Baobab Resources in good company at Tete Iron Ore Project

AIM-listed mineral explorer Baobab Resources (AIM:BAO) owns a number of exploration licences in the southeast-African state of Mozambique. Most notable of these is a large iron ore deposit in the Tete region, where scout drilling recently resumed after the end of the local wet season.

As Asian demand for steel has driven up the price of iron ore – and with many observers seeing the potential for continued surges – operating in this sector has become increasingly attractive. Having initially focused on a more advanced gold and copper deposit elsewhere in Mozambique, Baobab’s attention was switched by the huge potential of its Tete iron ore project

Baobab’s Tete Project, covering an area of 630 sp km straddling the central portion of a mafic complex, is located only a few kilometres north of the Zambezi River and the provincial capital of Tete. The project shares licence boundaries with the huge Maotize and Benga coal projects in development by Brazilian iron ore giant Vale (NYSE:VALE) and large Sydney-listed miner Riversdale (ASX:RIV), the latter in joint venture with Indian steel maker Tata (BOM:500470). Production is due to commence in 2011 with both thermal and metallurgical coal to be extracted for domestic consumption and export respectively.

Low tariff hydro-electric power is readily available from the 2,075 megawatt Cahora Bassa dam. Studies are underway to expand the dam’s capacity by an additional 1,300 megawatts. A new 1,500 megawatt scheme at Mphanda N'kuwa, also on the Zambezi, is in advanced planning stages and due to commence production in 2015. Coal fired power plants have been proposed for Vale and Riversdale’s coal operations. Riversdale has announced that the Benga power station will commence production in 2013 at an initial capacity of 500 megawatts with an option to expand to 2,000 megawatts.

The railway connecting Tete with the port of Beira is being refurbished, as is the port. The deep water port of Nacala and railway linking the port with the interior is also being refurbished under the auspices of the World Bank.

The Tete project contains two areas of magnetite-ilmenite mineralization: the largely untested Singore area at the south and the 8km long Massamba trend, comprising a chain of five descrete prospects, to the north.

Having drilled one Massamba trend prospect, Chitongue Grande, in 2009 and defined an inferred maiden resource of 47.7 million tonne over a small strike length of just 500m, the company is targeting at least 300 million tonnes at Massamba to make the project viable. From a ‘desktop study’, Australian mining consultants Coffey calculate an Exploration Target of tonnage potential at Massamba of between 400 million and 700 million tonnes, with a net present value of £200 million (based on a per iron unit of US$0.90 – significantly less than current prices). However Astaire cautions that ‘this is a potential future value and not a value that can be accurately ascribed to the project at the current time’.

Towards the end of the dry season, last November, Baobab began drilling the first of 60 scouting holes into the Massamba group trend, each of which will be around 200m deep and a mixture of diamond core and cheaper reverse circulation drilling. The combined total 12,000m of drilling is to ‘improve confidence’ in the desktop Exploration Target estimated in 2009. This scouting is expected to take until the end of September 2010. Chairman Jeremy Dowler says that after each line of four or five drill holes the company will update the market on its findings. He adds that a pre-feasibility study should commence ‘early next year’, where, based on the result of the drilling and the likely capital expenditure, power costs and so on, a more precise net present value of Massamba will be derived.

November’s findings from the South zone of the Massamba group showed broad zones of mineralisation similar to that of the inferred resource at Chitongue Grande further north, as well as massive magnetite-ilmenite intrusive dykes. With rain temporarily delaying further activities in the South Zone, drilling recommenced in March 2010 at the Chimbala prospect, which covers almost half of the Massamba trend. Davis Tube Recovery analysis of 6 rock chip samples collected from the Chimbala area returned average concentrate grades of 63.6 per cent iron, 0.76 per cent vanadium pentoxide and 6 per cent titanium dioxide at a mass recovery of 34.8 per cent from head grades averaging 49.3 per cent iron, 0.46 per cent vanadium pentoxide and 20.7 per cent titanium dioxide. 

12 km to the south of the Massamba trend, Singore enjoys massive magnetite-ilmenite outcrops in its West prospect with limited historical exploration apart from trenching and mapping in the 1960s and 1980s. At the Singore East prospect there has been no exploration history apart from the recent geophysical imaging, which outlines significant magnetic lineations traceable over distances of up to 6km. While Massamba remains the focus of the 2010 drilling campaign, managing director Ben James has assured that ‘Baobab's technical team will be rapidly developing the knowledge base at Singore with the view to targeting scout drill holes as soon as practicable’.

Astaire states that, with initial studies for Tete pointing to a 10 million tonnes per annum (MTPA) operation when fully up and running, extraction ‘will require capital expenditure of circa US$540 million’ and take 2 years to construct. The broker calculates that based on the 10 MTPA output ‘The magnetite product produces annual revenue of US$250 million per annum, whilst the ilmenite product generates US$110 million per annum.’

Mozambique has become one of the more stable African realms since democracy was established in the 1990s, but remains relatively unexplored by mining companies compared to others in the continent. Baobab expects to benefit from much cheaper energy costs due the country’s strong hydro-electric power infrastructure, especially from Tete’s proximity to the Zambezi river. ‘The lower costs are one of the main advantages over similar iron ore companies in Australia,’ says Dowler.

Dowler furthermore hopes to be able to benefit from a strong connection with the World Bank, whose developing countries investment arm, International Finance Corporation (IFC), has a 6.9 per cent stake in the Plc, options over another few per cent and a 15 per cent contributory interest in the Tete project that it acquired for an initial $400,000. ‘Having them onside will help us hugely in getting access to infrastructure,’ he argues. This is also a strong endorsement for the project’s chances, with the IFC having carried out extensive due diligence, and for its ethics, with IFC stressing the importance of backing companies that ‘develop projects in an environmentally and socially responsible manner’.

Baobab was floated on AIM in February 2007, raising £2 million at 10p after expenses. Since then the brokering duties have been moved to Astaire Securities which helped the company raise an oversubscribed £3 million in October and November. With much of this still intact, Dowler, who owns a 5 per cent stake, says the company is devoting ‘between 90 and 95 per cent’ of its cash and time resources to Tete at present, with IFC putting in its agreed annual 15 per cent contribution again this year. Commenting on the other base and precious metal assets in the Company’s portfolio, including the Mundonguara copper-gold project where the work carried out by the Company during 2007 – 2008 defined an initial resource that remains open down plunge and along strike, Dowler stated that Baobab would be seeking strategic joint venture partners to accelerate exploration and development.

Shares in Baobab sank from float price to a low of 1.25p last year but have ricocheted back to their present 7p to give the company a market value of £11.1 million.