Strategic Minerals enhanced with promise of early iron ore production

Amid last week’s gloomy markets Strategic Minerals (LON:SML) shares bucked the trend, rising more than 10 per cent. This came as the group unveiled plans to augment its exploration activities with the promise of some early production, and by extension, cashflow.

On Friday it announced it is in discussions to acquire private Australian firm Ebony Iron for an initial £10 million, which will be paid in shares.

Ebony’s assets are an interesting mix, which make a snug fit with SML’s Iron Glen magnetite project in Queensland.

They include a total of six exploration tenements in the Northern Territory and Western Australia.

Covering 6,221 square kilometres, the Ebony targets in Northern Territory are in the highly prospective Hodgson and Roper River regions, where Sherwin Iron is also blazing a trail.

The potential of these assets is underlined by the deal terms, which allow for the issue of a further 50 million new SML shares once a minimum JORC indicated resource of 200 million tonnes is confirmed.

However the near-term value catalyst is in the US, not Australia – New Mexico to be exact.

Ebony has a 900,000 tonne magnetite stockpile at Freeport McMoRan’s Cobre property, acquired via the takeover of Southern Minerals Group.

A total of 800,000 tonnes is greater than 63.9 per cent iron ore, with the remainder of the material greater than 58 per cent.

Ebony Iron has already undertaken a definitive feasibility study and compiled a budget for the project. Being on the site of an already established mine, the infrastructure at Cobre is there to allow the ore to be trucked out, which should occur in the first quarter of next year.

A back of envelope calculation reveals that Cobre could be a hugely cash-generative undertaking, which could provide the newly enlarged Strategic Minerals with revenues in excess of US$100 million per year over the two-to-three year life cycle of the operation. 

SML chief executive Pat Griffiths said earlier today: "We see the Ebony acquisition as a positive step towards the development of Strategic Minerals into a well balanced mining and exploration company with short term positive cash flow providing additional security to shareholders.”

Ebony directors Peter Bennetto and James Chisholm will join the Strategic Minerals board when the takeover is completed.

Bennetto said: "Melding SML's exploration assets and capital markets access with our production expertise and the Ebony team's ability to acquire positive cash flow operations to fast track growth, we feel we can build a great company and a powerful business."

The latest deal overlooks the potential of Strategic Minerals’ existing project – Iron Glen, in Queensland.

Based on the site of an existing mine which operated in the 1950s, the tenement covers 9,100 hectares, with applications in for a further 30 sub-blocks.

The beauty of Iron Glen is its proximity to the nearest rail line, less than 2 kilometers away, which links to the deepwater port of Townsville, 40 kilometres to the north.

With all important infrastructure so close to the site, capital costs of the project are likely to be a fraction of those of other similar scale mines.

“One of the strong points for Iron Glen is that we don’t need to raise the capex needed for other projects or have to wait for infrastructure to be put in,” says Matthew Bonthrone, an executive director of Strategic Minerals. 

Around 33 holes for a total of 3,300 metres have been drilled, so the latest programme is almost complete. The results are expected by the end of next month.

A potential poly-metallic target has also been identified several kilometres away from the main area of interest.

Bonthrone points to the Mount Moss Project in Queensland as providing the blue print for Iron Glen.

“It started with 600,000 tonnes (of iron ore magnetite) proved up and now has 50 million,” he reveals.

“We are hoping we can replicate that success and the evidence so far is pointing to a similar operation at the Iron Glen pit.

“We will be using the same port and the same logistics as Mount Moss, which shipped the first iron ore from Townsville last year.

Integral to the exploration programme is Terra Search, which is orchestrating the current drilling programme and will “deal with plant and machinery and offtakes” when the time comes.

“The next drilling will probably get underway late this year or early next,” Bonthrone says. 

Imminent also are the results of a recent heavy magnetic survey, which will be published soon. “That will give us additional areas to target within the tenement,” the Strategic Minerals director reveals.

Meanwhile the plans unveiled today, would turn the Strategic Minerals into one those very rare beasts on the junior market – mining companies with solid production and huge exploration upside.