ASX:TTY re: PRODUCERS IN THE BOX SEATFat Mining 99, 31 Oct,...

ASX:TTY re: PRODUCERS IN THE BOX SEAT


Fat Mining 99, 31 Oct, 2007
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More high-grade iron ore identified


After abandoning its takeover offer for Consolidated Minerals, the company has returned to what it does best, which is adding value to its 100%-owned Frances Creek iron ore project in the Northern Territory. The company's share price surged on the back of an announcement on Wednesday that a recent drilling programme has defined wide intercepts of high-grade iron ore at shallow depths. This is sure to add to the company's resource base.

"Frances Creek is showing all the indications of getting significantly larger."

Fat Prophets initially recommended buying Territory Resources at 36 cents in December 2005 (Fat Mining 6). Our last review of the stock was during July in Fat Mining 85.

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From a charting perspective, the outlook for Territory Resources remains compelling. A sharp break higher on Wednesday saw the stock reach a high of $1.43 following more than three weeks of consolidation between $1.07 and $1.235. Since August, the stock has now rallied by as much as 142%.

With the latest break to the topside reflecting firm investor support for the stock, we believe that downside risks are limited. Any pause in the upward trend is likely to be short-lived with support between $1.30 and $1.235. Below here, the $1.07 level underpins the upward trend.

Given the clear revival of upward momentum in Territory, we believe that further gains are achievable in the months ahead. A continuation above $1.43 will initially target the all-time high of June at $1.54, with levels beyond here achievable in time.

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Members familiar with Territory Resources would know that the company has been on a fairly wild ride since the appointment of Michael Kiernan as the company's Chairman. He needs no introduction, having been the former Managing Director of Consolidated Minerals. His stated ambition with Territory is to replicate the ConsMin business model by developing a diversified carbon minerals business.

He has sought to leverage off the company's recently commissioned Frances Creek iron ore project in the Northern Territory. We believe this is a sound strategy, as we believe diversification will be increasingly important, given the plethora of pure iron ore players set to hit the market over the next five years.

The company's bid for ConsMin can be described as ambitious, but we are pleased that the company has stuck to its knitting so to speak, and returned to focus on its Frances Creek iron ore project.

We must admit that outside of Territory, our long-standing favourite, we find it very hard to find value in the iron ore sector in Australia. We remain sceptical about the high development costs associated with many of the aspiring producers that will be hitting the market over the next five years. Most will have heavy debt burdens and their operations will be very sensitive to iron ore pricing.

The beauty of Territory is two-fold: firstly, it has a big head start on the chasing pack having commenced production during the September quarter; and secondly, it has developed its project on a shoestring budget when compared with most iron ore operations.

The key has been the Frances Creek project's proximity to existing infrastructure. This will allow it to avoid many of the pitfalls that could beset many of its sector colleagues that are developing isolated deposits at high cost.

As we have previously highlighted, iron ore is a relatively low margin business. The key to profitability and longer-term survival in the industry is the ability to minimise costs. Territory is in the box seat to maximize its operating margins, as all of its projects are located within 190km of Darwin and within proximity of road, rail and port facilities.

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Frances Creek commenced production during the September quarter. For Members that may be unaware, the project area had a successful history of iron ore production and export until 1974, when damage associated with Cyclone Tracy and lower prices closed the mine.

A number of major changes over the past 30 years have made the revival of Frances Creek possible. The most important is the new Alice Springs to Darwin railway line, allowing transportation of ore to the port of Darwin for export. Other vital ingredients include the development of new mining and processing equipment, new Darwin port facilities, and much better market conditions, driven by China's seemingly inexhaustible demand for steel.

Territory is producing a mix of lump and fine ore through a simple crush and screening process at a rate of 1.5 million tonnes per annum (tpa). This currently gives Frances Creek a project life of just over three years based on current reserves and six-and-a half-years based on current resources.

We believe these are just arbitrary numbers as they are likely to see substantial upgrading as a result of ongoing exploration work. Territory in fact aims to double output to 3.0 million tpa and expand mine life out to ten years.

This is immensely achievable in our view as Frances Creek hosts a 35km strike length that is highly prospective for additional iron ore deposits.

Annual production of 1.5 million tonnes at a conservative operating margin of around A$30 per tonne will generate net cash flow of $45 million annually.

We believe there is significant longer term potential for Territory to increase production, as exploration leads to further increases in the resource base and hence mine life. Our confidence was reinforced by the company's exploration results announced on Wednesday.

Territory revealed that drilling on two of its project areas, Jasmine Central and Helen 11, have returned outstanding iron ore results. The program has so far comprised around 3,000 metres of drilling. Some of the best hits included 40 metres @ 62% Fe from 39 metres depth below surface at Helene 11, whilst at Jasmine Central an intercept of 40 metres @ 64.6% Fe was returned.

These results will form part of a revised resource estimate over the next quarter.

Just a few days ago Territory announced an upgrade to its Frances Creek resource/reserve base. The incorporation of around 354,000 tonnes of iron ore fines into the equation has boosted Inferred & Indicated Resources to more than 10 million tonnes @ 60.47% Fe, whilst Reserves have grown to more than 5 million tonnes.

The good news for Territory shareholders is that all of these positive developments have generated significant upward momentum in the company's share price. Furthermore, shareholders have the opportunity to add to their holdings by way of a recently announced Share Purchase Plan (SPP). The plan will raise up to $21.5 million in exploration and development funding.

The terms of the SPP are extremely attractive, as it is priced at $1.00 per share. This is 34% below Territory's closing price on Wednesday! Members who are Territory shareholders will have the opportunity to subscribe for either $1,000, $3,000 or $5,000 worth of shares. Not surprisingly, we encourage eligible Members to take up their full SPP entitlement.

The offer will close on 19 November and the new shares will be issued on 23 November, with ASX quotation to begin on 27 November.

Territory Iron continues to represents what we consider to be an outstanding iron ore play. Its project developments costs and debt levels are extremely low due, and with production underway it has first-mover advantage over most of its competitors.

Territory Resources will remain firmly held within the Fat Prophets Mining & Resources portfolio. We would encourage all eligible Members to take up their SPP entitlement in full.

Disclosure: Interests associated with Fat Prophets declare a holding in Territory Resources.

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