Gunson Resources Waits With Bated Breath For POSCO To Pronounce On Funding
By Sean Smith in Perth
If Gunson Resources' managing director David Harley is nervous, he's not showing it. Yet the Australian-listed company is infused with a sense of expectation as the internal investment committee inside Korean steel giant POSCO mulls its next move.
The committee is POSCO is currently making up its mind whether to approve a propsed joint venture that will involve investment in Gunson's long-running A$180 million Coburn zircon and titanium project in Western Australia.
The decision, due in the third week of August, will be made against a background of recent weakening demand for zircon from the world's biggest consumer, China's ceramic industry, in the wake of Beijing's latest moves to rein in credit.
However, Harley notes that while volumes have dipped, zircon spot prices have remained relatively strong at above US$2,000 a tonne, as producers have cut back on supplies.
"The Chinese have done this before during the GFC", he says of the country's tighter fiscal regime.
"They just stopped, then they started again. In the second half of this year, they'll come out and buy their heads off again."
The precise terms of the proposed joint venture with POSCO have not been disclosed. What has been is that as part of it POSCO would take up a 40 per cent stake in Coburn, which lies 250 kilometres north of the West Australian port of Geraldton, and would fund its share of the development costs.
It would also pay Gunson an "earn in" sum based on a project value "well above" the junior company's market capitalisation, currently A$25 million.
Gunson has already hooked one major, DuPont, which has agreed an off-take deal for Gunson's share of Coburn's 90,000 tonnes a year of ilmenite.
And, while Harley is optimistic about POSCO coming aboard, but he remains cautious too. After all, the Korean company has already deferred a decision once, back in April, and its commitment isn't "a lay down misere".
As a fall back, Gunson is talking with two other potential partners - one based in East Asia, the other in Australia - which would take POSCO's place on the same terms, in the event that it does end up walking away from Coburn.
But Harley says Coburn's benefits are obvious to investors looking for long-term projects.
"We're ideal. We're ready to go, fully permitted. All it needs is money", he says. "These investors don't want to do the hard yards, they want something they can immediately get their teeth into."
Coburn is close to major regional infrastructure, including a major highway to Geraldton and the Bunbury-to-Dampier gas pipeline.
The financial modelling for Coburn was updated last November and increased the capital cost to A$180 million. However, it also lifted the project's net present value to A$223.7 million, and demonstrated an internal rate of return of 28.3 per cent.
Assuming a favourable decision from POSCO, Gunson's current timetable would have the project in production in 2014 after an 85 week construction period.
Gunson is in talks over other off-take agreements for the zircon from Cobun, which will account for 60 per cent of revenue, as well for the leuxocene and rutile, which are combined into a higher titanium dioxide product. The company is also progressing discussions over debt funding for its share of Coburn's development.
In addition, Gunson's engineers, Sedgman Metals Engineering, have been chipping away at the development costs and timetables, with the aim of delivering some meaningful savings by the end of September.
Harley is reluctant to give away too much, but it is believed project costs can be cut back by as much as 10 per cent.
GUN Price at posting:
11.3¢ Sentiment: Buy Disclosure: Held
