September 10, 2009Atlas Iron And Warwick Resources Join Forces...

September 10, 2009

Atlas Iron And Warwick Resources Join Forces On The Pilbara.

By Our Man in Oz / www.minesite.com

Judging from the reaction in the market, it looks as if shareholders in the tiny Australian iron ore explorer Warwick Resources will be the winners in the planned friendly merger that it’s announced with Atlas Iron, a company 10 times its size. Warwick’s shares jumped from around A42 cents before the deal was announced on Monday 7th, to a 12 month high of A59 cents on Tuesday 8th. What makes the deal compelling is that Atlas, arguably the most successful of Australia’s smaller iron ore stocks, will be introduced to a prolific iron ore region known as the Eastern Pilbara, at the same time as Warwick’s prodigious exploration talent slides into Atlas.

In one move, a one-for-three share swap, Atlas gets exposure to a region with the potential to produce iron ore “elephants”, an essential next step in the evolution of Atlas, and it gets a team of explorers with a reputation for making discoveries. If all goes to plan and Warwick is smoothly integrated into Atlas, this really could be a deal where one-plus-one equals three, and that means the reaction in the Atlas share price, which has risen from a pre-merger announcement of around A$1.64 to A$1.74 might be significantly underdone.

“Warwick is working in elephant country, and if Atlas is to have a chance to change the scale of its operations it needs to have tenements in the Eastern Pilbara”, Atlas chief executive, David Flanagan told Minesite’s Man in Oz. “We need to be there, in a Proterozoic geological setting, with its track record of yielding massive orebodies, to build a bigger business.”

To date, Atlas has been working on a business model based on the profitable exploitation of relatively small pods of high-grade iron ore in the Western Pilbara. Its’ start-up Pardoo mine has a resource of 28 million tonnes, and while bringing it into production cost a lowly A$14.5 million, it’s only likely to ship out around 2.5 million tonnes of ore a year. Next cab off the Atlas rank, Wodgina, is a 43 million tonne resource which will grow to around 3.6 million tonnes and cost even less to develop - A$10 million - thanks to a deal covering mothballed infrastructure at a nearby tantalum mine. Abydos, the third cab, is a 22 million tonne resource which will yield up to three million tonnes. Good as these projects are, much bigger orebodies beckon in the eastern part of the vast Pilbara iron ore province.

Warwick already has Atlas as a cornerstone 20 per cent shareholder and Atlas executive Mark Hancock on its board. It has been elephant hunting for the best past of three years, and has successfully secured an extensive tenement holding close to the biggest of Australia’s iron ore mines, the giant Mt Newman operations of BHP Billiton. While Warwick has outlined a number of small pods of high-grade, direct shipping ore, it has also identified priority exploration targets in the 50 million to 100 million tonne range. Drilling those bigger targets means that Warwick itself had to get bigger, which is why it is prepared to merge with Atlas, a deal which kills two birds with the one stone.

“The tenement position and elephant potential was one attraction, but of equal importance was bringing Bruce McQuitty into the enlarged Atlas”, David said. “He’s an excellent geologist. You might remember him as the man who headed up exploration at [manganese miner] Consolidated Minerals during its glory days. He came into our office 18 months ago and said: ‘this is my business plan, I’d like someone to take a 20 per cent stake in us, and support our exploration strategy in this part of the world’. The market hasn’t always got it, but we have, and I reckon he’s kicked goals almost every two weeks since he’s been there.”

As well as putting cash into Warwick, Atlas has been instrumental in Warwick expanding its footprint through the acquisition of additional tenements. The aim is not only to find big orebodies, but to develop a cluster of deposits for “hub-style” development. As with all iron ore projects, the key to success will ultimately be access to rail and port facilities, two matters which are yet to be resolved, but are nevertheless now likely to be, as more public access berths are built, and political and customer pressure mounts on BHP Billiton and Rio Tinto to open their railways to third party users. “Our initial investment in Warwick was always on the basis that at some stage we would bring the two companies closer together”, David said. “It was never a financial play, and Bruce was in complete agreement.”

David conceded that there are risks associated with Atlas expanding into a new region, even as it brings on new mines to the west. “But those risks are far outweighed by the potential down there”, he said. “If you add the target potential of what Warwick is looking for, and what we already have, you could have up to 500 million tonnes of ore, and we expect to find more over time. This really is a win-win deal. The offer is at a substantial price premium to Warwick’s pre-deal share price. It creates a combined company which will generate substantial future benefits, including a bigger resource base, greater exploration potential, and an expanded pipeline of projects.”