Skardon River: our 6-billion-year mineFriday, November 11th,...

Skardon River: our 6-billion-year mine
Friday, November 11th, 2005

"Four years ago, the world was a significantly different place.

Osama Binliner had just blown up the Twin Towers, Lindsay Fox and Solly Lew were trying to buy Ansett, the All Ordinaries was at 3200, the great China boom was still 1 1/2 years away, BHP was at $8.30 and oil was $US20 a barrel.

And, slightly further down in the scale of things, Minerals Corporation announced that kaolin production had begun at its plant on the Skardon River on the west coast of Cape York. That announcement was made a fortnight after Minerals Corp launched a prospectus to raise $10 million in convertible notes.

In that prospectus the company reckoned Skardon River would be its major cash generator and profit earner by 2003.

Since November 2001, the earth has spun 4 billion kilometres around the sun, the Afghan and Iraq wars have started, the Taliban and Saddam Hussein have been more or less overthrown, George Bush has been re-elected to the White House, China has become a world power and Mark Latham has got through an entire political career.

Yet although Minerals Corp raised its $10 million, very little kaolin has been produced in that time from the Skardon River plant, and it still needs more cash.In the same period, the company's shares have sunk nearly 90 per cent, from 25 ? to 2.7 ?.

There are also a lot more of them.In November 2001, Minerals Corp had 175 million shares. Today, it has 529 million plus assorted convertible notes and debentures.

Having written several columns about Skardon River, Pierpont will be as brief as he can with its history. Back in the 1990s Australian Kaolin tried to develop the deposit. Australian Kaolin went belly-up after spending $100 million building a plant that didn't work.

Minerals Corp, headed by Vic Alexander, picked up the wreckage in 2000. Since then, the company has raised a further $56 million and made a lot of promising statements, but it still hasn't actually landed any big contracts and so isn't producing much kaolin.

To be fair, some of that $56 million would have been spent on other projects, but Skardon River must have accounted for the bulk of it.

Kaolin is an industrial clay. It is used in ceramics, paint, pharmaceuticals, plastics and tyres. But its biggest use is in the paper industry, as a filler that whitens paper.

Kaolin is therefore not homogenous. It has different prices depending on its grade and end use. After finding a kaolin deposit, you then have to find a buyer in one of these industries and convince him that your kaolin has the right specifications for his ceramics or whatever.

Also, if you're going to be in large-scale production, at least part of your product will need to be sold to paper makers. The paper industry uses 45 per cent of all kaolin produced, so without a paper maker as a customer, a kaolin mine will struggle to achieve the scale necessary to justify its investment.

At Skardon River the clay has to be mined, degritted, pumped 16 kilometres through a slurry pipeline, then put through a dry plant where it is dried, bagged and shipped.

Minerals Corp has hit trouble at every one of these steps.

The kaolin contained a high percentage of grit and it took ages to get a degritter. The calciner (kiln) and spray drier in the dry plant didn't work. It didn't have the right bagging equipment and - because Skardon River has a sandbar - it had to be barged out in uneconomic batches.

Of these physical problems, the calciner was probably the worst. Up there on Cape York, 80 kilometres north of Weipa, is one of the largest kilns in Australia. Pierpont informants who have been on-site say it's about 60 metres long.The kiln is lined with refractory bricks, which are basically chunks of concrete.

For some reason they had a habit of falling into the kaolin, which meant the nice white kaolin that emerged from the end of the calciner was mixed with finely ground particles of concrete.Do you want flecks of concrete on your office stationery or the pages of your morning paper? No? Neither do paper makers.

An even bigger problem has been finding a buyer. Vic has spent years sending test batches of kaolin around the world, but nobody has yet signed a contract.

The chairman of Minerals Corp, Doug Sutherland, says in the 2005 annual report: "This year has been highly productive in achieving many operational milestones at Skardon River and we look forward to expanding our marketing rollout in the new year to a cash positive position."

All very warming, but the words are eerily similar to those in the November 2001 prospectus.Long-suffering punters holding Minerals Corp scrip can be forgiven for cynicism because they've been living for years on promises while watching their share values dwindle.They've also been watching the company change focus.

Australian Kaolin originally targeted the paper industry. Since Minerals Corp took over Skardon River it has talked successively about producing kaolin for the paint, ceramics, rubber and pharmaceutical industries. So a plant that has yet to produce kaolin in volume to any specification has been talking about producing it to several different specifications.

Minerals Corp has also diversified. It has talked about developing a greenfield kaolin project in Western Australia and quarrying in China. It also bought 21 per cent of a mining company called Diatreme Resources.

Diatreme is looking for all sorts of minerals everywhere, but its main chance would be mineral sands in South Australia's highly prospective Eucla Basin.Doug says in the annual report that revolting shareholders have forced Minerals Corp to quit these diversifications.

Key shareholders apparently didn't like the concept of either Diatreme or quarrying in China.Another concept was that Minerals Corp might overcome its problems at Skardon River by just digging up the kaolin and barging it to Port Moresby for treatment. Why they should have contemplated that if - as the company said - the dry plant was working at Skardon River, Pierpont cannot imagine.

However, that plan appears to have also been dumped because Pierpont saw no mention of it in the annual report, nor in the company's business strategy update three weeks ago.

Financing has been another major problem. The share price has sagged in line with the broken promises.Vic has shown great resilience in financing but looks as though he's running out of options.

Minerals Corp held $4.8 million cash at June 30 this year and should raise a bit more from the sale of Diatreme and the Chinese quarries. However, operating cash flow was negative by $11 million last year, which is worrying.

Disregarding a sale and lease-back deal Minerals Corp did on its Skardon River plant, the company has $50 million debt on its books. That seems about enough debt for a company with negative cash flow.

Meanwhile, the market for Minerals Corp's equity is showing signs of fatigue.The company used to have a deal under which Cornell Capital of the United States would put up $10 million in return for shares at a discount. Cornell put up $2 million but then seems to have disappeared.

So in August, Minerals Corp generously offered shareholders a 15 per cent discount on the market price, if they subscribed to a share purchase plan. Brave punters took up 120 million shares at prices around 4.1 ? and 4.2 ?.

As the price has since collapsed to 2.7 ?, those punters now understand how the equities market rewards courage. Talking of courage, Vic must qualify for a medal of some sort because he bought half a million shares the other day at 2.8 ?.

From the brief history Pierpont has sketched here, it must be obvious that Skardon River is one of those mines where investors need to take the long view.If it helps, the planet has been around for 4 1/2 billion years and is predicted to die about 6 billion years from now.

Lest he be accused of negativism, Pierpont should place on record his confident belief that - sometime within that 6 billion years - Skardon River will become a mine.

Whether the present board will last that long is another question. There's been heavy, unexplained turnover in the stock recently, and the whisper around the Croesus Club is that a celestial tong may be about to challenge for board control when the annual meeting is held on November 30."
What has changed.....Uncle