Found this article in an Adelaide weekend newspaper. Cheers John.
'The Independent Weekly" 16th-22nd June 2007
A line in the sand About three million years ago Adelaide was under the sea and the shoreline was way up past Tailem Bend -- out in the Murray Mallee.
At the site where the tiny town Mindarie -- population 28 -- sits in the middle of the Mallee, the ancient beaches were pounded by the waves of the Southern Ocean, depositing large amounts of mineral sands along "strandlines" -- the beaches formed as the waters receded south.
Beach sands contain varying amounts of all sorts of stuff. It can be worthless sand, or, where the geology and geography are just right, contain large amounts of industrial minerals -- like zircon and titanium.
Any golfer knows about titanium -- a super-hard metal which makes the best drivers and, of all things, artificial teeth and hip replacements -- while zircon is fused onto clay tiles, toilets and basins as a glaze, making them hard and impervious to water.
Zircon is the more valuable of the two. As the Chinese economic miracle results in millions of new bathrooms, all gleaming with large areas of white tiles, the price of zircon has risen steadily from $US600 per tonne six years ago to close to $US900 per tonne today.
Back at the ancient beaches located under the town of Mindarie -- about halfway between Tailem Bend and Loxton -- a company called Australian Zircon NL -- is pushing ahead into the final stages of a $70 million project to mine the rich zircon deposits laid down between 20 and 50 million years ago.
Zircon is a relatively rare mineral with just over a million tonnes of high quality ceramic graded zircon produced in the world each year. The demand outlook for the mineral is strong with a decline in supply already under way. By 2012, even with every approved new project coming on stream, market studies show a potential supply gap of about 300,000 tonnes. That usually means a higher price.
Australian Zircon was kicked off by one of its directors, David Clarke eight years ago to exploit some rich zircon deposits that had been turned up in an SA Government drilling program. The shares have been up and down between 20 and 32 cents over most of that time.
Now that Australian Zircon (AZC) is closing in on its production phase, brokers are taking a closer look at the stock and coming up with quite bullish assessments of its ability to generate a strong, healthy and profitable income stream over the long term. Mining exploration companies are very difficult to value. Industrial companies are valued according to reliability of income, market domination, product lifecycle and the quality of management. Once a mining exploration company makes the transition to becoming a steady income generator, their market value usually increases as institutions and serious investors begin to take a more serious interest.
AZC is just about at that stage right now. Half a dozen institutions have taken up equity, an Austrian metal marketer and trader, DCM Decometal has contracted to take the entire product the mine can deliver as well as an 8 per cent stake. Founder David Clarke retains a 23 per cent stake and altogether the top 20 shareholders own well over 50 per cent of the company.
So how to value AZC? There are 286 million shares on issue, so with a share price of 32 cents the market values the company at $91 million.
The company has borrowed $47 million from the Commonwealth Bank to set up the mine and treatment plant. There is another $23 million in convertible notes that the directors intend to repay before conversion.
The big asset is the amount of zircon in the ground. In order to turn the bankable feasibility study into a going concern mine, the directors had to draw a line in the sand and state they had a reserve of 59 million tonnes at 4.3 per cent heavy minerals. That gives them a mine that will last at least twelve years on those reserves.
When Mindarie is up and running, 100,000 tonnes of saleable heavy minerals will be delivered each year to Port Adelaide at which time they'll be paid. One third of the 100,000 tonnes will be zircon -- at $US900 per tonne it equals $A40 million per year. The other minerals take the total annual revenue stream to $50-55 million. Costs are about $25 million a year. That leaves annual cash flow of $25-30 million out of which the directors intend to repay debt as soon as possible.
They are also thinking hard about expanding the Mindarie mine and getting a start on the WIM150 resource at Horsham which will be about three times as large as Mindarie and together will, hopefully, grow AZC into a world-class zircon producer.
While the Mindarie mine has been started with a stated reserve of 59 million tonnes, the probable reserves are much bigger. The Mindarie reserves are in long "strandlines" -- ancient beaches where heavy minerals have been deposited. They are about 120m wide and under about 15m of soft sand and with a strike length of anything up to 40km long.
