With a new set of scoping study numbers, Queensland Bauxite (ASX:QBL) now appears headed for a robust and highly profitable DSO bauxite mining operation.
An important key to QBL’s world class bauxite deposit and associated cost metrics is the fact that South Johnstone bauxite resides in the soil, not the underlying rock.
Hence, the bauxite can be “mined” at insanely low cost, at surface, free digging to at most 3 metres depth.
QBL will quite literally be able to extract its bauxite with a bobcat.
This will allow mining costs of just over $20 per tonne FOB… and QBL will be selling the bauxite at around $60 per tonne in 2015.
So an operation that mined and shipped 800,000 tonnes per annum initially through Mourilyan Port would pour revenues of $44 million every year into the QBL war chest.
On a larger 3-5 million tonnes per annum through Mourilyan Port would see revenues of $180 to $300 million every year.
This insanely low OPEX continues after the bauxite is out of the ground.
QBL has a network of roads, running directly through the deposit… and a rail for the larger project that heads directly to deep water port just 15-24 kilometres away:
We couldn’t make this stuff up if we tried.
And the latest cost and resources estimates are still from only 2.5% of the South Johnstone tenement… so QBL’s recently defined resource of 30 million tonnes could multiply by a factor of 10-40.
The significance of this in the current climate of rising bauxite demand and dwindling warehouse stockpiles simply cannot be overstated.
Particularly when one considers that QBL is capitalised at just $15 million – and that includes $4 million in cash.
An enterprise value of $11 million for a limited downside, exponential upside, investment-grade bauxite play with tier one management…
QBL is possibly the closest thing you’ll find to a “sure thing” in the small-cap mining space.
Having said that, these sort of glaring market inefficiencies rarely sit around for long.
QBL’s MONUMENTAL NEW METRICS
The Mourilyan port – which QBL’s bauxite deposit lies just 15-24 kilometres from - has current capacity for 800,000 tonnes per annum.
Even this initial 800,000 tonnes per annum would provide gross annual revenue to QBL of $44 million.
On 800,000tpa, after shipping costs to China, QBL would be left with an operating profit of around $14 million.
At 1 million tonnes per annum, it would increase to $18 million.
How would the market like that based on QBL’s current enterprise value of just $11 million!
QBL even has the deposit size to expand to a 3 to 5 million tonne per annum operation, which would require a port upgrade.
This can be done after the initial smaller operation is running and profitable – financiers will be easy to come by when South Johnstone reaches that point.
But regardless, QBL can develop a very profitable bauxite operation without expanding to this size.
But you can see the potential is there for QBL to become Fortescue-esque.
The New Force In Queensland Bauxite...
A TALE OF TWO BAUXITE STOCKS
QBL has a market cap of $15 million, with $4 million of that accounted for by cash.
Australian Bauxite (ASX:ABX) is capitalised at around $40 million, with cash of $2 million.
QBL is only 15-24km from the Mourilyan Port… compared to ABX at 130km.
And QBL bauxite looks to have areas of low reactive silica making it attractive for refining…
QBL’s bauxite is akin to the Darling Range deposits in Western Australia in many ways, lower grade in places but still around the 25-30% available alumina and reactive silica of around 3-4% in places. There has been insufficient drilling to date on South Johnstone, that is the main difference.
Low silica is crucial as the removal of silica during refining is costly.
The bauxite found throughout the Darling Range is also a gibbsite ore, an aluminium hydroxide requiring lower temperatures and lower pressures for alumina refining; these lower energy requirements provide further savings.
South Johnstone bauxite is similar to Darling Range bauxite in its gibbsitic nature, alumina grade and low silica content, but superior in that the bauxite resides in the soil and hence does not require drill and blast.
While there is bauxite generally in abundance in Australia, stumbling blocks for many include high silica, environmental issues, distance to port and high production costs.
QBL suffers from none of these and actually excels on every measure.
