoming a virtual iron ore miner with ownership of a project that could generate revenues of $300 million a year. The permit pegged by Cazaly's man that fateful Monday was E46/678. It is well known to the iron ore industry because the lease contains a long-discovered but untapped resource called Shovelanna.

Until 5pm on August 26, Shovelanna had been owned for 18 years by Rio Tinto and interests associated with the royal family of iron ore, the Hancocks.

But, in a display of all that is bad about being international and huge, Rio accidentally allowed the lease to lapse. How Rio Tinto dropped the Shovelanna ball is pure farce. The company actually paid the Marble Bar registrar for a renewal of its exploration permit on 28 July. Then it despatched a TNT courier with the formal application for renewal on 19 August. Miserably enough for Rio Tinto, the satchel carrying the documents did not lob with the registrar until August 31. By then McMahon had pounced.

Life has moved very rapidly for McMahon and Jones over the past 12 weeks. They have found a joint venture partner, Echelon Resources. They have signed up Investec, a London-based investment bank which wants to finance their plans. And now, after rapid-fire talks which began last week, they have locked in BHP Billiton.

BHP's involvement could be, on many levels, the deal-maker for Cazaly and its joint venture partner, Echelon (which is, interestingly enough, run by Matthew Rimes, a former Rio Tinto and Robe River manager).

From Shovelanna Hill you can see a BHP mine, the unimaginatively monikered Ore Body 18. The MOU being discussed by BHP and Cazaly would result in Australia's most muscled resources company taking up to 5 million tonnes a year of Shovelanna ore, blending it with its own product and sending it down the train line to Port Headland.

There are two reasons Rio Tinto never developed Shovelanna. One was the deposit did not justify investment in the new rail connection needed to take the ore to port. The second was that Shovelanna ore contains a very high level of phosphorous. BHP's involvement solves both problems. Shovelanna is a mere 12km from BHP infrastructure and the plans to blend the product with BHP's other ores means there is no longer an issue with phosphorous.

BHP's effective partnership (although it is not taking equity in either partner or the project) crosses more than the technical and logistical road blocks. It provides the minor miners with a new political clout and massively reduces the expense and time of construction.

With BHP's deal in their back pocket and, by using contractors to build and operate their mine, Shovelanna could cost the partners as little as $100 million up-front. And you would imagine Henry Walker Eltin is at the front of the queue for the job. It already operates Ore Body 18 for BHP.

The political implications of BHP's opportunism were immediately obvious yesterday to an increasingly peeved Rio Tinto. In a last ditch effort to reclaim Shovelanna, earlier this month Rio Tinto asked Western Australia's state Development Minister Alan Carpenter to renew its 18-year ownership of the exploration licence. Arguing public interest, the global miners reckoned Carpenter should use ministerial discretion to return Shovelanna to its rightful owners. But why, given that Rio Tinto had 18 years to to something with Shovelanna, is the company so dreadfully grumpy? First, there is the principle of the thing. And then there is the dreadful paradox of the timing of Calazy's swoop. The deposit was finally looking like it had a future because of the infrastructure Rio Tinto will build to support the Hope Downs development it acquired from Gina Rinehart.

But a public interest argument really requires something more that proving embarrassment and bad timing. It means convincing Mr Carpenter that the new ownership of Shovelanna will hurt the West Australian mining industry. And to do that, really, Rio Tinto must sustain an argument either that Calazy has improperly taken ownership of the tenement or that it is too small to build a big mine.

Humiliating as it may be for Rio Tinto, the first case cannot be established. And, by delivering its credibility and railway to Cazaly's mission, BHP has made life very difficult for its fellow citizen of the Pilbara to win on grounds of incapacity.

Rio Tinto, though, is not the only challenger attempting to loose Shovelanna from Cazaly's grip. Speculation that Andrew Forrest covets the deposit was confirmed yesterday, although Forrest's Fortescue Metals denied it had acquired any shares in Cazaly. The man who would be the Pilbara's third force is though stalking Shovelanna. Fortescue claims a pre-emptive right over the deposit and is headed to the Federal Court to attempt to prove it. Fortescue claims that a deal it signed with McMahon and his company Maincoast in January 2004 effectively made Cazaly's man a tenement spotter for Forrest.

Fortescue claims it paid McMahon a continuing fee, a five-figure sum in total, to identify iron ore prospects. It will claim McMahon, under the terms of their agreement, delivered four tenements in January 2004 and a fifth later that year.

Fortescue says the pre-emptive rights agreement was to be formalised as part of a five-year deal which it claims to have negotiated with McMahon between February and July. The big issue is going to be whether that deal was signed and whether the pre-emptive regime Fortescue is attempting to establish covers an exploration lease acquired by a company owned by Cazaly Resources. True to its combative nature, Cazaly flagged Fortescue's legal action in announcing the BHP deal. It rejected Fortescue's claim over E46/678 saying the "threats were without substance" and said its position would be defended with vigour.

In the end, I suppose, what this all means for certain is that we really are in a one-in-a-lifetime mining boom. We have four miners, two international giants and two wannabes, all in a bitter fight over a previously uneconomic iron ore deposit and now we have the prospect of lawyers from around the nation leaping in for their share of the action.