Over the last few weeks I have been studying the iron ore and steel markets in order to develop a better understanding of the value of MIL Resources. When I first bought this stock I was fired up because of the strategic value of their iron ore resource, and the long term potential of their gold projects. Drilling results from the Poi prospect are encouraging, however they do not motivate me to buy now. More likely they will be better buying in a few months. In the short term however, all I can see is the spectre of:
1. Amazon Bay going nowhere. A great resource but I question whether Chinese enterprises will be interested in developing it because of labour issues and infrastructure challenges in PNG. Most particularly lack of roads, power, and maybe coal/gas, but coal could come from Australia (Gladstone). I have metallurgical concerns. I hope they look for a better process, because I think there is no mature technology to compete with HIsmelt, and I think there is so far inadequate demand for high-alloy, high strength steel. That will come, but it might be 10-15 years. I think in the short term, a lot of money could be lost developing that project. It was my reason for buying now, so that reason has evaporated. Chinese steelmakers are going to be focusing on converting their blast furnaces to HIsmelt route, as well as developing competing coal resources in China, Mongolia, Russia and Canada. Both options are cheaper options in the short term. Interest in Amazon Bay might however come from the Japanese or India, as they have more interest in specialty steels. Is there the market incentives? Hmmm?
2. Gold projects: MIL has a number of gold projects which look really good. The Poi project is revealing its potential. The problem I have is the amount of money which will need to be sunk into these projects. I've seen it all before with PNG projects. All the road, drilling pad, line clearing, helicopter support, etc. Its an expensive exploration exercise which has driven many companies into administration or a similar fate. City Resources in the 1980s comes to mind. They might be able to farm-out some of these costs, but I will wait and see.
3. Dilution: MIL Resources is planning to consolidate its ownership over the projects it holds through Titan Metals. This is unfortunately dilutionary, and it will not be long before they will need more cash given the expensive exploration budget.
Really like the potential upside in this stock, but without a self-funded Amazon Bay project, I am easily scared off this stock. I will retain some stock because if a HK billionaire can make a bid for NZ Steel and get rejected by NZ Investment Review Board, there just might be some Chinese 'long term' capital for Amazon Bay. I just don't see the strategic sense. Also there may be some excitement from Poi and the other gold deposits. i.e. Some fantastic drilling results.
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Andrew Sheldon www.sheldonthinks.com
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