We always knew that the iron ore ground held by Alien Metals Ltd (LSE:UFO) in Western Australia was highly prospective in terms of grade and location.
The remaining questions were: how much ore is there really there, and is it economic?
The company came a significant step closer to answering the first question at the end of September when it released drilling results, and has now taken another giant step with the release of a scoping study that shows the Hancock project to be capable of delivering significant margin.
The study envisages a 1.25mln tonnes per year operation, with each tonne of iron ore costing US$60 to mine and deliver free on board, with a modelled iron ore selling price of US$100.
According to independent consultant Baker Geological Services Ltd, the inferred resource at the Hancock project in the Pilbara rings in at over 10mln tonnes.
That’s a nice number to be going on with, but Alien chief executive Bill Brodie Good reckons there could be plenty more to come.
“It’s better than expected as an initial resource,” he says, with the emphasis on the word ‘initial.’
“We’ve done less than a quarter of it. There are still kilometres of it that are untested.”
He also highlights the grade, which at 60.4% is well above the usual economic threshold for profitable iron ore operations in this region.
Handily, the higher grades tend to come at ridges at the surface, and initial surveys show that there are plenty of similar ridges that have yet to be drilled.
“Our upside is big,” says Brodie Good, simply.
But now that the initial resource is in the bag, there are other things to be getting on with too.
“This type of high grade ore, and where it is – it’s economically viable,” he argues.
After all, if there’s one commodity Australians really know about transporting in bulk, it’s iron ore.
“You do it by road. The road’s effectively there. The port infrastructure’s in place – you can hire a facility at a nominal costs. You pay a price and your buyer brings a ship in.”
Fenix Resources is already up and running to the south of where Alien is, with a project that looks pretty similar to Hancock – they’ve got buyers and they’ve shown it can be done.
Alien’s share price jumped 10% on news of the scoping study, and in other circumstances might have been expected to go even higher.
But the broader economic backdrop is hard to avoid. The Chinese have abruptly implemented a go-slow for their steel manufacturing, partly because of a shortage of coal, and partly for environmental reasons. That’s lead to a drop-off in demand for iron ore, and consequently a drop-off in the price too.
But bear in mind, that in the run up to this correction iron ore had previously been running really hot. Indeed, arguably unsustainably hot. There was bound to be a pull back and now it’s come, Alien still doesn’t look in too bad a shape.
For one thing, it’s got all the other assets in its portfolio to fall back on – drilling at the Elizabeth Hill silver project is ongoing, work on the Brockman iron ore project is underway, and although the coronavirus is hampering activity on the Mexican silver assets, progress is being made.
More to the point though as far as Hancock is concerned, the iron ore price doesn’t have to be high for it to work.
Spot iron ore is currently still comfortably trading at around US$120 per tonne on China freight rates to Tianjin, which is US$20 above the price used in the Alien modelling and a full US$60 above the estimated operating costs.
And there’s more than one way to skin a cat: take Alien’s 10mln tonne resource and put an iron ore price of just US$100 per tonne to it, and you come up with a back-of-the-envelope in ground valuation of US$1bn.
Crunching the numbers like that is a highly speculative exercise, of course, but it does give a sense of the types of sums involved. This is high grade ore located in an area with well-established infrastructure, and it could well be the making of the company.
Brodie Good knows he’s still got plenty to prove, though.
“I want to get back drilling on Hancock before Christmas,” he says
“I’d like to bring the inferred resource into indicated. We also need some specific gravity information.”
There’s money in the bank to get the work done, so shareholders have plenty of newsflow to look forward to.
Meanwhile, in the background, Alien continues to look at other opportunities. Whether any of those leads to anything remains to be seen, but the company has shown itself to be nimble in the past when it comes to dealmaking, so don’t rule anything out.