Gunson Resources fast tracks Mount Gunson, JV at Coburn mineral sands
ASX Code: GUN
Share Price: $0.016
52 Week -:
Issued Ordinary Shares: 255.4M
Market Cap: $4.1M
Enterprise Value: $3.6M
Gunson Resources (ASX: GUN) is a multi-commodity developer that aims to mine the Coburn heavy sands deposit in Western Australia, and has formally launched a farm-in with Terrace Mining to study the feasibility of producing copper, silver, and cobalt metal from shallow deposits at Mount Gunson in South Australia.
The deal with Terrace Mining will see Terrace spend $2.5 million on a bankable feasibility study for mining of the shallow open pittable MG14 and Windabout deposits excised from the joint venture Gunson has with Noranda Pacific.
A proposed flow sheet is currently being tested by Terrace that utilises cyanide to leach copper and silver. Early tests show 90% copper recovery into solution.
Dissolution of the copper and silver is the first step to produce saleable metal or metal salts at the minesite. Indications are that this route will significantly improve the value of the Mount Gunson Project.
MG14 and Windabout contain identified JORC resources of 209,680 tonnes of copper with significant cobalt and silver credits. Conceptual potential exists for a Life of Mine of up to 17 years that outputs 9,000t of copper per year plus cobalt and silver credits.
Conceptual studies indicate that the project has potential to generate annualised copper revenues of ~$76 million plus cobalt and silver credits.
Peer group analysis indicates that Gunson’s 49% interest in the Terrace Joint Venture after the farm-in phase will carry a conceptual valuation of 14 cents per share on commencement of mining operations.
A rapid recovery in the zircon market in 2014 has brought the Coburn Heavy Mineral Sands project (100% owned) back into focus. A definitive feasibility study was announced in January 2010 and an optimisation study completed in February last year. Final mine permitting is expected in the current calendar quarter. Coburn carries a Resource of 979 million tonnes and JORC Reserve of 308 million tonnes at a grade of 1.2% heavy minerals.
Coburn offers a driver for valuation uplift for Gunson given than it is construction ready and that discussions for project funding are continuing.
On 27th February 2014, the executive chairman of major producer Tronox advised of a very strong rebound in zircon sales in 2014 and he, along with UBS, expect a volume led recovery to begin mid-2014 for titanium feedstocks. This will be driven by higher plant utilisation and inventory drawdown from pigment producers, putting upward pressure on feedstock volume/price, and demand-led recovery for zircon.
Current market valuation of $4.1 million and 1.6 cents per Gunson share provides long term investors with share price drivers from two key projects. This ignores upside from any strategic partner joining the mineral sands project.
Downside risk seems minimal. Speculative buy.
Gunson Resources Ltd is an ASX listed explorer and developer of the Coburn Heavy Mineral Sands Project, and Mount Gunson Copper Project including the MG14 & Windabout Excised Area. It also owns the grass roots Fowlers Bay Nickel Exploration Project, and Tennant Creek Gold Exploration Project (Figure 1).
FIGURE 1: Gunson Resources PROJECT AREAS
FIGURE 2: WINDABOUT AND MG14 COPPER, COBALT, & SILVER JOINT VENTURE PROJECT AREA
Terrace Mining Pty Ltd (Terrace), which is a wholly owned subsidiary of unlisted public company Torrens Mining Limited, has negotiated an option period of 12 months, commencing mid-February 2014, to complete a Metallurgical Test Study and establish the economic viability of extracting copper, silver, and cobalt from the resources located at MG14 and Windabout. Terrace then has an additional 18 months to deliver a Bankable Feasibility Study and “Decision to Mine” to Gunson.
The agreement has been approved by Noranda which controls an interest over the Excised Area that lies below a depth of 250 metres. Terrace must spend a cumulative $2.5 million to earn a 51% interest in a JV. Gunson will then retain a 49% interest and will be responsible for its share of outgoings once Terrace has completed its $2.5 million commitment.
Discussions with Terrace commenced in 2013, and bore fruit in late-2013 with a focus on a metallurgical breakthrough. This involved the application of on-site electrowinning to produce pure metal, as opposed to Gunson’s earlier feasibility studies that involved the production of concentrate that would be trucked, then shipped overseas to a smelter for processing.
