Big hopes for a Tassie small cap

PORTFOLIO POINT: An emerging iron ore project in Tasmania will give tin and tungsten minnow Venture Minerals a vital financial injection.

Buy the iron ore, get the tin and tungsten for free. If Venture Minerals was in the retail business, that’s the message it could paint in its front window.

Venture, obviously, is not running a shop, but the sales appeal of 'buy one, get one free’ is the same with a mining company as it is with any other business.

So far, the market does not appear to have absorbed the significance of what Venture reported earlier this week, perhaps because the iron ore tonnage involved is small compared with the massive volumes normally associated with that commodity.

Venture’s ASX filing on Tuesday, March 20, said the company had doubled the resource at its Livingstone and Riley Creek iron ore deposits in Tasmania to 4.4 million tonnes of material, assaying 57% iron.

In terms of size, Livingstone and Riley Creek represent little more than a few days’ worth of exports from the Pilbara operations of BHP Billiton or Rio Tinto in WA.

However, what the iron ore discovered by Venture in Tasmania lacks in tonnes, it more than makes up for in dollars when stacked alongside the financial metrics of the stock.

The key to understanding Venture’s emerging iron ore project is the profit margin on the material, and the secondary point is that because it is going to be a small iron ore mine, it will not attract the new Minerals Resource Rent Tax, so long as annual profit remains under $100 million a year.

Venture’s plan is to mine 1 million tonnes of ore per year from rich pods of direct shipping iron ore, at a profit margin of around $50 a tonne, which will generate an annual profit of $50 million. Given that Venture is currently capitalised at $81 million, the value gap between market price and future cash flows becomes easier to see.

In theory, Venture could generate $200 million in profit from iron ore over the next four years – more than enough to cover the estimated $162 million capital cost of the Mt Lindsay tin and tungsten deposit on the west coast of Tasmania, which is the real reason Venture is exploring.

“Why am I in tin?,” was the half-joking question from Venture chief executive Hamish Halliday on the sidelines of a mining conference in Hong Kong this week.

The answer is that the type of orebody discovered by Venture is never likely to be big, and unlikely to be developed without the current high levels of Asian demand for the ore.

What the iron ore represents for Venture is a source of early cash flow which will, in theory, pay for Mt Lindsay, which is in the final stages of a feasibility study.

The speed at which Venture is planning to move from exploration into production is another surprise feature of the company’s assets, as is the capital cost of starting the iron ore operation.

First iron ore could be mined at Livingstone for less than $3 million (yes, there are no zeros after the $3), thanks to the ore sitting on the surface, requiring only a front-end loader to dig it up and a truck to haul the ore away. Once mined, the ore will be hauled to a railway siding for transport by TasRail to port for export.

First iron ore shipment could occur as soon as early next year, with cash flow overlapping the financing and construction phase of the tin and tungsten project, which is scheduled to start production in early 2014.

Unlike iron ore, tin and tungsten require a much closer focus on marketing, and have historically suffered from periods of over- and under-supply.

Halliday is confident that strong Asian demand for both metals means that the uncertainty once associated with tin and tungsten is over.

“Tin today is being driven by the worldwide switch to lead-free solder on environmental ground,” he said. “Tungsten is a strategically important metal used in producing speciality steels, with China accounting for 85% of global production.”

Since mid-2009, the price of tin has risen from around $US15,000 a tonne to $US23,000 a tonne, but did get as high as $US33,000 a tonne last year.

Tungsten, over the same time, has risen from around $US18,000 a tonne to almost $US43,000 a tonne.

Exploration at Mt Lindsay is continuing, though the company already has a resource of sufficient size to mine for an initial eight years, with a pre-feasibility study pointing to life-of-mine revenue of around $US1.2 billion, and average net cash a year of $US72 million, for an internal rate of return of between 29% and 42%, depending on the assumed sale price of the two metals.

On the market, Venture shares have reacted modestly to Tuesday’s announcement that the iron ore resource had doubled, rising from 31c in early March to 35c at last sales.

“Investors need to recognise that the run of success with our iron ore project is over and above our flagship tin and tungsten deposits,” Halliday said.

He’s right, although there is an issue with size. It is difficult for an investor to get in (and out) of a stock when the company is valued at just $81 million.

The trigger for wider recognition of Venture on the market could be when its market value clears the $100 million mark – a level which should put it on the radar screen of institutions operating small resource funds.