Strategic Minerals (LON:SML) is all about creating income streams and ultimately dividends, according to managing director John Peters and newly appointed chairman Alan Broome, who are now steering the company.
That’s not something you often hear from the juniors populating the natural resources sector - particularly those of an exploration bent that still want to plough cash into holes in the ground without any real regard for the woeful state of the mining capital markets.
Many of those familiar with the sector will know Strategic under old management as the operator of the Cobre iron ore stockpile in New Mexico.
That project still limps along today at a fraction of its planned capacity supplying the domestic market at around 18,000 tonnes a year.
At this rate of production it pays a fair portion of the corporate overhead.
And as Peters points out, it certainly isn't the focal point of planning going forward.
With the acquisition of Tatu, on New Zealand’s North Island, the company has acquired an asset with 6.72mln tonnes of thermal coal – three-quarters of that is in the higher confidence measured category.
Crucially, it fits with Strategic’s redrawn commercial blue-print in being reasonably cheap and easy to put into production.
With a mining permit in place, it will spend the next five to six months doing the basic marketing work on a 200,000 tonne a year pit.
So, it will spend a few thousand dollars bulk sampling the deposit, analysing the coal and circulating those results around potential local buyers.
And that’s another crucial part of Peters’ and Broome’s plan: Strategic is not an export company. It wants to cut out the cyclicality of exporting by finding local buyers for its output - whether it’s from Tatu or the next potential project, Wanbao in China.
All things being equal, it hopes to start work on the low cost underground mine in October with the aim of having it at full production by this time next year.
Infrastructure - road, rail, electricity - is all there and relatively cheap to access.
Because of the method it is using it will be churning out coal almost from the get go.
The capital investment required is put anywhere from US$3mln – US$6mln, depending on whether Strategic buys new equipment such as continuous miners and shovel cars.
There is the option to acquire second-hand kit, or the firm may even opt to bring in a contractor.
Funding shouldn't be an issue either - it could be done solely from equity, although it has other less dilutive options open to it such as a royalty programme.
Tatu will provide the platform for the business - the cash flow to move to the next level.
Looking at the Tatu operation, it should be capable of generating a margin of around US$15 a tonne on the coal it produces, which would give Strategic a profit of US$3mln a year.
Building from there it is looking at the Wanbao coking coal mine in Jilian Province, which is relatively close to a number of the China’s steel makers.
The project is an old underground mine that can be converted to a 1mln tonnes a year, low-cost open pit.
“[Wanbao] creates a very simple operation that accesses coal of a known quality over old workings. We should be able to produce enough to take to the local steel makers in the volumes they want,” said Peters.
“The demand in the area should be good; there are two major producers who are importing.”
Its plans for Wanbao are not as advanced as they are for Tatu so there is no indication of the costs associated with developing this much larger operation.
But it points to the nature of the plan being developed by Peters, and Broom, a 40-year industry veteran.
They are developing with a staged approach to building a cash generative business - one that is able to reward investors.
“I think as a longer term vision for the company, what we are really about is creating income streams on top of income streams which will help us pay a dividend,” said Peters “That will differentiate us from the other miners.”