Iron ore junior reminds investors where leverage lies

The soaring iron ore price is generating cash hand-over-fist for Rio, BHP and FMG. But when it comes to leverage for investors, juniors like Centaurus have it in spades. Plus, which gold miner spurned takeover suitor St Barbara?

The trickle-down effect of the surge in iron ore prices in response to Vale’s January 25 tailings dam disaster is starting to take effect.

Project proposals consigned to history when iron ore prices tanked some years back are being dusted off in the hope that the $US100/t prices are here to stay for the foreseeable future.

It is something the big producers Rio Tinto and BHP fear could eventually undercut prices for the long-term as the pesky new producers stick around in the more sedate iron ore pricing expected to prevail in two to three years’ time when Vale gets back to its annual 400mtpa run rate.

But they don’t need to worry about Centaurus (CTM) with its boutique plan to get into production at its Jambreiro project in project in Minas Gerais state, also home to Vale’s tragically deadly Brumadinho operation.

Jambreiro is being dusted off as a potential 1mpta operation. It might be immaterial in scale to both the Brazilian domestic market and the global seaborne market, but it could be very material to Centuarus with its 0.8c share price and $22m market cap.

Centaurus was a 0.5c stock at the start at the month so in percentage terms at least, the highest iron ore prices in five years has been more material to its shareholders than the big producers.

Centaurus has long been a Brazilian specialist and before the recent spike in iron ore prices, it had shifted its focus from Jambreiro to the Carajas where it has nickel and copper/gold interests that more than cover its current market cap.

Jambreiro was the subject of a pre-feasibility study back in 2013 and the company has just announced it will do a new version “to capitalise on the new opportunities which have emerged in the domestic and international iron ore market in the past six months”.

Unlike most other juniors thinking it is time to reboot their iron ore ambitions, Centaurus has the luxury of Jambreiro already having a mining licence and environmental approvals in place for up to 3mtpa from an initial 18 million-tonne reserve of high-grade, low impurity material for supply to the local steel mills.

Focussing on an initial 1mtpa project means that financing the start-up should be all that much easier, with the resource base big enough to support a self-funded expansion in later years.

One of the more notable changes in the new PFS will be the adoption of dry-stacking of tailings over a wet tailings dam in deference to Brazil’s well-founded suspicion of all tailings dams, remembering the latest Vale disaster follows the Vale-BHP owned Samarco disaster in 2015.

Things have changed a lot since the last PFS on Jambreiro and there are many moving parts to the economic outcome of the new PFS.

But rough calculations suggest that even allowing for iron ore prices to come back to pre-Vale disaster expectations for long-term-terms prices of around $US60-$80/t, Jambreiro could be good for $A20-$A25m in pre-tax operating cashflow.

That’s kind of interesting for a $22m company. But first Centaurus has to deliver the project.

Which Leonora-Leinster goldie spurned Vassie?

St Barbara (SBM) boss Bob Vassie had a fire-side chat on Thursday with the media after his Melbourne Mining Club presentation, which went down well with the 500 in attendance, with the help of some funny anecdotes.

Given he talked a lot about St Barbara’s $854 million (debt and equity) agreed takeover of Canada’s Atlantic Gold, and that it is all about the upside to come from Atlantic being the regional processing hub for all the gold along the historic gold belt in Nova Scotia, Vassie was asked why not Australia?

St Barbara’s Gwalia mine at Leonora still throws off heaps of cash but it is getting deeper and without a shaft, it takes 1.5 hours for the haulage trucks to get to the surface. While there is now a clear plan to continue using trucks, the production upside is limited.

That’s why most thought St Barbara would look into its own backyard for some growth, leveraging off its Leonora infrastructure to add in high-grade deposits and/or operations owned by others within a 100km or so of Gwalia.

But Vassie headed off to Nova Scotia instead, with Atlantic producing about 100,000oz annually from its central deposit, and with plans to bring in regional deposits to approach the annual rate of 250,000 oz needed to make the acquisition a good one.

Vassie revealed in his fire-side chat that WA was considered.

“I would also say that there is one thing that we chased and we would have liked it but they just won’t talk to us,’’ Vassie said, without saying who it was.

“People said that we can’t talk to you now because we are undervalued and we are going to be filling our value later. And that happens,” Vassie said.

“I am not sad about it. And we haven’t gone to Nova Scotia out of frustration.

“We’ve gone to Nova Scotia to fulfil our strategy – which I have talked about for two years now - and it ticks all the boxes, and it is in one of the better jurisdictions.”

Grab a map of the Leonora-Leinster gold (and nickel) belt and some likely names pop out as potentially being the one that “just won’t talk” to Vassie because they are busy working their way up the value chain.

Bellevue Gold (BGL) is one based on its fast growing resource positions, while Saracen (SAR) and Red 5 pop up because of their combination of resource growth and existing production.

Whoever it was, they might have been right to tell Vassie "not just now thanks," which says something about the growing confidence of the three named above. And who knows, Vassie might just keep at them.