minesite article

Will GUN get past the finish line this time around?

http://minesite.com/news/gunson-edges-ever-closer-to-a-development-deal-for-the-coburn-zircon-project-in-western-australia

Gunson Edges Ever Closer To A Development Deal For The Coburn Zircon Project In Western Australia

By Our Man in Oz

Gunson Resources has been ready to press the go button on its Coburn zircon project in Western Australia for more than a year. It hasn’t, because the right deal with the right partner hasn’t yet been signed. Now, though, the company reckons it’s pretty close. Ideally, the potential partner will share Coburn’s estimated US$180 million capital cost, and provide the long-term contracts that will be essential to provide strength-in-depth to the proposed minimum mine life of 24 years.

The “wisdom” of not developing Coburn earlier can be tested by comparing last year’s zircon and titanium minerals prices with those on offer today. The average price for zircon, which is in heavy demand in China for use in ceramics, was US$906 a tonne last year, according to a recent market analysis by the investment bank, Goldman Sachs. This year the price is forecast to average US$1,903 per tonne. It’s the same story with rutile, up from US$560 per tonne to US$1,045 per tonne, and ilmenite, which is up from US$107 per tonne to US$181 per tonne.

Next year, and perhaps beyond, prices should continue to rise. That makes for a pretty healthy outlook for one of the few fully-approved and government-permitted undeveloped zircon projects in the world. And it’s hardly surprising that that’s a point which Gunson chief executive, David Harley, enjoys making. “We really have moved to a point where zircon customers, and minerals traders, are beating a path to our door”, David said during a chat in his Perth office. “Demand is strong, and prices look like staying high for some time, thanks to a major supply shortage. It’s a perfect time to be bringing a new project into production.”

But before Gunson can make the final steps towards starting construction it must finalise its negotiations with a partner. “We’re getting close,” David said. “I know you’ve heard that before, but we’re now in serious talks with a potential partner which could see them buy a 40 per cent stake in Coburn, and provide long-term access to markets.” David declined to name the likely partner, only saying that it was an Asian company. But given that David has been burned once by a potential Chinese partner, that turned out to be only chasing a high-priced construction contract, it’s a fair bet that China is off the Gunson dance card.

Whoever joins Gunson in Coburn will be getting a slice of a project which is displaying greatly improved investment fundamentals as compared to a few years ago when zircon and titanium prices were low. At a major mineral sands conference in Hong Kong two weeks ago, Coburn was singled out by Goldman Sachs on account of its completed definitive feasibility study. The investment bank noted that Gunson is evaluating finance options, including the introduction of a joint venture partner.

And although the Goldman analysts did not express an investment view on Gunson, other analysts are enthusiastic. Edison Investment Research, which has a working relationship with Gunson, values the company at A52 cents a share, more than triple its recent price of A14 cents.

The research work of Goldman Sachs into the zircon and titanium markets adds to the belief that Coburn is close to waking up, after time in the pending file. “We remain very positive in our outlook for this suite of commodities despite the prospect of a few months of softer demand from China”, Goldman said. “We believe that the positive structural story is very much intact and, in the short term the potential for merger and acquisition activity should be supportive for some of the smaller names in the sector.”

Zircon, which will account for an estimated 67 per cent of the revenue from Coburn, is forecast by Goldman to hit US$2,500 per tonne in 2012 and then to rise up to US$2,700 per tonne in 2014, before easing to US$2,250 in 2015. Ilmenite, about 18 per cent of Coburn’s revenue, is forecast to reach US$275 per tonne next year before easing to around US$180 per tonne.

Along with those price forecasts come two key observations from Goldman: “shortages are driving M&A potential”, says the bank, and it then adds that there has been “limited demand destruction”. In other words, low prices over the past decade did their work in killing off exploration and new project developments, before bumping into a situation of continued strong demand as the Chinese buy ceramics for their new bathrooms.

When, not if, Gunson presses the go button on Coburn, the project will spin off handsome returns. For that initial A$180 million capital outlay Gunson (and its partner) will get a mine producing 40,000 tonnes of zircon a year, 90,000 tonnes of ilmenite, 9,000 tonnes of rutile and 7,000 tonnes of leucoxene. Using August mineral prices as a guide, that implies annual revenue of A$111.2 million which, after costs of A$67.2 million, leaves a net operating margin of A$44 million – which boils down to an internal rate of return (IRR) of 33 per cent, more than double the 15.6 per cent IRR which the company produced in a January, 2010, analysis. Not a bad proposition, all told, and it’ll be interesting to see who ends up buying in.