Shree Minerals’ (ASX: SHH) recently defined high-grade iron ore hematite Direct Shipping Ore (DSO) resource at Nelson Bay will change the valuation dynamics of the Company.
Worth as much as $200 million at current market rates for iron ore, mining of DSO material will generate strong near term cash flows and transform Shree Minerals from explorer to profitable producer.
The hematite ore is similar to ore found in Western Australia's Pilbara region; low alumina and a premium product easy-to-extract, and should enable Shree Minerals to gain near term cash flows with little financial or execution risk.
Mining of DSO material is likely to have a CAPEX cost only around $4 million and using contractor mobile mining and crushing would only take between three to four months to set-up.
At current Lump and Fines prices, the DSO output from Nelson Bay is expected to generate $15-20 million in annual cash flows for Shree Minerals.
With current market capitalisation at less than $14.6 million, this under-valuation is unlikely to continue for long.
Shree Minerals’ management includes chairman, Sanjay Loyalka who was instrumental in developing Aditya Birla Group’s operations within Australia while director, Mahendra Pal was responsible for the discovery of concealed iron ore resources at Hamersley Iron’s (Rio Tinto Iron) Mount Tom Price (Southern Batter) and Paraburdoo (Lens II) iron ore mines and new iron resources at Lamington (low phos hematite Brockman), Juna Downs (Marra Mamba ore), etc., in the Pilbara Region of Western Australia. Background
Shree Minerals acquired the Nelson Bay tenement from coking coal specialist coking Gujarat NRE Coking Coal (ASX: GNM) in 2008 and have to date raised $5.2 million (including IPO of $3.4 million in Jan 2010) for its advanced Nelson Bay River Project in north-west Tasmania, which covers 93 square kilometres.
The project is located in a world class mineral province with a highly developed infrastructure supporting mining operations for over 30 years in the region including: Grange Resources’ (ASX: GRR) Savage River Iron Ore, Avebury Nickel, Beacon Hill Resources’ Arthur River magnetite project, Bass Metals’ (ASX: BSM) Hellyer Mine, Oz Minerals’ (ASX: OZL) Roseberry Mine and Venture Minerals’ (ASX: VMS) Mt Lindsay project. Grange Resources’ Savage River Magnetite Mine produces an annualised 2.3 million tonnes of pelletised magnetite.
Drilling and mapping in 2010 at Nelson Bay Project indicated that hematite-goethite mineralisation which is suitable for DSO occurs over an area in excess of one kilometre in strike with grades in the range of 50-67% iron (Fe).
A recently revised resource estimate by Hellman and Schofield resulted in an upgrade to a JORC Indicated and Inferred Resource at Nelson Bay to 12.7 million tonnes at 36.1% Fe (30% Fe cut-off), for a 14% increase of contained Fe. The resources includes a DSO resource of 1.2 million tonnes including 500,000 tonnes of DSO at an average grade of 57.8% Fe and 700,000 tonnes of beneficial goethite-hematite resource.
The hematite deposit sits on top of a larger body of magnetite.
The Inferred Magnetite Resource is 7.8 million tonnes at 38.3% Davis Tube Recovery (DTR). This is capable of producing high grade concentrates for Blast Furnace (BF) Pellets and Dense Media Magnetite (DMM).
The Nelson Bay project includes: EL41/2004 (Nelson Bay River) and EL54/2008 (Rebecca Creek) and cover a total of 93 square kilometres, located in the far North-West of Tasmania. It is located in an area that has substantial infrastructure devoted to major mining activities, and is approximately 100 kilometres by mostly sealed road to Port Latta and approximately 150 kilometres to Burnie Port.
The JORC Resource at Nelson River covers approximately one kilometre in strike length of hematite-goethite mineralisation including approximately 400 metres of magnetite. Study of recent ground magnetic and Tasmanian Government’s airborne magnetic survey data suggests that the strike length of iron mineralisation at the Nelson Bay River Iron Project extends to in excess of 2.3 kilometres; mineralisation remains open along strike and dip, and in some parts extends to greater than 300 metres in depth.
The Company is currently undertaking an Aboriginal Heritage survey, Environmental Surveys of flora and fauna, Surface water Surveys and Engineering / Feasibility studies (geology / resource estimation, mining, metallurgical, Process Plant).
Feasibility studies, port access, traffic and infrastructure studies are underway with a view to commencing production in late financial year 2011/2012. Near term production
The DSO resource at the Nelson Bay Project, with low capital expenditure CAPEX and low operating expenditure (OPEX) has encouraged Shree Minerals to immediately proceed with mine permitting, technical studies and engineering to put the project into production in 2011/12.
Shree Minerals aims to extract small quantities of DSO from an open pit to produce Lump and Fines products, with very low deleterious elements and an iron ore product of Lump and Fines from the beneficial goethite-hematite iron resource located within the very lightly explored project area.
