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Savannah's Archer says Rio deal "new approach to mining"

Published: 16:22 22 Jun 2015 BST

HeavySands
The finished product. This is what Savannah is working towards - a functioning mine.

“This deal represents a new approach in the mining industry for collaboration between majors and juniors,” says David Archer of Savannah Resources (LON:SAV).

It’s quite a claim to make, but following formal signing of a mineral sands joint venture with Rio Tinto (LON:RIO) in Mozambique, Archer is feeling pretty bullish.

Under the terms of the deal Savannah’s Jangamo project will be combined with Rio’s Mutamba adjacent project into a single exploration and development prospect.

Other projects in the neighbourhood will also be rolled into the joint venture, which will boast a total resource of 65mln tonnes at 4.2% total heavy minerals (THM), and exploration upside to the tune of a whopping 12bn tonnes, according to Rio Tinto estimates.

So far, so standard, even if the projects do look good. So why then is Archer talking about a “new approach” in mining? The answer lies in the structure of the deal.

“It’s standard for juniors to do exploration and then sell to a major”, says Archer. “But in this particular case, Rio has created a high quality body of technical work on Mutamba.”

Rio has done the exploration work and is now allowing Savannah to farm-in, earning up to 51% by undertaking scoping, pre-feasibility and feasibility studies.

The attraction for Savannah is that even though Mutamba is not yet possessed of a formal resource, it occupies the ground between Jangamo and the coast.

“It’s all part of a wider, more unified mineral sands system,” says Archer. “It’s one of the largest mineral sands accumulations in East Africa.”

There are others of course. Kenmare Resources is well known for the Moma mine, some way to the north of Mutamba-Jangamo.

But investors will be well aware that it took nigh on twenty-five years for the Carvill family to get that mine going, and it hasn’t exactly been plain sailing since.

Having Rio Tinto on board right from the get-go is likely to make a world of difference to Savannah’s path to production.

For a start, as part of the joint venture Rio has undertaken either to take product from any mine itself, or to secure an off-take deal for that product.

Rio’s global reach should go a long way towards securing a good deal in a market that’s often opaque.

Even more significant will be Rio’s potential contribution to construction costs, if and when that time arrives. Theoretically, Savannah will be at 51% and Rio at 49% when the green light for construction is given, although it’s worth noting that Rio has the option to drop out at any stage.

If it does that the entire project will revert to Savannah.

A more likely outcome will be that Rio likes the project and elects either to buy it outright or to fund its own end and give assistance to Savannah.

In the short-term, though, it will be down to Savannah to prove the worth of these projects, and to act, unofficially, as Rio Tinto’s exploration and development arm for Mozambican mineral sands. That will involve some initial outlay, but probably not too much.

“The cash requirement in the early stages will be minimal,” says Archer. “It will mainly involve data compilation, and then we’ll be focusing on the completion of an early scoping study.”

All this was music to the ears of an investment community that has largely fallen out of love with junior miners over the past couple of years, with mineral sands no exception to the rule.

Pricing for mineral sands, an important source for titanium, zircon and rutile, has been weak in recent years, with major players like Iluka warning recently that prices will have to rise again before new mines can come on stream.

All the same, demand is likely to remain relatively constant, as the prime uses for mineral sands, in ceramics and pigments, are unlikely to diminish any time soon.

Shares in Savannah jumped by nearly 85% to 3.82p in early trade on Monday, after the deal was announced.

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