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Gulf Industrials Ltd: Building an African Industrial Minerals House

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Gulf Industrials (ASX:GLF) is amongst a new breed of Australian resource companies seeking to dominate a niche position in near term, low cost, early cash flow projects in Africa.  In Gulf’s case, in industrial minerals. 

GLF’s approach is multi-tiered as follows:

- Production from the Namekara Vermiculite Project in Uganda
- Develop the Soalara Limestone Project in Madagascar
- Explore for phosphate on the Ugandan tenements
- Other industrial mineral projects in selected African jurisdictions
- Joint ventures with other industrial mineral producers to extract and maximise value in Africa

The GLF management team, helmed by executive chairman Scott Reid, is certainly up to the task having previously developed a number of resource projects in Africa and South America.

Industrial minerals are raw materials used in a wide range of industrial and domestic products where demand is generally consistent and long term and exposure to commodity price cycles is less pronounced.  Long term cash flows are more predictable and can provide a strong platform for growth by acquisition.

In May of 2009 GLF purchased the advanced Namekara Vermiculite Project  located in Uganda from Rio Tinto for US$1m. Uganda transitioned to a multiparty democracy five years ago.  Investment in Uganda is expected to nearly double this year to $3 billion (Sh225 billion) compared to last year, thanks to growing foreign interest in oil. (Source: Uganda Investment Authority).   Corporate tax rate in Uganda is 30%.

In May 2010, the plant was successfully re-commissioned by GLF.

Rio Tinto owns a majority interest in the Palabora Mining Company of South Africa where. In addition to copper, it produces 25 - 30% of the worldwide output of vermiculite at 200,000 tonnes per annum, and reported a product specific  profit of 40.9 million Rand / US$5.64 million for 2009.

The Namekara Project may match Palabora in size, but contains a greater percentage of coarse grained  ore, which is in short supply across the globe, largely due to Palabora’s diminishing output of this vermiculite category, and which fetches a more competitive price.

GLF’s Namekara Project in East Africa is one of the world’s largest reported vermiculite resources, with the mining lease containing a JORC inferred resource of 54.9 million tonnes at 26.7% of 180 um V and 18.8% 425 um V.

In addition, there is potential exploration upside at Namekara with GLF owning three connecting exploration Permits and one mining licence. The Namekara Project is supported by excellent infrastructure.

The existing open pit mine is contained within an 1 km² area with and demonstrates the potential to host  additional ore over a very much larger area.  The property is expected to develop into a long life producing mine with a mine life of over 50 years, at a possible rate of 150 -200,000 tonnes per annum.  

Vermiculite is an inert mineral that expands up to 30 times its original volume when heated, and has excellent thermal and acoustic insulating properties.  Market demand is for loose fill insulation, lightweight aggregate, growing medium in the horticulture industry, fire protection, friction linings, animal feedstuff, insulation in steelworks foundries, packaging materials and other applications.

In June, the Namekara Project attracted financing from industry end-user investor Dupré Minerals, which is a leading U.K. distributor of vermiculite products.  Dupre invested $1 million to support the development and ramp-up of the project and signed an exclusive 25 year global distribution offtake agreement with Gulf for vermiculite.

After an extensive due diligence, African Lion, which is a long term African investor backed by European and African banks, became a cornerstone investor in GLF in May 2010, investing $1.155 million for a 19.9% stake in GLF. 

African Lion is a patient equity investor that seeks out projects in their early stages that are underpinned by solid fundamentals.  African Lion also provide equity, debt or mezzanine financing, so it would not be a surprise to see additional participation by African Lion in GLF projects.

Recently raised funds were sufficient to commission a production plant by installing 10 new screens, crusher, additional winnowers and a new plant front end.  The new plant was commissioned and commenced production in May 2010 and was designed to allow for additional process capacity to be added as new sales contracts are established.

Current production is at 400 tonnes per month and is building up to 1,500 tonnes per month over the next three months to achieve production of 15,000 tonnes per annum.
 
An upgrade is planned for early 2011, to increase production to 30,000 tonnes per annum based on the current production plan to meet the market demand. A decision in 2011 to further increase output from the Namekara Vermiculite Project to over 30,000 tpa will be made.. With strong worldwide demand for Vermiculite GLF expects to ramp this up to 85,000 tonnes per annum by 2015, which would cost an estimated $10 million. 

Assuming 18,000 tpa, gross revenues are estimated at $5.0m.  At 35,000 tpa, revenues are estimated at $9.6m. At 85,000 tpa, gross revenues would be $24.2m.

The property is currently staffed by 140 people, with labour and middle management all Ugandan nationals, assisted by some specialist support from South Africa.

Process plant equipment, specialist supplies, and spares are purchased from South Africa with the balance of requirements sourced locally in Uganda.  Ore processing starts with loading open trucks from a shallow open pit.

The ore is delivered to the nearby plant, where it is screened and crushed, then sent to a rotating dryer.  The dried ore is injected into an air stream, where it is winnowed as it falls and then screened into different grades.

Rand Merchant Bank, based in South Africa, will assist with the structuring of finance for the Vermiculite Project and other African projects under evaluation by GLF.

GLF has exercised its option over the Soalara Limestone Project, Madagascar, a feasibility study will be initiated.  The resource covers 12.5 square kilometres, is located next to a deepwater port site, and hosts a high quality limestone suitable for the cement, minerals processing and fertiliser industries. Strategic alliances have been established with MCC Contracts, SDV Bollore and Mineral Resource Development for plant design, open cut mining contracts, port logistics and development advice.

Market prospects for the long term sale of 4.7m tonnes per year of limestone are under active negotiation with a local nickel project for 1.7 m tonnes, Indian Steel Group for 1m tonnes, and exports to nearby East Africa for up to 1m tonnes, as are discussions to finance the project for a possible development start in 2011.

Local limestone prices are around US$10 per tonne, which would generate potential revenues of US47 million from current deals under discussion.  The project could develop substantially past this point, turning into a world class limestone, lime and cement export project.  The limestone project may well be the jewel in the industrial minerals “rough” for GLF.

In addition, other industrial mineral projects, with similar investment criteria of low cost resource projects close to infrastructure and logistics platforms are under investigation, in order to grow the company.

Conclusion

The appearance of African Lion on the GLF register as the cornerstone investor is a strong endorsement for GLF and Chairman Scott Reid’s African industrial minerals strategy. 

While not without risk operating in Africa, GLF’s prospects of building a bourgeoning African industrial minerals investment house look solid underpinned by growing project cash flows. Yet GLF retains a “blue sky” component.

Taking a line through estimated FY2011/12 cash flows and revenues, we could see a conservative lower case market cap. and valuation of $10m, or 3.1 cents per share with an upper case valuation of $24m, or 7.5cps for GLF based on the production ramp up at Namekara.  This compares to the current $5.7 million valuation for GLF.

A further catalyst for valuation upside would be significant positive news flow for the limestone project.

GLF has issued 318,604,729 shares that trade at 1.8 cents, valuing the company at an extremely light $5.73 million.

 

Quick facts: Gulf Industrials Limited

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