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April 23, 2009

As Iron Ore Production From Frances Creek Starts To Rise, Territory Resources Looks To Have Recovered Its Poise


By Our Man in Oz



It’s always the little things that tell you when a company is in trouble, or when a crisis has been averted. At Territory Resources it was a plate of cream biscuits served with afternoon tea which told Minesite’s Man in Oz that better times are on their way. Laughter followed this seemingly casual observation but there was more substance to it than a simple joke from a cynical Australian journalist. The high quality biscuits were the cream on a corporate cake comprising a confident executive team, a fresh financing deal, and rising iron ore production. That combination tells the story of a company which has looked into the abyss and pulled back from the downward plunge into oblivion.
“We’re very much on the way back,” said Territory’s no-nonsense chairman, Andrew Simpson. “It’s taken a lot of hard work, but we have reached a point where not only are passed problems resolved, but we’re looking to build the business.” By that Simpson means much more than plodding along running the company’s single mine at Frances Creek in the Northern Territory. He believes that a template has been created which will enable the acquisition of other iron ore assets and a repeat what has been achieved at Territory over the past six months.

“There are a lot of factors moving in our favour,” Simpson said. “We have a strong financial arrangement with our major shareholder [Hong Kong’s Noble Group], and we have a supportive banking arrangement. Demand for high quality iron ore in China is rising, not falling, as some people might imagine. Costs at Frances Creek have been lowered as production has been rising, and we’re confident that exploration will add to the mine’s life.”

On the market, a handful of enthusiasts have spotted the changes underway inside Territory. Since hitting a rock bottom price of A7.3 cents last November the stock has been on a recovery trajectory, trading as high as A23.5 cents last year, before settling back to around A19 cents this week. That latest price is still a country mile from last year’s price peak of A$1.05, but as older investors sometimes mutter into their beer, “the trend is your friend”, and in Territory’s case the trend is up.

It quite obviously wasn’t always so, and before getting too caught up in the euphoria of a rising share price and cream biscuits on the boardroom table, it’s worth looking at the mess Territory found itself in last year. For brief moment in time, Territory was the cash cow in a small corporate empire being assembled by Michael Kiernan, a mining entrepreneur who made his name at the manganese miner, Consolidated Minerals, with the help of Noble Group’s enigmatic founder, Richard Elman.

Unfortunately for Kiernan he suffered a soufflé experience, a slightly rude way of saying it was hard to rise a second time, perhaps because he was doing too much too quickly. Hands-on running of the Frances Creek mine was what was required, not the rapid-fire collection of investments that he orchestrated, which included acquiring 27.4 per cent of the beach sands miner, Matilda Minerals, 73.5 per cent of another sands miner, Olympia Resources, 10.8 per cent of copper miner, India Resources and 19.9 per cent of troubled gold miner, Monarch.

Simpson, a metals market expert, inherited this hodge podge of assets when asked by Elman to sort out the situation, and that’s pretty much what he’s done. Non-performing investments have been ditched. Fresh management has been recruited, including a career mine operator in Andy Haslam as managing director, a man already familiar to Minesite readers for his former role at the head of tungsten explorer Vital Metals. The debt and currency hedge chaos has been sorted, and the Frances Creek mine has now been restored to centre-stage as the reason for Territory’s existence.

Rather than looking like an after-party mess in an outback bar, Territory today has a mine producing two million tonnes of premium quality iron ore, an output level set to rise to 2.5 million tonnes. The current cost is A$51 a tonne, set to fall to a targeted A$45/tonne. Noble Group and Territory’s bank have agreed to restructured loan facilities, including pre-payment on iron ore cargoes to provide working capital. Simpson said explaining how the company got into its mess, and how it was getting out, wasn’t easy because of the structure of the debt and hedging.

“I’m not avoiding the question, but it is a bit of a moving target,” he said. “The currency hedge was taken out in the middle of last year, when the Aussie dollar was around US85 cents. Then it fell to US63 cents. Our debt to CBA [Commonwealth Bank of Australia] is around A$20 million. When the dollar was at US63 cents our debt to CBA blew out to about A$32 million. As we stand today, with the dollar at US73 cents, it’s back to about A$17 million.” The catch, however, is that the rising Aussie dollar (which aids the hedge book) hits the profit margin on iron ore which is sold in US dollars.

For followers of Territory, and that includes Minesite, as we’d like to see Simpson or Andy Haslam present at one of our London forums in response to the ongoing interest in the company in London, the simple message is “crisis over”. What then of the future, especially after the current round of long-term iron ore price talks is concluded? “What we’re saying is that the company is now stable. Operations are going well, though we have to see the long-term price because that influences our revenue for the year ahead.” But, even if there is a significant drop in the long-term iron ore price, and new pricing mechanisms, such as indexing, become widely used, Territory has what steel mills want today – ore grading up to 68% iron, perfect for a blast furnace operator with an eye on costs and efficiency.

Looking ahead, Simpson can see Territory achieving a minimum five-year mine life at Frances Creek at 2.5 million tonnes a year, a number determined by current reserves and current rail capacity. Both of those factors could improve, starting with reserves. “Hopefully, there will be some good results coming out in late April,” Simpson said. “We’re planning to drill continuously with one rig for the next nine months. We want to add five million tonnes to confirm our five year mine life, but I reckon it’ll be much better than that because we are replacing each year what we’ve mined and there are excellent indications of more high-grade ore to be drilled out.”

Surprisingly, though perhaps as a result of the sugar from the Monte Carlo creams kicking in, Simpson confidence rises and corporate expansion is revealed as an agenda item. “We’ve cleared a lot of hurdles,” he said. “We proved that we’re cash positive, which is survival step one. Repaying debt is step two, which we plan to do in two years, and then comes a period of excess cash and an opportunity to grow.”

Now comes the message which ought to have investors blowing the dust off their Territory file. “We want to set up Territory and Frances Creek as a template for an excellent, small, open-cut mine”, Simpson said. “We want to show it to our shareholders, and our bankers. We want to say come to our site because this is as good as you will see in a small operation. It’s because of what’s been achieved that I have an ambition to buy another iron ore mine, and I want to use the Frances Creek template to say, guys, we’re bloody good at this, we want more assets where we can apply our work ethic.”

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