There are no environmental issues or red flags, as the South Johnstone tenement is rural and mostly produces sugar cane.
Given QBL’s stunning attributes, strong interest from Chinese off takers is anticipated.
Based on the market cap of ABX, which is not overvalued by any stretch of the imagination, our immediate “fair valuation” of QBL is around 10-12c per share, or 4X present trading prices.
And in fact this is underplaying the situation… all metrics now suggest that QBL should attract a loftier valuation than ABX.
BAUXITE-SPECIFIC MANAGEMENT
QBL Chairman Pnina Feldman was the first woman ever in Australia to publicly list a mining company.
This company was known as Diamond Rose, and it took Mrs Feldman into the BRW top 200 rich list in the first year of listing.
Pnina then founded Australian Gold Investments which became QBL after the acquisition of its global scale bauxite assets in North Queensland.
“Bauxite Pnina” is also chairperson of the unlisted Plateau Bauxite, so she knows her way around a bauxite mine.
She has negotiated major joint ventures with major companies including BHP Billiton and De Beers.
De Beers is a powerful cartel that dominates the diamond mining, diamond trading and diamond manufacturing sectors.
She is the sort of mining heavyweight you would expect to see at a multinational mining house… so she has the contacts and the influence.
Instead, she has chosen to remain with QBL – because there is nothing more satisfying than growing a microcap explorer into a profitable producer.
Pnina is building a bauxite team around her...South Johnstone is a reality because of one woman's belief and determination in its ability to yield "big bauxite".
BAUXITE: THE NEW GRAPHITE
Bauxite ore is refined into alumina, which is then refined further into aluminium. It takes four to seven tonnes of bauxite to make just one tonne of aluminium.
Last year, China sourced over 65% of its bauxite it needs from Indonesia, which equates to almost 50 million tonnes.
So, when China became aware of Indonesia’s plan to ban bauxite exports, it stockpiled a veritable war chest of the stuff.
But China’s stockpile is already dwindling, and may be completely exhausted over the next 6 months.
Until recently, Indonesia was the main supplier of bauxite to China, accounting for around 65% of overall supply last year.
But in an attempt to create jobs by encouraging producers to build refineries on mainland Indonesia, the government enforced a ban on mineral ore exports in January.
UBS recently had this to say about our favourite commodity:
And JP Morgan noted that bauxite imports into China remain short of consumption requirements for Chinese alumina refineries.
The Chinese are doing their best to collect surplus aluminium… but despite their efforts, they are expected to exhaust existing supplies within 6 months according to Lachlan Shaw and Vivek Dhar, analysts at Commonwealth Bank of Australia.
“We see it as unlikely that Indonesia will change its stance on the ban."
There’s potential for a so-called bauxite gap of 10 million to 15 million metric tonnes as stockpiles in the country run out, and prices may rise, Andrew Wood, group executive of strategy and development at Alumina Limited, said at a conference in Singapore.
“The Indonesian ban, and the extent it holds, is obviously a key uncertainty for Chinese refiners,” said Wood. While there’s a number of potential outcomes that will take a while to play out, all reasonable scenarios are likely to increase bauxite and alumina costs, he said.
The bauxite price into China may average $75 to $80 a tonne on a long-term basis, said Wood.
So we have established that medium to long term, bauxite is a standout commodity play.
The stars also line up in the very short term…
As you can see in the chart below, the aluminium price has just commenced a fresh thrust as part of an established bullish trend:
This will add to QBL’s immediate market appeal and intensify positive sentiment around QBL’s already high margin bauxite projects.
Adding to the simmering pressure that is building in the bauxite space, worldwide stockpiles are plummeting… and we really mean plummeting:
Aluminium inventories on the London Metal Exchange dropped for a 53rd session in a row, the longest stretch of declines since November 2000.
Aluminum is the best performing metal after nickel on the London Metal Exchange this year, rising 11 percent to $2,002.75 a tonne.