A proposed flow sheet is currently being tested by Terrace that utilises sodium cyanide to leach copper and silver, and recovers 90% of the copper into cyanide solution. This approach to mineral processing of the very fine-grained sulphide mineralisation at MG14 and Windabout is a radical departure from earlier flotation testwork which produced sulphide copper concentrates recovering between 54% - 68% of the copper in the ore.
The technology for the recovery of copper by sodium cyanide leaching, which is extensively practiced in the gold mining industry, has been well established at least since the 1960’s but is little utilized because the majority of copper sulphides can be processed by conventional flotation or sulphuric acid leaching metallurgical technologies. Acid leaching is not applicable for MG14 and Windabout because the host rock, being highly calcareous, consumes excessive amounts of acid and flotation does not give satisfactory copper recoveries from the ore.
Gunson completed studies at MG14 in 2010 that estimated an initial CAPEX of $41.7 million to produce a copper sulphide concentrate that recovered 67% of the copper in the ore. This study concluded that the project would generate payback of CAPEX in 2 years and produce a cumulative free cash flow of $7.9 million over the first two years of operation.
Estimates at the time included copper at US$3.10 per pound (current LME spot price US$3.23 per pound), cobalt at US$14.50 per pound (current LME spot price US$14.22 per pound), and an exchange rate of US$0.92 for the Australian dollar (current rate US$0.895).
The study did not include revenues from recovery of silver that assayed 10 ounces per tonne of concentrate, nor was additional work completed on switching to longer life operations at Windabout. This could conceptually extend the Life of Mine for an additional 15 years at a rate of 9,000 tonnes of copper metal per annum.
COBURN HEAVY MINERAL SANDS PROJECT – REMAINS AS FLAGSHIP PROJECT
The Coburn Heavy Mineral Sands Project is 100% owned by Gunson and is its flagship project. The project area covers 1,200 square kilometres of fossil coastline, and is located in an area that is well served by the North West Coastal Highway 45 kilometres to the east and the Dampier to Bunbury natural gas pipeline 120 kilometres east (Figure 3).
Geraldton is 300 kilometres south by road along the North West Coastal Highway and is a major mineral sand port, where Iluka Resources (ASX: ILU) ships its zircon and titanium dioxide products to markets overseas. JORC compliant Measured, Indicated and Inferred Resources at Coburn are 979 million tonnes at a grade of 1.26% heavy minerals, with a cut-off grade of 0.8% heavy minerals.
Mining has been approved over two thirds of the Amy zone that has a strike length of 35 kilometres, width of 3 kilometres and is 10 – 50 metres thick. Amy hosts a JORC compliant Proven and Probable Reserve of 308 million tonnes at a grade of 1.2% heavy minerals and a cut-off grade of 0.8% heavy minerals (Figure 3). The heavy mineral suite of this reserve is made up of 23% zircon, 48% ilmenite, 7% rutile, and 5% leucoxene.
Coburn has a natural competitive advantage by hosting much higher levels of zircon (greater value) and a very low slime level of 2.7%. Competitor resources operated by Iluka in the Eucla Basin carry a slime level of 12%, and Base Resources (ASX: BSE) in Kenya carry 26%.
Coburn was discovered in 2000, and has been evaluated by a Definitive Feasibility Study announced in early 2010, Front End Engineering and Design Study in 2012, and an Optimisation Study in 2013. The recent Optimisation Study increased annualised output to 49,500 tonnes of zircon for 65% of product revenue, 109,000 tonnes of ilmenite for 19% of product revenue, and 23,500 tonnes of HiTi (high titanium product made up of rutile and leucoxene) for 16% of product revenue.
Production costs were reduced to $2.89 per tonne of ore to extract US$5.90 per tonne of refined heavy minerals, and utilised long term price forecasts of US$1,715 per tonne of zircon, US$1,000 per tonne of rutile, US$800 per tonne of leucoxene and US$145 – US$190 per tonne for ilmenite.
The study estimated annualised revenue at A$146.1 million, OPEX at $94.8 million to provide an annual operating margin of $51.3 million. Initial CAPEX for a Life of Mine of 19 years was estimated at $202 million to provide a Pre-Tax Internal Rate of Return of 19.5%, and Pre-Tax Net Present Value (at an 8% discount) of $208 million. Additional cost reduction targets have been identified, and will be fully evaluated once a strategic partner has been secured.
