i like the bit about no leak...

IN THE iron ore game, it's all about location.

Without a railway and port system worth billions of dollars, it's impossible to ship the bulk commodity to Asian steelmakers.

So, back in November, when tiny West Australian explorer AusQuest announced it had picked up prospective iron ore acreage just 5 kilometres from Rio Tinto's Tom Price mining centre in the Pilbara, it sounded almost too good to be true.

And it got even better: Rio agreed to take up a $1 million share placement in AusQuest in return for the option to get a 60 per cent stake in the Nameless Prospect project.

That meant that, unlike Andrew Forrest's Fortescue Metals, there would be no need for AusQuest to build a costly railway or to fight BHP or Rio for third-party access.

Investors were ecstatic. The day of the announcement, AusQuest shares more than doubled to 38.5c. And by the time Rio officially grabbed a 7 per cent stake in the company in May, shares had doubled again, to 75c.

But yesterday morning it all came crashing down.

When trading began, AusQuest shares began to drop precipitously even though there had been no announcement from the company.

By the time AusQuest released drilling results from the Nameless Prospect shortly after 11am, its shares had already fallen more than 10 per cent.

The drilling results were not good. The iron content was in the low 50 per cent range rather than the high 50 per cent range earlier surface sampling had indicated. Worse, it was full of clay.

Considering the findings, the company managed to put out a fairly upbeat announcement.

"It is not possible to make any definitive statements regarding the commercial potential of the mineralisation," AusQuest said.

"The company thinks it may be possible to reduce this clay content by processing (screening and washing) which would enhance the iron grade of the resultant product.

"However, no test work has been undertaken."

In a conversation later in the day, AusQuest managing director Graeme Drew admitted the company was "a little disappointed" by the results but said he did not believe they had leaked out early from his office. "I wouldn't have thought so," he said. "The market's a strange place. I don't know what's happened."

But the early morning falls were only the beginning. AusQuest's shares nearly halved, closing 25.5c, or 44 per cent, lower at 33c - below the price last November when it signed the joint venture with Rio.

Rio has 60 days to examine the data and decide whether to proceed with the next stage of the joint venture agreement. But clearly many investors believe it will pull out.

"We're in discussions with [AusQuest] and they are doing what they now need to do in terms of market obligations, and we'll continue our discussions," Rio said.