minestite story on territory resources

http://www.minesite.com/nc/minews/singlenews/article/frances-creek-survives-its-second-cyclone-and-territory-resources-picks-up-the-pieces.html

July 24, 2008

Frances Creek Survives Its Second Cyclone, And Territory Resources Picks Up The Pieces


By Our Man in Oz



Lightning might not strike twice in the same spot, but cyclones do. The twin cyclonic events in the life of the Frances Creek iron ore mine in Australia’s Northern Territory were named Tracy and Michael. Tracy struck on Christmas Eve 1974, flooding the Frances Creek pit, as well killing 65 people and damaging essential infrastructure in the nearby port city of Darwin. Michael, also known as Michael Kiernan, struck two years ago, also bringing violent gusts of wind, and for a time doing a lot of good in restoring Frances Creek. But, earlier this year cyclone Michael went off course, a combination of trying to do too much too quickly, and of re-directing spare cash from Frances Creek into the troubled goldminer, Monarch Gold, rather than into a rock solid, but less glamorous business, called Territory Resources.
After Michael comes Andrew. Also prone to moderately strong winds and forceful opinions, Andrew Simpson, is the new man in charge of Territory. He was also, until recently, a very close associate of Kiernan, but told Minesite’s Man in Oz earlier this week, that relations now were “icy, at best”. The problem, when friends fall out, is to know which side to take. So, for this exercise in explaining what’s afoot at Territory there will be a degree of skirting around the core issues of who said what, and when, with an emphasis instead of focusing on the business of explaining why Territory and its Frances Creek mine remain a terrific little investment opportunity.

“We really do have an excellent mine with considerable potential for expansion”, Simpson said. “For the 12-months ahead we have set ourselves three key performance indicators. We’re going to expand production to an annual rate of 2.25 million tonnes of ore by December, and 2.5 million tonnes by July next year. We’re going to spend A$11 million a year over the next two years on exploration, with the aim of expanding the resource base to 20 million tonnes, enough to extend mine life out to five to 10 years. And we’re going to get the cost of production down to less than A$60 a tonne, free-on-board.”

With iron ore prices in the stratosphere, and likely to stay there for at least another three years, Territory is heading into a very profitable period. Simpson dodges providing a direct answer to the profits question but it is reasonable to assume that the company is looking at an annual gross profit of close to A$100 million a year when it hits the target of 2.5 million tonnes a year, with at least half, or around A$50 million, sticking, as net profit. In simple terms Minesite’s Man in Oz arrived at this financial equation: The high-grade haematite being produced at Frances Creek (61.5 per cent iron content for lump ore and 59.5 per cent for fines) fetches close to A$100 a tonne. At 2.5 million tonnes that equates to annual revenue of around A$250 million – minus about A$150 million in costs (A$60 a tonne).

It could be more because one of the features of Frances Creek is that no serious exploration has been carried out for decades. After Tracy, the mine was abandoned because of minesite and port damage, plus the onset of a period of low world iron ore prices and prolific production from the big iron ore mines across the Northern Territory border in Western Australia. The China boom has blown away that gloom, a fact that Kiernan and his financial partner, Noble Group’s Richard Elman were quick to spot. They had been looking for a way into the iron ore industry, initially fiddling around with a possible joint venture with the Andrew Forrest-led Fortescue Metals. That proposal went nowhere, but Frances Creek went somewhere, though not far. With little fanfare, and perhaps too little preparation (such as drilling ahead to prove up reserves) Kiernan “bulldozed” Frances Creek back into production. Output has been modest, but the mine should produce its one millionth tonne in the current quarter.

Higher production from what are essentially fixed costs is the key to restoring investors’ interest in Territory, which has been severely punished on the stock market recently. Its shares have come crashing down 61 per cent from a high late last year of A$1.74 to recent trades at around A67.5 cents, a price which actually represents a partial recovery from the A61.5 cent low reached last week, when Territory revealed that it was owed cash by Monarch and held a 19.96 per cent stake in the gold miner which is in receivership. Simpson has stated very bluntly that: “there will be no further provision of funds to Monarch either as debt or equity”.

Digging the company out of its Monarch hole is a job which Simpson has taken on reluctantly, but with the full blessing of Elman, one of Hong Kong’s top China traders. “We’re very confident that with accelerated exploration we will be able to rapidly expand the resource base at Frances Creek,” Simpson told Minesite. “We have been held back by a shortage of geologists and drilling rigs, and I say that as chairman of Swick Drilling. But, the board has been told by its exploration team that 90 per cent of the targets are ready to be drilled. Within the next few weeks we should have three rigs on site.”

Expanding exploration is a first step to growing Frances Creek. Currently, the mine has a tiny inferred and indicated resource base of 10 million tonnes, with just one million in the inferred category and nine million indicated – hardly sufficient to talk with confidence about growing a business to 2.5 million tonnes a year. Money to ramp up drilling and expand production will come from cash flow, which remains positive, and possibly from a fresh injection of funding via the stockbroking firm Euroz Securities, which has been given a mandate to advise on capital availability.

“When you cut through the troubles we’ve experienced you’ll still find a very solid business based on a small, but high-grade resource of iron ore,” Simpson said. “Growing the business off that resource is our primary focus, and as we do that we will be able to look for additional sources of raw material to sell to the global carbon steel industry, particularly China. We also remain positive about the outlook for mineral sands where we have exposure through Matildas Minerals and Olympia Resources. We see diversification as important, because there are real issues in being a one-trick pony.”