TIDE TURNING FOR HEAVY MINERALS
The last calendar quarter of 2013 saw pricing for zircon at US$1,083 per tonne, with rutile at US$910 per tonne and appears to be the bottom of a deep bear cycle for heavy minerals. This is mirrored in the recovery of share prices of competitor companies that include the Iluka Resources share price from a September 2013 low of $8.00 to a February 2014 high of $9.50.
Iluka is the world’s largest producer of zircon with 2013 annualised production of 285,000 tonnes and supported by production of 585,000 tonnes of ilmenite, 127,000 tonnes of rutile, and 59,000 tonnes of synthetic rutile. Production is sourced mainly from the Eucla Basin of South Australia, and the Murray Basin in Victoria. Most of the heavy mineral concentrate from the Eucla Basin is refined in Geraldton.
Iluka reported that it managed to achieve a cash margin of 35% generated on 2013 EBITDA. This is an impressive achievement as it occurred at a major cyclical low for the pricing of zircon and other heavy minerals. Iluka CEO David Robb recently said: “Over the last 8 quarters, indicators or conditions have been improving and they are generally better than they have been in at any other time in the last 2 years“. In a round table discussion with UBS in Sydney on 24th February 2014, Robb said that the zircon supply problems of 2010-2011 may return and that instead of the 2012-2013 excess supply there may be a supply crunch.
Other producers are reporting that December 2013 quarter demand for zircon was firm in China and USA, and subdued in Europe. Zircon consumption in 2013 appears similar to 2012 levels, but the largest increase for two years appears to have begun in 2014.
Zircon is used to manufacture ceramic tiles, sanitary ware, tableware, refractory and foundry products and glass. Zircon metal is utilised in nuclear fuel rods and alloys. Zircon chemicals are used in pigments, paints, rust proofing of automobiles, tanning, textiles, and catalysts. Zirconia is used in refractories, catalysts, ceramics and electronics.
Construction markets in USA, China and Europe improved over the last 6 to 9 months, indicating that pigment and thus feedstock demand will also improve.
Full permitting of Coburn is expected by the end of the current calendar quarter.
The Coburn Project has very low geopolitical and land access risk due to its location in mid-west coastal Western Australia, and is in an area that is very supportive of mine development. Technical risk related to the resource is also low as the broad orebody is homogeneous and the sands are free flowing with low radioactive elements, standard grain sizes, negligible slimes and oversize and low “trash” heavy minerals.
Capital costs at Coburn are likely to be further reduced as the latest published estimate was made at the peak of the mining boom in mid-2012. Since then, capital costs appear to have dropped by 10% to 15%.
Multiple technical studies have also reduced the risk of cost and schedule overruns, and all development approvals have either been received or at an advanced application stage.
MOUNT GUNSON COPPER EXPLORATION PROJECT
Gunson retains a 49% interest in the Mount Gunson Project, with Noranda holding the balance of 51%. The project area surrounds the MG14 and Windabout Project area and covers 1,039 square kilometres.
Noranda has suspended its exploration programme over the project area, and has elected not to proceed further, now seeking to farm-out its interest.
FOWLERS BAY NICKEL PROJECT
Gunson holds 100% of the Fowlers Bay Nickel Project in South Australia that covers 700 square kilometres and is located 150 kilometres west of Ceduna. The project area lies in a high grade metamorphic craton margin terrain that is somewhat similar to the geology of the Fraser Range belt of Western Australia, host to the Nova and Bollinger nickel-copper sulphide discoveries made by Sirius Resources (ASX: SIR).
Four discrete targets have been defined by geological analysis or airborne magnetic data. A gravity geophysical survey was completed in November of 2013 over one of the targets measuring 9 kilometres by 3.5 kilometres. The gravity data suggests that one magnetic unit is comprised of mafic and possibly ultramafic rocks that may contain nickel sulphides.
TENNANT CREEK GOLD EXPLORATION PROJECT
Gunson holds a 100% interest in three approved Exploration Licences and one Exploration Licence application that cover 76.6 square kilometres in the Tennant Creek district of the Northern Territory.
Little exploration effort has been directed at hematite-rich, magnetite-deficient gold and copper ore bodies that have either a very weak coincident or adjacent magnetic anomaly such as the major hematite-rich ore bodies at Prominent Hill or Olympic Dam in South Australia.
