Wednesday, 6 October 2010

Bellzone razes risk in Guinea

Bellzone Mining has continued to eliminate the mining risk at its Kalia iron ore project in Guinea with a further increase and upgrade of its mineral resources. With only more good news expected on the resource front in the coming months, the remaining risk centres around the would-be operation's challenging infrastructure demands and existing country-risk.

The updated resource follows work over both Kalia I and Kalia II and has increased the total magnetite resource by 56.5% to 3.74 billion tonnes. More importantly from a risk perspective, 670 million tonnes from an entirely inferred initial resource has been converted into measured and indicated resources. There is also a maiden resource on the way in the fourth quarter for the higher quality oxide ore, on which Bellzone is relying to deliver a direct shipping ore (DSO) element within its planned operation.

The current resource would support a 50Mt per annum operation with a life of 60 years as envisaged by Bellzone, which would be reached with a staged approach. Stage one would see 20Mtpa of DSO produced as early as 2014 and 10Mtpa of concentrate by 2015 before the DSO production climbs to 30Mtpa by 2017 with 20Mtpa of concentrate.

The price tag for stage one has been set at $US3.8 billion, most of which is attributed to related infrastructure requirements – a 285km rail and coastal port, primarily – that China International Fund (CIF) has committed to fund in exchange for a 100% offtake agreement at Kalia.

This is just part of the picture. The current resource at Kalia has been delineated from just 6km of the 19km combined strike length at Kalia I and Kalia II. Bellzone predicts the total magnetite resource could reach more than 13Bt in addition to possible oxide resources of 2.9Bt. In this case, the mine life and production would be increased.

Bellzone managing director Nik Zuks said while the company would continue to look at expansions to the overall resource, focus had turned to producing the oxide resource in the December quarter. Investment bank CanaccordGenuity indicated in a research note last week that the upgraded magnetite resource figures had reduced the discount applied to Kalia and that an oxide resource would have the same effect when released next quarter.

“This upgrade and the major steps achieved over recent months towards project completion reduce the completion risk on this project and, as such, allow us to reduce the 'haircut' we applied previously to our net present value estimate for the completed project,” the bank said.

“We point to the importance of the higher-grade near-surface hematite at this project as a source of DSO. Our site visit and familiarity with these deposits suggest to us that JORC classification of the hematite cap is little more than a formality. When it comes later this year, we will be able to upgrade its contribution to value in Bellzone.”

In addition, Zuks said that both the infrastructure agreement and government agreements in place had “hugely de-risked” the project.

“The detailed agreement with CIF, the presidential decrees which lawfully secure the Kalia convention and exclusive infrastructure development rights, and a proven substantial JORC magnetite resource has hugely de-risked Bellzone's aspirations of building a 50Mtpa iron operation in Guinea,” he said.

With such a large and expanding resource in hand along with a financial partner in CIF, CanaccordGenuity broker Mike Cook believes that delivering an economic feasibility study for the infrastructure component of the development remained the major hurdle for Bellzone.

“[Kalia] is being de-risked because Bellzone is managing to tick a number of boxes,” he said. “The next step to de-risk it further is the feasibility study both on infrastructure and the mine itself. The feasibility for the mine will be the easy bit. The tricky bit is going to be getting the rail to traverse across some fairly tricky terrain – it's not flat like Western Australia but then again we're not talking about the Himalayas.

“The risk is that the feasibility study comes up and says that it's actually going to cost too much and will erode the return on the project; and that it's going to take five years to build the project rather than three. And that's a possibility.”

He said coming up with a positive feasibility over the next 12 months and building the mine and infrastructure over the following three years would be “quite a big ask”.

There is also an element of risk hanging over Guinea – a country that has had its share of troubles over the years and which loves a good military coup. Chris Melville from risk consultancy Menas Associates said the move toward democratic elections (in progress) after a year of military rule and a further nine months of interim government was a positive step for Guinea, but the outlook was uncertain. He said both presidential candidates were similarly accepting of foreign investment in the mining industry, with the frontrunner, Cellou Dalein Diallo also having increasingly strong links with the Chinese.

“This is a country that has been locked down and stagnating under the authoritarian rule of Lansana Conte from 1984 to 2008,” he said. “A lot of the ethnic and political dynamics that were contained under his rule have the potential to re-emerge under a newly democratic order. There is also a risk going forward, given how close the election process has been, that whoever loses it will seek to overturn the result through popular protest or potentially unconstitutional means.

“In a highly personalised and contested political environment such as Guinea's, the personalities of the people in power are hugely important for mining companies, especially those who have signed agreements during a transitional period. A lot of deals have been signed in this period, which creates an underlying level of risk when a new fully legitimate and constitutional government is inaugurated. The key question for the players who signed deals is to what extent have they been able to embed themselves with personalities who will remain important in the post-election period.”

Guinea is seen by many, including the usually conservative Rio Tinto, as a country where the mineral wealth outweighs any risk. Bellzone's position in Guinea and its ability to progress rapidly towards production make the junior one of the standout emerging iron ore players in the market, according to Renaissance Capital.

“Given its growth potential and the fact that the region is now game-on in terms of iron ore development, we think investors should see Bellzone as a highly favourable risk/reward investment,” the bank said. “At the time of Bellzone's IPO, the market was sceptical about management's ability to progress the project over a compressed timeline. This is no longer an issue.

“The project has been de-risked, and actually accelerated, due to the elimination of the usual lengthy period of funding required for a project of this nature.”

Source: HighGrade

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