MIL Resources (MGK.ASX) - looking good

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MIL Resources continues to put out gratifying news about its Amazon Bay titano-magnetite (titanium & iron ore) deposit in PNG, as well as its nearby gold project. This company is really in a very good position. Of course the stock will be even more compelling if Labor wins the next election. In the interests of freedom, I would prefer a libertarian government, but since the majority of you are inclined to shoot yourselves in the foot, why not a kinder liberal tyranny than the Labor collectivist revolution. Personally I'd prefer more freedom to making more money. But for some of your non-intellectuals, you might be overwhelmed by the short term bribe of a government 'super' extortion.

You can download the lasted reports on this stock from the MIL Resources website. The company did not respond to my email raising the prospect of using a deepwater port in the Philippines as a transshipment facility. Clearly this is because:

1. They see China as the principle growth market

2. They anticipate development of a smaller 2.5Mtpa mine, not a larger capacity operation I am implying

3. They anticipate a Chinese investor to fund project ore resource delineation, though I also hold out a hope for a Japanese partner (Kawasaki Steel Corp), even if as a minor partner, so they can look at sintering options. I am not a metallurgist, so I don't know whether sintering offers an opportunity to recover titanium. I suspect not because sintering merely welds iron particles together, but it will allow blending to reduce the titanium grade.

4. They did not address the issues raised in my email - clearly because Downer EDI engineers have not had an opportunity to cost the proposal, if they are even looking at it. I did not send it as a client/consultant, but rather as a shareholder wanting to realise full value from my investment. This proposal would change the capital and operating cost & revenue dynamics for the project. Strategically it also means more partners.

There is additional news in terms of project costs. It seems that cash operating costs for the project will be about $30/tonne, and $25/tonne for capital. I think their cost of capital is too high, say $20/tonne. There is of course the project of capital costs coming down if my proposal is realistic. I understand WA miners have cash operating and capital costs of around $60/tonne, but I am not certain about that. I need to do more research. They benefit from established infrastructure, MIL benefits from proximity to the cost. The implication is that adding incremental capacity to MIL Resources will mean much greater upside.

The other appealing news is that the company has undertaken some sampling on its gold project. This appears to be trench sampling, which should give a good idea about the calibre of this project to offer potential as a gold mine. We will need however to await drilling to get a better idea. Though with a long strike extent, it will take some time to know the final result. The good news is that the proximity of this project to the iron ore, and the location of the New Britain projects (on islands north of PNG), mean that all their projects benefit from favourable geography, i.e. access to infrastructure, and otherwise the ease of barging in much needed supplies. There is even the prospect of barging ore to others processing plants, since these are islands. This is of course too early to say. These New Britain projects sit a long a convergent plate boundary, and there is the prospect of repetitions of large gold resources found along strike, on other islands.

Lastly, the company has been very conservative in its use of cash. The company has only spent down $0.5mil from $3.3mil to $2.8mil, so there is the prospect of a deferred capital raising. Any funding by a Chinese partner for Amazon Bay is likely to be restricted to the project. I would not be surprised if they require an equity investment...though this might simply be a direct project equity. I would expect a Chinese partner to be required to spend $15-20mil in order to prove up the resource and to fund a feasibility study, thereafter both parties have to contribute to project funding. I will in my next email prepare a financial valuation for this company based on my expectations for this project.

MIL Resources is shaping up as an incredibly successful company - with huge upside in a number of projects. Some of you will wait until I am proven right. The problem with this strategy is that the stock might triple when they announce a Chinese partner. The best time to buy is when they are trading off lows - like now.

I might add that our fascist government has scared the Chinese and other investors. There are about 60 small exploration companies in Australia for iron ore, and another 40 coal project developers who would have liked foreign investment. We need to understand the huge Japanese investments made in Australia in the 1960s and 1970s. China is 15x the population, and is growing at 8-10x - faster than Japan. Expect it to be a lot more worried about security of supply than Japan. And I have not even mentioned India, which is growing slightly slower. India actually has good quality iron ore, but its coal is crap, and there will probably be security of supply issues there anyway, so we will likely find a market for iron ore there. A Labor government is scaring investors, which is good for MIL Resources PNG project. Even if a Liberal government drops the tax, Labor has done huge damage to Australia's reputation. They will be investing with a 20-year project outlook. So this is very good for MIL Resources. There is no other iron ore provinces in the Asia-Pacific Region really. China has crap iron ore which is causing environmental issues. Indonesia and PNG have these beach magnetite sands, so does NZ, but all these countries have no deepwater ports. Australia has may deepwater ports, but it has a Labor government, and its iron ore is 400km inland. South Australian iron ore is appealing too, but still - Labor government risk.

I have since been doing some research on WA miners - the Aurox Balla Balla project is 110km from a deepwater port, so clearly it is in a good position. Unfortunately it suffers from the Resource Rent Tax. I am assuming they will be taxed for their iron content, but maybe they will get a reprieve from a Labor government. It has a low strip ratio, but it still has to crush the ore. Reed Resources has the misfortune of being inland WA, near Cue, so it has a rail disadvantage.

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Andrew Sheldon www.sheldonthinks.com