Gunson believes that the Tennant Creek Project area has potential for similar ore bodies that can be quickly and cheaply tested with ground geophysics and shallow drilling. A 2 hole diamond drilling program to a depth of 250 metres each is planned for mid-2014. This will evaluate an untested geophysical anomaly that covers a 1.2 kilometre long interpreted hematitic ironstone body in the 100 -150 metre depth range.
CATALYSTS – 2014 - 2015
- Completion of permitting for Coburn expected in March quarter of 2014.
- Government funding approval pending, which will trigger drilling at Tennant Creek Gold Project in mid-2014.
- Completion of metallurgical testing at MG14 and Windabout and confirmation of proposed flow sheet and process plant design. Data released throughout 2014.
- Completion of Bankable Feasibility Study and “Decision to Mine” for Joint Venture over MG14 and Windabout. Data released throughout 2015.
- Completion of Environmental and Mine Permitting for MG14 and Windabout completed after Decision to Mine is announced.
- Gunson continues to seek strategic partners for Coburn. Approval will generate very significant upside in 2014 – 2015.
COBURN HEAVY MINERALS
Peak valuation was driven by strong demand for zircon and commentary issued by entities such as Goldman Sachs who forecast that zircon prices would exceed US$2,000 per tonne from 2012 -2015, and that titanium dioxide prices would double.
The current valuation flows directly from a significant pull back in heavy mineral prices to a current zircon price of just above US$1,000 per tonne, along with a collapse of the proposed development agreement for Coburn with POSCO of South Korea.
Management firmly believe that long term demand from emerging markets will drive a revival in zircon prices and underpin funding and development of the project. This demand increase is already evident from recent comments by the chief executives of major producers Iluka and Tronox.
The current valuation ignores the fact that Coburn is a long life project of at least 19 years and is dependent on life cycle economics, not short term price swings in commodity prices. Market pricing also completely devalues sunk costs of $30 million for completion of all technical studies and permitting at Coburn.
Gunson Resources will require additional working capital and funding to execute its business strategy and progression of the two projects.
A revival of negotiations with a well-credentialed potential strategic partner is bound to have a major and immediate impact on market valuation.
TERRACE MINING FARM-IN AT MG14 AND WINDABOUT
Management has adopted a prudent approach to development of remaining assets that includes a farm-in venture with Terrace Mining to develop copper, silver and cobalt resources at MG14 and Windabout in South Australia.
Conceptual studies are indicating that MG14 has potential to produce 9,000 tonnes of copper metal per year for 2 years, and that Windabout has additional potential to produce at the same rate for an additional 15 years, subject to developing a cost effective mining method for this 70 metre deep deposit.
At this production rate, the project will create estimated annual revenue of $76 million based on current LME spot price for copper, and before credits for cobalt and silver are included.
Valuation of this asset and revenue generating capacity will become clearer as technical and economic studies are completed over the next 12 to 18 months.
Hillgrove Mining currently operates the small open pit Kanmantoo copper mine in South Australia that produces 20,000 tonnes of copper concentrates per year. The mine has copper resources of 259,831 tonnes (at a grade of 0.78% Cu) that currently carry an Enterprise Valuation of $0.16 per share.
Kanmantoo is approximately 275 kilometres by road from the Terrace Mining Joint Venture and has a similar sized resource, so we place it within the same conceptual peer group for estimation of a forward valuation.
The assets at MG14 and Windabout carry resources of 209,680 tonnes of copper at grades of 1.0% – 1.4% Cu, along with relatively rich credits of cobalt and silver. Applying the Kanmantoo Enterprise Valuation to the copper assets at MG14 and Windabout equates to a conceptual Enterprise Valuation of $73.8 million after completion of technical studies and commencement of mining.
Gunson’s 49% equity interest then carries a projected conceptual valuation of $36.1 million or $0.14 per share (undiluted) at commencement of mining operations.
This does not take into account additional copper resources that are located within the Mount Gunson Copper Project area at Cattlegrid South of 11,700 tonnes, Sweet Nell 4,200 tonnes, Tailings Dams 10,080 tonnes, and Emmie Bluff with 312,000 tonnes; which may be mined at a future point in time.
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