Cape Lambert Resources to bank royalties from Mayoko: H2 2014
Cape Lambert Resources (ASX: CFE)
could soon receive substantial royalty income with Exxaro Resources
(JSE: EXX) being granted a Mining Convention for the Mayoko Iron Ore
Project in the Republic of Congo.
The Mayoko royalty was negotiated by Cape Lambert as part consideration when it sold its 100% interest in the Mayoko Project to African Iron in January 2011.
The royalty of US$1 per tonne of iron ore shipped from Mayoko was transferred to Exxaro after it acquired African Iron in March 2012.
Exxaro had previously advised that Mayoko is expected to commence production in the second half of 2014 at a rate of 30,000 tonnes per month.
This will rise to 2 million tonnes per annum from 2015 before ramping up to about 10Mtpa from 2019.
“It is great news that Exxaro will commence mining operations at the Mayoko Iron Ore Project in the coming months, not only for Exxaro and the people of the Republic of Congo, but also for Cape Lambert and its shareholders who will receive significant royalty income for many years to come,” executive chairman Tony Sage said.
The Mining Convention is subject to the fulfilment of certain conditions precedent, notably in relation to the execution of definitive agreements for Exxaro’s access to rail and port facilities.
Exxaro has indicated it will be considering the Mining Convention together with these agreements within its governance processes and will provide further detailed information at its annual results presentation on Thursday, 6 March 2014.
Mayoko Iron Ore Project
The Mayoko Iron Ore Project, located in the southwest corner of the Republic of Congo and 300 kilometres northeast of the port city of Pointe Noire, has a JORC Resource of 685 million tonnes of iron ore consisting of a hematite cap of direct shipping ore (DSO) at 55% iron and beneficiable DSO ore at 41% iron.
To accommodate its target of producing 10Mtpa of iron ore by 2017, Exxaro is looking at expanding rail facilities.
The existing rail corridor was one of the most important attributes of this opportunity and although the rail line is in good repair, its capacity would need to be expanded.
A new bulk commodities port is being developed to the north, facilitated by investments from Exxaro and other major mining companies.
Tony Sage’s Cape Lambert Resources acquires and invests in undervalued mineral assets and companies, adds value to those assets through a “hands on” approach to management, exploration and evaluation.
These are then monetised into cash at a multiple retaining an exposure to the assets through a production royalty and/or equity interest. As assets are converted into cash, CFE looks to distribute surplus cash to shareholders.
Cash levels increasing
CFE had $14.6 million in cash at bank at December end. An additional A$5.6 million, being for environmental bonds associated with the Leichhardt Project is due for release to the company in February 2014.
However, the cash pile, (and potential distribution to shareholders and buy-backs) will likely increase as TSX listed Eldorado Gold Corporation (TSX: ELD) has made a takeover offer to acquire all of the shares of Glory Resources Limited (ASX:GLY), a company which Cape Lambert holds 36,750,000 shares in, for A$0.17 per share.
Successful completion would see Cape Lambert pocket $12.7 million. This would take total cash to $32.9 million versus a Market Cap. of $74 million, roughly trading at just half of cash backing.
Royalty income commencing H2 2014
The royalty is equal to US$1 per tonne for every tonne of iron ore shipped from the Mayoko Project (indexed annually to the CPI).
Previously, Exxaro had indicated that production from Mayoko is due to commence in the second half of 2014 at a rate of 30,000 tonnes per month, rising to 2 million tonnes per annum from 2015.
From 2019, it is expected that production will be approximately 10Mtpa.
So this would imply a $360,000 per annum royalty stream rising to $2 million per annum from 2015 and to $10 million from 2019. This provides a significant royalty stream for CFE shareholders for years to come.
On market buy back
During the period CFE undertook an on market buy back of 21,169,905 fully paid ordinary shares completed for expenditure A$3,019,421.41.
The net effect of the buy-back is to tighten issued capital and increase returns to shareholders.
In short, Cape Lambert is pulling the right levers. Proactive Investors can see, with royalty income commencing and cash levels increasing, that potential returns to shareholders – from both capital gains and surplus cash distribution are significant. With no debt and a history of paying out retained cash in dividends or capital returns, and buying back shares on market - it provides a platform for maximising returns to Cape Lambert shareholders. Which the market has missed.
This provides an opportunity right now for investors to buy at a discount to the intrinsic underlying value of Cape Lambert.
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