Gunson Resources sees enhanced returns at Coburn project on mineral sands price rises

Gunson Resources (ASX: GUN) has increased the predicted financial returns of the Coburn Zircon Project on forecasts for higher mineral sand prices, despite the rising energy and other costs now incorporated in the project financial model.

With the estimated project NPV (8%) now at $300 million and the IRR up 3% to 35% on a pre-tax and pre-funding basis, there remains significant value upside from the project’s substantial resource base.

The urbanisation of developing economies has resulted in rising demand for zircon and titanium dioxide and a lack of adequate supply, making the financial attractiveness of the Coburn project even more enticing.

The Coburn Project, which is Gunson‘s lead project, is focused on mineral sands namely Zircon (66% ZrO2); Ilmenite (61% TiO2); Rutile (95% TiO2); and Leucoxene (90% TiO2) is located in Western Australia and contains proved (53 million tonnes (Mt) and probable (255Mt) reserves of 308Mt at 1.2% heavy minerals.

A Definitive Feasibility Study (DFS) announced in early 2010 revealed that Coburn Project has the potential to support a high volume, low cost, long life mining operation producing quality mineral products.

Approximately 67% of the revenue from the proposed mine is expected to come from zircon.

The updated product prices outweigh the effect of increased capital and operating costs that reflect a recent engineering cost review, the proposed Federal Government carbon tax and reduction in the diesel fuel rebate.

The costs also took into account other changes suggested during due diligence by potential strategic investors and banks.

Proposals from some potential strategic investors have been received, with further proposals from companies currently finalising their due diligence expected by the end of this month.

The further improvement in the market for mineral sand commodities was reflected in the price rises for the second half of 2011 negotiated by industry leader Iluka Resources (ASX: ILU).

Updated price forecasts by consultancy TZMI received at the end of July 2011, were used to revise the previously announced estimates of Project financial returns on 28th April 2011.

The new estimates incorporate:

- Increased Capital Cost: Estimated capital costs have been increased by 6% from the January 2010 Definitive Feasibility Study (DFS) estimate, reflecting a recent capital cost review by the Company’s engineers, Sedgmans, as outlined in the release of 20th May 2011.

- Increased Fuel Cost: Estimated diesel fuel costs have been further increased to conservatively reflect the proposed 6.2 cents per litre reduction in the Federal Government’s diesel fuel rebate announced on 10th July 2011.

- Increased Power Costs: Estimated power costs have been conservatively increased to reflect the effect of the proposed new Carbon Tax on the price of natural gas to be used for power generation.

- Product price increases: Estimated zircon and titanium mineral product prices have been increased in line with recently updated forecasts by TZMI, which reflect continued tightening in the mineral sand commodities markets.

In addition, there is a strong case for a royalty reduction on finished mineral sand products in Western Australia, to reflect the Government’s policy of encouraging downstream processing in the state.

Over the 23.5 year mine life modelled, total revenue is estimated at $A2.2 billion, with an operating cash surplus of $A879 million or $A37 million per annum.

The company is now strategically placed for its construction ready Coburn zircon mineral sands project to be in production in 2013, subject to project funding decision.

With zircon prices forecast by Goldman Sachs to reach US$2,000/tonne, Gunson's Coburn project should be cast in a new light with an IRR of 35% as demand for ceramic tiles and paints in housing in developing economies should boost Gunson's current valuation of around $30 million, which is likely to appear undervalued once the project finance is finalised.