strong buy depth, page-6

Buy TFE around 30.5 cents
29 Nov, 2006
Territory Iron
Significant resource upgrade as production beckons
Market Cap $41 million

Territory Iron has recently announced a substantial resource upgrade at its soon-to-be-developed Frances Creek iron ore project in the Northern Territory. Total resources have jumped by 38% compared to a year ago, to 9.4 million tonnes, with a revised reserve estimate anticipated before year-end. Meanwhile, project development work is continuing solidly, with the company on target for first iron ore production in August 2007.
"Development is firmly underway on the Frances Creek ore project"
Fat Prophets initially recommended Territory Iron at 37 cents in December 2005 (Fat Mining 6). Our last review of the stock was during September (Fat Mining 42).


A substantial increase in average daily trading volumes during the past week signals growing investor interest in Territory. This increase in volume follows a rebound from the September low of 25 cents but gains have so far been modest.
Chartists believe this combination of increased volume at a time of relatively steady prices represents accumulation by investors. This type of activity frequently precedes a strong break higher. In the near term, we anticipate further consolidation above initial support at 28 cents with the September low of 25 cents to underpin the shares.
A break above 33 cents will signal an attempt to revive upward momentum, with a further break above the July high of 35.5 cents to provide confirmation. We believe that such a move would see the emergence of a sustainable upward trend. In time, Territory retains the potential to retest the all-time high of January at 47.5 cents, in our opinion.
We could forgive Members for thinking that due to its below-par share price performance over recent times, Territory Iron must possess some fundamental flaw that warrants avoidance of the stock. Nothing could be further from the truth, in fact. In our view, Territory represents a clear case of the market failing to appreciate a standout, emerging production opportunity.
As a reminder to our Members, Territory Iron is an emerging iron ore player at a most fortuitous time, with iron ore prices currently at record levels. The company plans to commence production in mid 2007, enhancing its attraction given that market forecasters are tipping a further price rise of at least 10% next year, adding to cumulative rises of more than 90%
over the past two years.
Territory Iron is a relatively new entrant to the iron ore scene in Australia, listing less than two years ago, in early 2005. It has interests in several iron ore deposits in the Northern Territory, which are at an advanced stage of development.
The company is developing its iron ore project in close proximity to key infrastructure, with further substantial infrastructure assistance provided by the Northern Territory government. As a result, the company should avoid many of the pitfalls that could potentially beset many of its sector colleagues, which are developing relatively isolated iron ore deposits at high cost.
Iron ore is a relatively low margin business and the key to profitability and longer-term survival through tough times is the capacity to minimize costs. We believe Territory Iron is in the box seat to maximize its operating margins. All of Territory's projects are located within 190km of Darwin and within proximity of road, rail and developing port facilities.
The company's flagship project is Frances Creek, which is progressing rapidly towards first commercial production in mid 2007. It hosts a 35km strike length that is highly prospective for additional iron ore deposits. The project has a successful history of iron ore extraction, with production and exporting continuing until 1974, before flooding and consequent damage associated with Cyclone Tracy forced its closure.
A number of major changes over the past 30 years have made the revival of this old iron ore field possible. The major one is the project's close proximity of just 20km to the new Alice Springs to Darwin railway line, which will allow the transportation of ore to the port of Darwin for export by ship. Other vital ingredients include the development of new mining and processing equipment, new Darwin port facilities, and much improved market conditions.
In our most recent report on the company, we suggested that ongoing exploration drilling work at Frances Creek could lead
to a substantial resource upgrade in the near future. Territory has completed almost 20,000 metres of drilling at Frances Creek during the current field season. Our forecast proved correct, with the company announcing last week a 38% increase in tonnage to 9.4 million tonnes, compared to a year ago. Encouragingly in our view, 76% (or 7.1 million tonnes) now fall within the higher confidence Indicated Resource category, with just 25% within the Inferred category.
We anticipate that further work will lead to an upgraded Reserve estimate in December. Once complete, this should allow the company to define its product specifications in order to secure an off-take partner, which we believe the company will accomplish in early 2007.
The Frances Creek project is firmly on track to produce first iron ore by mid 2007. The ore will be a mix of lump and fines produced through a simple crush and screening process. Territory will truck the ore 20km to the Adelaide to Darwin railway line for transport to Darwin port. Once there, the ore will then be loaded onto ships for export.
Territory Iron recently completed an agreement with FreightLink, which will supply the company with rolling stock and some infrastructure to carry its iron ore to the Darwin port. FreightLink will charge the company by way of a per-tonne of ore transported arrangement. We believe the deal is a great one for the company, because it relives it of the capital commitment of having to purchase locomotives and rolling stock and construct siding infrastructure. This is a situation that most of Territory's rival emerging iron ore players would love to be in, but aren't.
The company is also getting help from the Northern Territory Government, which is partially funding the upgrading of Darwin port infrastructure to allow iron ore export. The Government, through the Port of Darwin Authority, is provide up to $3 million to fund the construction of conveyors within the stockpile area at the port, which is in addition to the train bottom dump and bulk loader facilities already being provided by the Corporation. The Government will recover the funding through a $1.00 per tonne levy upon commencement of shipping.
Emerson Stewart is managing the design and construction of the conveyor system at the Port of Darwin, while Bruce McFadzean, who has 28 years experience in mining with a strong production focus, will handle mine engineering and contracts management. The company is set to recruit operators and senior technical staff for the project.
The company is well down the track with respect to finalizing a working capital facility, which we estimate to be in the order of $10 million -$15 million. The purpose of the facility will be to provide working capital during the ramp up period, while the company builds up ore stockpiles prior to export. Mining, transport and crushing contractors have provided budget estimates and we expect contracts will be finalised with the next few weeks, along with the construction contract for an 80-man camp at Pine Creek.
In addition, the company has reached in-principle agreement with the Northern Land Council with respect to native Title issues.
With respect to project development, we anticipate camp construction and mining commencement in March 2007, with shipping to begin by August 2007.
A conservative initial production scenario in our view would see annual combined lump and fines production of 1.5 million tonnes, at a margin of around A$20 per tonne. This would generate net cash flow of $30 million annually, which compares favourably with the company's current market value of around $40 million. We believe there is significant longer term potential for Territory to increase annualized production, as exploration leads to further increases in the resource base and hence mine life.
As at September 30 2006, the company held cash reserves of $12.9 million.
Territory Iron represents what we consider to be an outstanding, but so far relatively unappreciated, emerging production play. Iron ore prices are likely to hit fresh records in the New Year, which will coincide perfectly with the timing of Frances Creek project commissioning. Most importantly, the company's project developments costs are extremely low due to the availability of existing infrastructure. This gives Territory Iron a major advantage over most of its competitors.