This is an update on some previous ongoing research I have been doing on MIL Resources (MGK.ASX). I hope to get to the shareholders meeting this month, but its probably not going to happen because of the preliminary work. The company is based in my hometown. A number of points to make. Firstly, I over-estimated the potential of the Amazon Bay titanomagnetite deposit. The deposit is a world-class strategic asset. The problem as I see it is that the 'mooted' 17Mtpa market for titanomagnetite is a mirage. It will not be developed unless someone is prepared to look at downstream steel production. It took me two weeks of researching steel to research that conclusion. i.e. Pig iron, titanium slag and vanadium metal. There is a similar operation in NZ which made a profit of $15mil last year. Bluescope is trying to sell the operation. This project is better located, has higher titanium, but it cannot compete with:
1. Titanomagnetite from China - there are actually some iron ore producers which supply titanomagnetite ore to steel makers in China, but they are mining the stuff for $12/tonne, so PNG cannot compete with that.
2. Titanomagnetite from Russia's Far East is mined for $5/tonne, and can be cheaply exported to NE China, so that is an appealing source for that part of China.
For these reasons I ignore the 17Mtpa of 'potential market' as ludicrous. Just because a steelmaker consumes titanomagnetite does not mean they are going to buy your product, least of all when the steelmaker owns the titanomagnetite mines. See a company called China VTM. For this reason, I have no confidence in the CRU 'strategic' report.
China is mostly based on blast furnace technology, which cannot accept high-Ti ores. Until that changes or demand for high-strength steels increases, this project does not have a market. If you want evidence of that, look at prices for vanadium. The market is over-supplied because of Chinese titanomagnetite production. So unless some Chinese or Indian company is willing to
enter this market, or even a technologically sophisticated Japanese or Korean company wanting to develop an offshore market in high-strength, specialty steels, then I think this project will retain that status for some time. I therefore think they are looking at the wrong market for partners. It is not China, who are
really a competitor, but Japan or maybe POSCO (Korea). Personally, if I was CEO, I'd be brushing up on my Japanese..
CEO: Sumimasen..Anata wa PNG ni ita kota ga arimasuka?
Japanese CEO: Eii
CEO: Hunto ni. Sagoi ei na! (Incredible!)
Japanese CEO: Biru onagaishimasu! (More beer please!)
It so happens that maybe the MIL Resources know all this because in recent times they have shifted focus to gold. And preliminary results from the Poi gold project, very close to Amazon Bay, are very good. The sampling has only just started, but the results are living up to my expectations. A single channel/trench in this interim report suggests the deposit is offering commercial grades. One section however does not make a mine; particularly not a trench sample, which provides only a single cutting of the mineralisation, and provides no indication of what is at depth, nor what is along the 11km strike.
I still think the company looks like good value, but the development lead time has been severely stretched for Amazon Bay, whether for product market potential, or because of the downstream investment required to create marketable product. Will a company want to do that in PNG? Well maybe not, but there is the potential to make the downstream elements near Gladestone, Qld for coal supplies. I would not be surprised to see an Electric Arc Furnace in Gladstone in future, both for the coal, coal seam gas, and port facilities.
The company has excellent potential with the gold projects, $2.8mil in cash, and a proven world class resource. In the short term, expect some more exciting trenching & drilling results. I am particularly pleased with the results from the first trench - yielding 12m @ 9.6g/t Au and 0.65% Cu - because of:
1. The high grade of the gold
2. The association with good copper grades
3. The fact that they have anomalous gold over 11km in streams, and they have only just started testing this structure.
There is also the potential for them to secure JV partners to explore some of their other gold projects. This deposit reminds me a little of the Highlands Pacific gold mine. I seem to remember Pat Elliott (chairman of MIL) from somewhere. I think he was chairman of Highlands, so its interesting that he ended up driving this project. I hope he does not enter into another stupid hedging arrangement, which drove HIG into the ditch. I would need to check that. Anyway, he can't do much damage as chairman or whilst they are explorers. That is what I love about exploration. They are so cheap. You simply can't destroy what you know is a great project until you start building a mine. By them I've usually sold and moved on. Not going to make the mistake of investing in real mines again. They are accidents waiting to happen.
The best investment is a company with $2-5mil in cash, a world class asset and a market capitalisation of $5-10mil. You would be surprised how many stocks are around like that. Gippsland Ltd is another one that comes to mind, Union Resources another. They make great takeover targets, they have no problem raising cash....ok...GIP is having some difficulty....but probably not for much longer.
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Andrew Sheldon www.sheldonthinks.com
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