MIL Resources (MGK.ASX) - better buying

Share |

Over the last 5-6 months I have watched MIL Resources (MGK.ASX), the stock has gone sideways. In that time the company just keeps getting better. The company is on the verge of releasing its feasibility study for the Amazon Bay vanadium-titanomagnetite (Va-Ti-Fe) deposit. I have talked about this deposit already. You might ask - Isn't there enough ASX companies developing iron resources in the world? I could not agree more...the problem is that most of them have projects in "Gillard country", and thus they are all under threat of 'partial nationalisation'. Well, there is no keeping a good capitalist down. Bad news for Australia is good news for PNG, because MIL Res has a 90% share of the Amazon Bay deposit, which has a number of advantages over those Aussie projects:

1. It is (so far) free of the resource tax issues effecting Australia

2. It is free, unconsolidated sands, so no excavation is required, just low-cost dredging. Recent announcements suggest there will need to be a grind-phase to beneficiate the ore.

3. The resource is on the coast, so no expensive rail haul is required

4. A market study by CRU has highlighted a market of 17Mtpa in China for 'Titano-Magnetite Iron Ore'

5. Further metallurgical testwork could improve the concentration of the Amazon Bay ironsands product. Preliminary quantitative mineralogical analysis suggests a “best possible concentrate” of 54% Fe, 1.05% V205, 13% Ti02, 4.8% Si02 and 1.2% Al203, which is a specialised product. Laboratory work has focused on meeting these targets and in particular lowering the titania grades, which would give their product broader market appeal.

6. Large resource of 2-4 billion tonnes expected based on preliminary aerial surveys and sampling.

7. The potentially far lower capital and operating cost of the project. The reason is that there is no need for an expensive rail loader, rail line, locomotives, no expensive port. For the operating costs, minimal grinding, cheap processing. Engineering consultant, Downer EDI Mining –Mineral Technologies Pty Ltd estimate that the total capital cost of A$300-4600 million with a most likely cost around A$415 million. The breadth of the capital cost implies a larger scale of development with downstream processing. The 'most likely operating costs are estimated around $A30 per tonne of concentrate if electro-magnetic beneficiation and reverse flotation is required, otherwise as little as A$20/t product. I understand WA miners have operating costs of $A50-60/tonne, and they are investing billions.

8. The company proposes production of a high grade, vanadium-bearing, titano-magnetite concentrate at a production rate of 2.5 million tonnes per annum.

9. The plant and infrastructure is designed on a modular basis that can be easily expanded.

This is exciting news in itself, however I have however outlined a strategy in an email to MIL Resources two weeks ago, suggesting a higher value approach. The approach involves either:

1. Removing titanium - if that is a plausible by-product, or a lower Ti-grade product

2. Blending the ore with WA-based iron ore projects at a transhipment facility to reduce grades in the southern Philippines. Blending and sintering would increase the delivered cost to customers, however it would also increase the value, and give the company access to global markets and a capesize terminal at Cagayan de Oro. This option is of course contingent upon the support of Philippine Sinter Corp (50% owned by steelmaker Kawasaki Steel Corp)...whom would make a nice partner. The facility will allow MIL Resources to blend out (dilute) the undesirable titanium levels in the mine concentrate. The facility could be used to sinter the ore, which has already been subjected to grinding to liberate the ore. This culminates in a lower value 'fines' product.

2. Produce a specialised high Ti-magnetite concentrate for China - a 17Mtpa market.

The sinter facility has deepwater berths able to load capesize (180,000dwt) vessels, so MIL Resources will be able to take its product from self-loading 50,000-70,000dwt ships from the mine site, and discharge an upgraded sinter iron ore in larger capesize (180,000dwt) ships which can go anywhere in the world. The sintering and blending will offset the transhipping cost. Costs would be further reduced if they are able to use dedicated vessels. There is of course a lot of idle speculation...so we will have to watch and wait. Being a profitable investor however demands anticipating the future....particularly where management is generally not always good, disclosure generally bad. But I guess when there are shareholders like myself anticipating future project trends, maybe it scares executives intent on securing every possible advantage. Well, does it not behoove them to be ahead of the game. They of course ought to have secured the exploration rights to all the plausible iron ore resources in PNG.

The Amazon Bay project ought to appeal to a few iron ore consumers like Kawasaki Steel (half owner of Philippine Sinter Corp), or Andrew Forrest of Fortescue Metals, who might like to diversify outside of Australia given that his assets are essentially being partially nationalised....Well not nationalised but enslaved in the subtle ways that fascists do...the effect is the same. Mind you he could turn MIL Resources into a political side-show, so perhaps a consumer is better.

Amazon Bay ought to be marketable when compared to the publicly reported concentrate grades of Aurox’s Balla Balla deposit of 44.7% Fe; 0.66% V205 and 13.8% Ti02 from and Reed Resources’ Barrambie project of 49% Fe; 0.82% V205 and 16.7% Ti02.

Engineering Studies

The mining process involves several steps:

1. Mine operations/wet plant. Mining by two bucket wheel dredges, each at a nominal rate of 1300 tonnes per hour, wet plant essentially comprises two parallel, four stage circuits of spiral concentrators. Dredging is the cheapest form of mining, so operating costs will be very low, and the dredge can even be leased to reduce capital costs.

2. Beneficiation Plant. Comprising magnetic, electro-magnetic/reverse flotation and grinding circuits. This stage is uncertain, but these processes are offset by savings on crushing, rail haulage at other iron ore mining operations. Using a course dry grinding, titania grades as low as 19% have (so far) been achieved. Finer, wet grinding/wet separation is expected to produce substantial improvement; as well as reducing gangue minerals.

3. Port/Stockpiling. The final product is thickened, prior to stockpiling. A wharf is designed to handle handysize ships. This is cheap infrastructure.

4. Other costs includes earthworks, offices, accommodation, roads, power and fuel unloading and storage.

This is not the whole story with MIL Resources - the company has a 50% interest in Titan Metals Limited – which has a portfolio of EL’s and ELAs in PNG prospective for gold, copper, molybdenum and nickel. Current focus is on the Poi gold copper prospect which holds a well defined gold copper mineralized syenite ridge with alluvial gold draining the intrusive system. Geophysical modeling has defined an extensive radiometric anomaly striking over 11km long and 1.5km wide coincident with cross-cutting radiometric structures and magnetic anomalies. This setting is considered to be a favourable host to gold copper mineralized systems. Expect some trenching results from this project in soming months, to be followed up by drilling. The company has also acquired appealing gold projects in the volcanic islands north of PNG. e.g. New Britain.

MIL Resources has 256,677,240 shares on issue, plus 60,329,111 listed options expiring 31/05/2012 with 10c to pay. They have a handy cash balance as at 30th June of $3.3 million. Yet the market capitalisation is just $A8.7 million. Go figure! For a project with the potential to undercut most iron ore production on a capital & operating cost basis.

-----------------------------------------------

Andrew Sheldon www.sheldonthinks.com