No Aka, Showman was an important asset to Pluton but he wasn't...

No Aka, Showman was an important asset to Pluton but he wasn't Pluton. Everytime I get depressed about some new news on Pluton I go back to badfishes post on PLV fundamentals after the AGM and ask, whats new? Not much really. Here it is again ....

Everything I say here is of course my own opinion and is based on what I thought was said and presented, both at the AGM and at the pub afterwards. That means also that most of the stuff had an obviously positive bent to it but the truth is, there certainly seems to be a lot to be positive about.

Pluton is now an Iron Ore producer. We have produced our first shipment, sold it already and are now awaiting the arrival of the ship to carry it to China. As I mentioned in a post on Thursday, we are likely to have the money for this shipment, deposited in our account before the ship is finished loading, let alone delivering the ore. We will probably load another shipment at the end of December (that load is being processed and stockpiled at the Cockatoo Island shiploader right now). Then we will have a couple of months of single shipments before ramping up to 2 shipments per month until November next year, when we expect to be making three shipments per month.

Over the next 30 months, we plan to ship more than 70 loads out of Cockatoo, all coming from the remnant ore deposits (mainly Stage 4 but including some material available from other parts of the operation such as earth works for the new road cutting needed to access the stage 4 area resulting in "waste" material that contains enough ore to be suitable for blending and shipment). The numbers discussed at the meeting were that these 70 loads are likely to earn approximately $3m profit per load, or about $200m profit for the JV over the next 2.5 years.

So that's what will happen with the mining of the remnant ore in the short term. Based on those numbers, a share price of $1 would probably represent a PE of about 5, which I don't think is out of the question.

Then the really interesting stuff will start to happen. Personally, I was surprised to find out how little I understood about the underground on Cockatoo. Like most Australians, I don't equate Iron Ore mining with anything other than reasonably shallow, open-cut mining. That's because we are blessed with abundant resources very close to the surface but that is not the case in many other areas. China for example has a lot of it's iron ore produced from underground mines. Sure it's more expensive (generally) to mine, but that is where the Pluton story comes to the fore.

As a quick aside, I'll give a layman's explanation of some of the things Tony discussed in relation to the IO grades. An iron ore grade of 69.3% is termed pure because iron mainly occurs naturally as molecules of iron atoms combined with oxygen atoms. This means that for rock containing iron ore, once all the impurities are removed the residual is made up of 69.3% Iron and 30.7% oxygen (by weight). There are differing combinations of iron to oxygen, and in a simple sense these represent the differing terms associated with IO deposits e.g. magnetite is made up of 3 iron atoms and 4 oxygen atoms (Fe3O4) and hematite is 2 iron atoms and 3 oxygen atoms (Fe2O3).

Without wanting to labour the obvious but given that the aim is to get the Fe atoms on their own so that they can be mixed with carbon to make steel, the purer the ore is to start with, the easier and cheaper it is to produce steel hence the premium on higher grades.

Back to Pluton. Our Cockatoo grades are probably the highest grades being mined anywhere in the world at the moment. At 68.5% they contain just 0.8% of material that is considered waste, and on top of that, our waste is mainly silica which does not represent any issues in terms of handling or removal. So it's very high quality and therefore can be economic at higher than normal production costs. This means that the idea of underground mining on Cockatoo is not as "out there" as I had originally thought. When you consider that the underground mining would probably present no greater technical challenge than the standard underground coal mining operation in Australia (as was the feeling expressed at the AGM), you start to see that not only could it be an enormous company changing event, it could actually happen relatively quickly, maybe even as soon as the completion of the current remnant ore program.

I wont even try to estimate the value of the underground as the numbers are simply staggering (as has already been pointed out on this thread). The BHP drilling showed the ore body to extend at least 200m deep (with grades consistent with the 68.5% being recovered at the surface) and the only idea anybody has about how far this might extend in each direction, is the little we know from scratching a few meters worth off the surface of Cockatoo Island itself. It may be contiguous with Irvine island given the results to date and it may also continue on up to Koolan - who knows but even if it stops at the boundaries currently defined by the surface operations, the company that mines it will be worth more than $5b.

Quickly back to discussing the underground mining technology, there was a fair bit of discussion about the 2013 drilling program aimed at defining an indicated resource, determining the hydrology and looking for any geological anomolies (faults etc) that might impact a mine design. The only comment on hydrology was that water issues in any underground mine can be dealt with given modern techniques, its just a matter of whether the cost of pumping water out is too high to make the operation economic.

Given that the drilling program supports the current understanding of what's underground, a mine plan using what was described as "block and pillar" was the most likely. This is a common underground technique where large blocks of material are removed, separated by areas that remain untouched, effectively forming pillars within the mined area. It results in a honeycomb effect and is is also possible to go back in, fill the areas that were removed and then take out the material that had previously formed the pillars, thereby increasing the recovery rates.

This concept is being considered by our underground mining consultant who has reviewed the data and given a positive assessment of the project. I missed the name of the company (and it probably wouldn't mean much to me anyway) but apparently they are Australia's best underground mining engineers, with a strong record of delivering underground mining operations, not just theoretical consultants.

Then there's Irvine which has a bit of a "pantene" aspect to it - it won't happen overnight but it will happen! The EPA process just has to be followed and the anomoly of a wet season that wasn't wet enough, simply bumped everything for another year. We should be back on a clear path after this wet season, assuming we get the data needed to satisfy the EPA.

I want to finish up with some comments about the people that run Pluton. We all know Tony from his posts here on HC, but it is worth remembering how human communication works. More than 60% of all information is contained in the visual and auditory queues we get when we watch someone talk. Less than 10% of information is in the raw words. So when you read what Tony says on HC, you really don't get to absorb the full impact. You'll get much more from talking to Tony on the phone, and even more if you are lucky enough to spend some time face to face, talking about what is going on. And he is more than happy to talk to shareholders at any time (but preferably during working hours).

Malcolm and Russell are both genuine and highly experienced Directors. When you seen them with Tony, you can understand that this is a Board that respects the experience and abilities of each member and is able to work in the best interests of the company and the shareholders. The senior executives that the Board has assembled to see us through the difficult process of transitioning from an explorer to a producer seem to be of the highest calibre. Forthright, open and with an air of extreme competence, I have no doubt they will deliver.

Then there is WEG. While our new Director was unable to be present for the meeting, every conversation I had with Directors and staff of Pluton was pretty much the same - these are trustworthy people. While I won't give away who said it, one comment I got was that we may just have fallen into partnership with the only truly ethical Chinese businessman on the planet. There were so many anecdotes of things that had happened over the last 6 months that were clear indicators that these people were looking for partners not suckers, that in my opinion, this is a genuine win-win situation.

Really, there was heaps more but that's enough for now. I'll probably get an opportunity to post a few more comments and observations next week.

Cheers

Badfish