Gunson Resources Funding Decision Required

While there has been a broad based correction in the resources sector in recent months, on the back of heightened concerns that growth in the major global economies is stalling, one sub-sector that is firing on all cylinders is the mineral sands industry.

Indeed, mineral sands industry leader Iluka Resources recently announced stunning price increases relating to mineral sands pricing agreements for the second half of 2011.

Iluka has negotiated a staggering 70-75% increase relative to its first half prices for both rutile (US$1,300/t) and synthetic rutile (US$1,000/t). At the same time it has negotiated a still impressive 35-40% increase to around US$2,100/t for its zircon sales. Placing this in perspective, at the end of 2010 zircon pricing was around US$1,000/t!

Against this backdrop, emerging mineral sands players have probably never had a better time to try and bring new production on line. One such company is Gunson Resources – a junior resource company that primarily provides leverage to the zircon market via the potential development of its Coburn mineral sands project in northwest of WA, as well as a range of earlier stage base metal exploration and assessment opportunities.

It has not been smooth sailing for the potential development of Coburn so far. Back in 2007 a strategic partnership was formed with China Triumph International Engineering Company (CTIEC) to support a joint venture development. However, this deal fell over before any meaningful engineering and construction activities were achieved.

Subsequently, Gunson completed a Definitive Feasibility Study (DFS) in late 2009 and this has been recently revised to incorporate the current economic environment. This includes significant improvements in pricing expectations for mineral sand products, partially offset by a 6% increase in capital cost requirements – largely attributable to electrical and labour costs.

Overall, Gunson has reported a positive revision for the Coburn project NPV in the updated DFS, which has increased by some 39% to approximately A$300m based on TZMI pricing forecasts and an 8% discount rate. The IRR has also increased to 32%. Significantly, the recent pricing outcomes achieved by from Iluka have not yet been factored into the perceived NPV of the Coburn project and we anticipate it won’t be long before Gunson updates its numbers to reflect these new price points.

However, we caution readers that the above analysis assumes a 2.5% royalty rate compared to the 5% rate currently prevailing in WA. Gunson is prosecuting the case for a reduction to 2.5%. Using the current 5% gross state royalty, the April 2011 NPV and IRR would be A$274 million and 29.7% respectively.

Nevertheless, the re-rating of Coburn’s valuation undoubtedly bolsters the potential for the company to belatedly finalise funding arrangements for the project. Indeed, market conditions for mineral sand producers have never been better and the forecast is for zircon and rutile prices to remain at elevated levels into the foreseeable future. Against this backdrop management will never get a better opportunity to extract value for their shareholders.

Gunson’s Coburn tenements cover around 1,200 sq km of fossil coastline, some 700km north of Perth and 250km north of the regional centre and port of Geraldton. The project is adjacent to the Shark Bay World Heritage Property. The delineated mineral sand deposit, known as the Amy Zone, occurs over 35km of strike length, is up to 3km wide and is generally 10-50m thick.

Source: Gunson Resources

The project is predominantly covered by granted mining leases and has key environmental approvals in place covering the southern two thirds of the property, supporting timely development once funding is in place.

Gunson has undertaken a number of drilling campaigns at Coburn since 2000, most recently completing a program comprising 166 holes (3,837m) designed to test for ore extensions to the south east of proposed open Pit E and to upgrade the inferred resource in the northern third of the project area.

Within the project area, JORC-compliant ore reserves of 308Mt averaging 1.2% heavy minerals have been delineated. Zircon comprises 23% of the heavy mineral suite, high titanium ilmenite (61% TiO2) 48%, rutile 7% and leucoxene 5%. These reserves are sufficient to support a mine life of 17.5 years at a mining rate of 17.5Mtpa.