Exxaro are hoping to get their mining license approved this...

Exxaro are hoping to get their mining license approved this month in a special sitting of parliament.

This is a significant milestone for the region and will see Exxaro producing in the first half of next year.

This derisks Exxaro significantly and in my opinion could lead to an attempt by Exxaro to consolidate the region.

Exxaro could lock up the region and the existing rail and port infrastructure. They are a large company with significant growth ambitions and as such I find it likely that they would see value in consolidating the area.

Both Exxaro and EQX are looking to do 2mtpa. Should Exxaro consolidate the region they could feasibly do 4mtpa. Assuming a $60 margin on Ore sold this could add $120m in free cash flow per year. If they paid us $300m for out asset this still would be a good return on capital. This does not even factor in the extra 178 million tonnes of DSO they pick up which would add around 20 years of mine life.

It simply makes too much sense for Exxaro to take EQX out. Even if EQX were paid $250m (30% discount to what Exxaro paid for their asset) this would equate to $2 per EQX share. Plus the $50m we have in cash we would be sitting at $2.50 per share in cash + we would still have Badondo which is likely to be an even better asset than Mayoko.

I think the above will play out and I would not be surprised if it all happens sooner rather than later assuming that Exxaro get their mining convention.

2014 will be a big year for EQX.