But the big deposit is the WIM150 deposit near Horsham. Australian Zircon will earn an 80 per cent interest in WIM150 by completing a bankable feasibility study, scheduled to commence later this year. This deposit was for a long time owned by CRA, now Rio, which never developed the deposit because of a problem over the size of the zircon sands. AZC has got Roche Mining to test a new technique that can recover 87 per cent of raw feed zircon into an acceptable heavy mineral concentrate and recovered zircon product from that.
AZC is confident it has solved the problem and can work up the Horsham deposit which is at least three times the size of the Mindarie zircon fields.
"The WIM150 deposit at Horsham is a bit of an anomaly because it's a discrete deposit of zircon and other heavy minerals that has been dumped between offshore sandbars rather than along beaches but its beauty is its size, and to a lesser extent, its zircon concentration -- but it's a big, potentially company-making anomaly," according to Chief Executive Officer Jim Wilton.
Wilton joined AZC last year. A geologist from Adelaide University, and with business qualifications from Queensland University of Technology, he began his career with MIM's coal operations in Queensland, went to the Red Dome gold mine near Cairns, had four years with Origin Energy evaluating gas and energy assets, and then another four years with Santos where he worked on the recently-abandoned gas pipeline from New Guinea.
He is excited about the prospect of building a world class mine from Adelaide with the AZC team.
"We have been able to put together a really first-class team of experienced mineral sands miners which is an achievement in itself," says Wilton, considering we're going through the biggest mining boom since the stone ages.
The CFO is Andrew White, an ex Newmont financial accountant, Gerard Bosch, Exploration Manager, a geologist with 26 years experience in exploration and development, Stephen Hunt, an international trader in metals and mineral commodities who arranged the offtake agreement with DCM DECOmetal, and the General Manager of Operations, Phil Baillie, who most recently ran the Onslow Salt mine in WA.
Out at the mine, AZC has hired a South African metallurgist Richard Fagan to run the treatment plant and Shaun Cresswell is in charge of mining. He's from Bemax, a listed NSW mineral sands producer, and he has already attracted a heavy duty team of experienced sand miners to operate the machinery and take out 4 million tonnes of ore a year.
Locals like Brett Tucker from Loxton, formerly of Bernard Booth Wines, are happy to get jobs at the mine where pay and conditions are way above local standards, and AZC wants most of its 70-strong workforce to be local.
So the Mindarie operation is the company's first foray into a field where it hopes to become a world-class supplier within about five years. Once it has Mindarie up and running, the bankable feasibility study into the Horsham field will be kicked off.
Mining is fairly simple -- the 15m of cover is removed with two D11 Caterpillar bucket dozers shifting 100 tonnes in one grab. At $2.5 million apiece they're worked around the clock and are company-owned. The overburden is pushed straight back into the void where the ore has been taken. Rehabilitation of the site is done under strict State Government guidelines under the guidance of AZC's environmental scientist.
The ore is mixed with water and the slurry pumped into a mobile Primary Concentrator where simple mechanical processes upgrade the ore after which it is pumped to the permanent Mineral Separation Plant at the Mindarie site.
The products are bagged and sent to Adelaide on special trains put on by Genesee & Wyoming which is pleased to use the Loxton track twice a week instead of the couple of wheat trains in mid-summer.
Taylor Collison mining analyst Andrew Shearer says AZC is well positioned to supply zircon into a global market that is expected to be supply-constrained due to continuing increases in demand from China and India.
"AZC's board and management team has the technical, financial, legal, and marketing experience required to handle the evaluation and development and operation of projects like the Mindarie mine and WIM150 deposit.
Shearer reckons AZC shares are worth at least 50 cents -- and that's only based on current stated reserves and resources and an initial mine life of only 10 years. But clearly, with exploration around Mindarie limited because of the need to get the cash flowing, there are ample opportunities for more zircon close to the existing treatment plants -- and then the WIM150 resource is on top of that.
"As zircon cannot be recycled economically, the world is extremely dependent on primary production. With Chinese demand five times Chinese production and the incipient emergence of India only underpins the price growth that industry specialists are predicting," Shearer says.
"Zircon is a commodity characterised by long term under-supply and over demand."