Bauxite valuations are right in the eye of a perfect storm… and QBL is hugely leveraged to the bauxite price, with limited downside. Don’t forget, no debt...
It just does not get any better than this.
QBL’s BAUXITE BOOM
Below you can see a substantial price movement in QBL shares, beginning in late June, 2010.
What could cause such an enormous market reaction?
It was the acquisition of the very same bauxite projects that QBL are now rapidly moving towards highly profitable production.
On the 25th June 2010, QBL revealed its proposed acquisition of 80% of the South Johnstone bauxite province in Queensland from Volcan Holdings, a NASDAQ listed company.
It would also acquire 80% of the Ravenshoe, Ravenshoe East and Atherton bauxite projects.
You can see just how close the projects are to shipping ports and rail, especially South Johnstone.
In fact, a railway and a network of roads run directly through the tenement to the Mourilyan deep water port, which is capable of berthing 40-50 tonne vessels.
And as luck would have it, there are two alumina refineries, and an aluminium smelter, just down the coast at Gladstone.
It’s almost too easy.
Given new developments at South Johnstone, and the bauxite supply/demand imbalance, QBL could, in the not too distant future, be re-testing the 31c high it achieved on 3rd February, 2011.
10 bagger, anyone?
When compared to the market cap and metrics of ABX, there is definitely that potential.
FOLLOWING IN FORTESCUE’S FOOTSTEPS
QBL is blazing the same trail to success made famous by Andrew Forrest’s Fortescue Metals Group (ASX:FMG).
FMG began its rise with a DSO iron production and shipping campaign.
That was clever, as DSO is a premium product that sells for healthy prices, and its low cost to mine and produce.
The combination of strong sale prices, low CAPEX and low OPEX can lead to bumper profits, and bumper share prices.
Back in May 2003/4, FMG was trading at around 3c, just like QBL is, 11 years later.
As you can see below, the stock promptly 438-bagged to a high of $13.15…:
This turned $10,000 investments into well over $4 million.
FMG had gained control of a large mineral field and began extracting DSO iron…
QBL have gained control of another big mineral field, and plan to extract and sell another high grade bulk commodity - DSO bauxite.
With an Internal Rate of Return of 287% and a Net Present Value of $75 million, South Johnstone is a Project, set against a looming bauxite shortage, that is out of the box and a gift from the heavens.
FMG suffered major infrastructure challenges in its early days, with no access to rail, and a long distance to the coast or a shipping port.
On the other hand, QBL has a railway running directly through its South Johnstone project, which is just 15-24km from the coast, and an existing deep water port.
FMG showed that it is possible.
QBL has Feldman's vision, building a management team, the project, and the infrastructure to turn another “pipe dream” into commercial reality.
For investors in QBL with a market cap and EV of just $8 million set against high IRR and NPV numbers it just does not get any better except maybe winning the lottery!
Dig deeper...it is the low estimated Capital Expenditure of circa $5 million against that current share market valuation metric that showcases just how good South Johnstone could be...that tilts the probability of development meter to high.
Add in a payback period of <6 months for repayment of a very modest Project capital - once the Go button is pushed and it demonstrates moreover, again how undervalued QBL is right now.
Port of Mourilyan, Queensland
ALL THE MAKINGS OF A MONSTER
Once the significance of the new scoping study numbers truly sink in to the market’s collective consciousness, QBL may be in for one almighty re-rating.
Nothing beats the satisfaction of a ballooning stock portfolio… and QBL may be responsible for some serious wealth creation in the weeks, months and years to come.
We believe QBL will be one of THE stocks of 2015… and beyond. Investors who jumped in on our earlier QBL missive this year at 1-1.3c are sitting on terrific profits.
With additional price catalysts to come including possible off take deals with Chinese buyers and further resource definition drilling, there will be a steady stream of price sensitive news flow.
Blue sky is no longer the potential for QBL; it’s now blue stratosphere.
The New Force In Queensland Bauxite has arrived.
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