in the news, page-5

Hi Matt

You keep repeating that Mayoko lacks the required economies of scale, however I disagree.

Economies of scale is the principle whereby a cost advantage arises with increased output of a product. Rio Tinto have economies of scale down to a fine art with a break even price of around $45  - the worlds lowest.

Fortescue have also recently tripled production which has seen a substantial decrease in their breakeven price from over $85 to around $75.

Then we have little EQX and their Mayoko project with a measly 2mtpa of production and a whopping break even of $65 - $10's less then the worlds fourth biggest Iron Ore producer Fortescue!

The point being while our tonnage is low our margin is high so scale is not as important to us as it is to higher cost producers. Look at Sandfire resources. They do not produce anywhere near as much Copper as the worlds biggest mines and yet they have one of the lowest costs of productions going around. They did the numbers and simply worked out they were on the right end of the global cost curve so the margins were defendable and more importantly profitable. This is what will be key for any resource project that makes it into production at this time in the cycle.

Even at the dismal spot Iron Ore price at around $83 the Mayoko project would make $18 per tonne. I like many others however have a slightly more positive view on the medium term price of Iron Ore. The view I share is that the laws of supply and demand will force the Iron Ore price to find a new equilibrium which I believe will be around $100. This theory is based on the fact that around 25% of world production is unprofitable at the current spot price so high cost producers will be forced to leave the market which has already started to happen, particularly in China. This thought is echoed by RIO CEO Sam Walsh who believes 125 million tonnes of high cost production will leave the market this year.

http://www.mining.com/iron-ore-price-in-stunning-turnaround-18721/

So at around $100 Mayoko makes around $35/tonne or $70m per year. Not bad for an operation which could have a capex of around $150m. What's that a 2 year payback period? 1.5 years better than SDL and a construction period 2.5 years shorter than SDL?

So again why do we need economies of scale? You need to look at the return on your investment and Mayoko has an exceptional return on equity even if it doesn't have the scale of bigger operations - including Fortescue. Matt I fully appreciate Mayoko is a very small boutique project that is dwarfed by most other Iron Ore mines, however I think this point is not particularly relevant if you have already achieved a lower operating price than some of the worlds biggest producers.

Lets just all hope that the Theory I support on Iron Ore is the one that actually plays out....or we are all toast!