changing strategy

Aurox Resources 01 Oct, 2008
Changing Strategy
AXO; Hold around $0.27

Aurox continues to make steady progress in the assessment and development of its Balla Balla magnetite iron ore project. However, the company is yet to finalise its funding requirements for the project. With debt and equity markets in turmoil the company is reviewing its strategic options.

“Funding issues have led Aurox to initiate a strategic review of how to maximise shareholder value during the current period of turmoil on global markets.”

Recapping, the Balla Balla magnetite project is located near Port Hedland in the Pilbara region of WA. Aurox has defined an initial project producing 6mtpa of magnetite from 2010, with a staged increase to 10mtpa proposed by 2014.

Capital cost required to complete development to the 10mtpa stage are likely to be in the order of A$1 billion, although the returns are attractive. At current pricing the full scale project is forecast to generate annual EBITDA of around $500m.

Project funding is being supported, in part, by two 15 year sales contracts with Chinese steelmakers. In addition Port facilities have been secured and critical long lead items ordered (crusher and grinding mills).

Earlier this month the company flagged to the market that it was undertaking a strategic review of its project implementation. The broad ranging review will assess “strategic alternatives to ensure that Aurox shareholder value is maximised”.

Funding of a project of this scale was always going to be a stretch for an emerging junior resource company such as Aurox. Clearly, the current debt and equity market turmoil has not aided this process.

Despite this backdrop the company notes that it has “received expressions of interest from twelve banks in relation to proposed debt funding for the Balla Balla project. Aurox and its debt advisors have selected a syndicate comprising five banks (Australian and international) in relation to project finance facilities.”

Overall, Aurox believes that it would require in the order of $300m to $350m of new equity funds to help support the debt component of the development. At the current market capitalisation and share price this would simply be too dilutive to be palatable for existing shareholders.

The obvious alternative is for a third party to join the project. This would most likely be via a friendly party transaction and Aurox has appointed a corporate advisor to conduct the search.

However, the company is in effect opening itself up for corporate activity. Indeed, the current market conditions are ripe for takeover activity – particularly from Chinese interests.

Capital Structure
Our current estimate of the capital structure of Aurox is as follows:

Market Valua Issued Shares (m) SP (A$) Market Cap (A$m)
Fully paid shares 151.2 $0.30 $45.4
Options/Conv note 57.7 $0.30 $17.3
Cash from options $5.7
Diluted Market Cap 57.0
Cash $36.0
Debt (Con Note) $0.0
Enterprise value $21.0

NB: Convertible Note treated as equity.

Project Update
The recent company release also provided a technical update on progress at Balla Balla, as follows:

Interim Mineral Resource Upgrade
The Balla Balla magnetite resource estimate was increased from 473mt to 502mt following the completion of additional extension drilling to the Western and Central- East pit areas.

Infill and extension drilling along the Far West area is now complete and resource modelling is being undertaken to upgrade the current Inferred Resources to the Measured and Indicated Resource categories. This will allow pit design and reserves to be estimated for this area.



Engineering Update
Aurox reports that all technical aspects of the project are now well advanced including detailed engineering of the concentrate plant, port dewatering and material handling equipment. Tender documents for mining, civil engineering, accommodation, earthworks, plant erection and other disciplines have been compiled and tenders will be released and negotiated once appropriate funding and final approvals are in place.

Magnetite Processing Plant
The iron ore processing plant is designed to commence at 6mtpa concentrate production with a simple upgrade to 10mtpa planned. The company has formalised arrangements securing long lead capital items and initiating engineering.

Plant and port layout and circuit design are fixed and detailed engineering is well advanced.

The majority of the key and ancillary processing plant equipment is designed to process 10mtpa with requirements for a second ball mill, and additional magnetic separators, a tailings thickener and dewatering filters to secure the expansion capacity.

The crusher is transportable allowing it to operate near the source of the open-cut mining and thereby reducing mining fleet operating costs (fuel, tyres, etc). A conveyor will transport the crushed material to the processing plant, when it is cheaper than trucking ore.

Slurry Pipeline Balla Balla to Port Hedland
Transport of concentrate to the port via a slurry pipe has been determined the most economic method. Test work and engineering designs are being undertaken to optimise the slurry pipe and associated equipment.

Production water bore installation sufficient for long term sustainable production and conveyance of 6mtpa of concentrate through the slurry pipe has been completed, with an excess margin of nearly 30%.

Utah Point Multi-user Port Facility
The Balla Balla iron concentrate will be shipped from the Utah Point berth currently under development by the Port Hedland Port Authority (PHPA). Aurox has secured a 15 year agreement with the PHPA which includes an exclusive area to construct an Aurox owned and operated dewatering facility including concentrate stacker and reclaimer capable of loading ships at 7,500 tonne per hour.

Environmental Approvals Update
Aurox continues to progress the environmental approvals process for Balla Balla and expects final Ministerial Approval in the first quarter of 2009.

Balla Balla Ilmenite Potential
Aurox is investigating the potential to extract a titanium rich concentrate from ilmenite in the magnetite tailings. The tailings have potential to be upgraded via high intensity magnetic and gravity separation, followed by flotation. Current results indicate a potential to produce 550,000tpa of titanium concentrate, at the 6mtpa iron concentrate throughput rates.

Balla Balla Phosphate Potential
Aurox is also assessing the potential for beneficiation of phosphate from its Balla Balla project. The phosphate is contained in the hanging-wall waste rock located immediately above the magnetite ore being mined in the proposed operation.

Testwork is in currently in progress trying to replicate historical testwork which indicates a saleable concentrate with around 30% P2O5 can be produced. This is likely to lead to assessment of conceptual phosphate project producing up to 1mtpa of +30% P2O5 concentrate.

Stock Resource Recommendation
The Balla Balla project represents a robust development opportunity. However, in the current market funding is a stretch for a company of Aurox’s size, without severely compromising shareholder value. The company needs the support of a ‘big brother’ and has started a global search accordingly. We await progress in this regard and in the interim Stock Resource recommends Aurox as a Hold around $0.27