With the DSO component, Shree Minerals has potential near term cash flows with very low CAPEX and very low OPEX and hence less appointed risk.
Mining will be from two open pits:
- DSO pit
- Main deep pit (magnetite)
For the deeper and longer term magnetite project, Minserve has completed mine planning for an open pit that will extract 400,000 tonnes of ore per annum for processing through a local plant that will include circuits to grind, mill, magnetically separate, and run through a floatation circuit to produce 150,000 tonnes of high grade magnetite concentrate.
The magnetite mine operation will take a phased approach, with the bulk of production in the form of DMM concentrate.
From the magnetite concentrates, these will be suitable and likely to be in demand coal washeries and high-grade BF pellets.
When a high quality magnetite concentrate can be mined, processed and shipped either to:
- coal exporters along the eastern seaboard of Australia, it is utilised in coal washery operations to upgrade coal, where coal miners pay over A$200 per tonne or,
- process into High grade Blast furnace Pellets to be used by Steel manufacturers within Australia or to China. Magnetite Pellets fetch a premium to hematite iron ore as it is higher grade & less energy consuming in blast furnace. At current spot prices for iron ore, high grade BF Pellets would fetch a CFR price of around $200 per tonne.
Metallurgical test work by SGS Minerals Services has returned a high grade magnetite concentrate with a head Fe grade greater than 69.0% with low impurities: Silica (SiO2) less than 1.6%, Alumina (Al2O3) less than 0.05% and Phosphorous less than 0.01%.
A Conceptual Study by Minserve Group in 2006 indicated the magnetite project would have robust returns with cash flows of A$178 million over a 16 year mine life with a CAPEX of $25 million for the cost of the plant, pit and associated infrastructure to mine the magnetite based on the coal washery magnetite product.
Sale of magnetite is expected to produce an annualised cash surplus of $12.3 million for at least 16 years. Total mine site costs are estimated at $109.70 per tonne of High Grade magnetite concentrate, plus shipping costs to port of $18.80 per tonne for a total of $128.50 FOB per tonne. A feasibility study is currently being undertaken by Minserve.
The current market for Coal Washery Magnetite product is niche, but profitable and is currently only supplied by the Tallawang Mine in New South Wales and the Kara Mine in Tasmania, with additional supplies imported from overseas – indicating a potential market demand for magnetite product from the Nelson Bay Project.
With the Australian coal industry currently exporting 230 million tonnes of coal per year and likely to grow to 330 million tonnes per year over the next five years, this will substantially increase the demand for DMM and provide a market for Shree Minerals magnetite.
The Kara Mine is operated by Tasmania Mines (ASX: TMM). By way of comparison, Tasman Mines produced 68,010 tonnes of DMM in the half year to June 2010, recording sales of $13.03 million and a gross profit of $7.77 million. Tasmania Mines’ sole producing asset is the Kara mine and the Company is capitalised at $19.2 million.
The magnetite concentrate is also suitable for production of high grade Blast furnace pellets which has a very high demand by steel manufacturers. The demand is expected to grow substantially mainly on back of high growth in crude steel production in China & India. This product is priced at a premium to the traditional Hematite Iron ore which is produced in the Pilbara. Exploration
The current JORC resource at Nelson Bay River Project is based on drilling at the northern end of the strike line, where recent magnetic survey work indicated that the main strike line of mineralisation extends for at least 2,300 metres and is open along strike and at depth. The mineralisation in some cases is deeper than 300 metres.
In 2011, exploration will focus on geological mapping and compilation of old maps; upgrading resources (especially the goethitic-hematite), planning for DSO mining and related studies.
Other projects held by Shree Minerals within this province include the Sulphide Creek Project, located 5 kilometres from Queenstown in Western Australia. Drilling at the Davie Prospect is indicating potential for moderate to high grade gold mineralisation at depths below 167 metres, open at depth and along strike. Management & Shareholders
Shree Minerals is headed by chairman, Sanjay Loyalka, who owns 28% of Shree Minerals, along with Arun Jagatramka, a director, who is the managing director of Gujarat NRE Coke Ltd., director, Mahendra Pal who was responsible for the discoveries of concealed iron resources at Hamersley Iron’s (Rio Tinto Iron) Mount Tom Price and Paraburdoo iron ore mines and others in the Pilbara region of Western Australia.
Gujarat NRE Coke Group (BOM: 512579), the largest independent producer of metallurgical coke in India and has major investments in Australian coal mines. It owns approximately 77 % of Gujarat NRE Coking Coal, which owns a 17% holding in Shree Minerals. Additionally, China All International Holding Group owns 18.0%.
SHH Price at posting:
2.2¢ Sentiment: Buy Disclosure: Held
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