ONE OFF THE WOOD: Korab Resources’ (ASX: KOR) 100 per cent-owned Winchester magnesite deposit is located within the company’s Batchelor project, located near the town of Batchelor, some 85 kilometres south of Darwin.
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Results from a recently-completed pre-feasibility study have demonstrated the project to possess impressive economics combined with the ability to potentially generate pre-tax earnings of $395 million and after tax profit of about $275 million over a 14 year mine life.
RR: The Winchester project seems like new news to the market but you have actually been involved there for quite a while.
AK: We acquired the Batchelor project in 2007, which contains the Winchester deposit.
Winchester had been previously taken to pre-feasibility in 2001 by a previous owner looking to produce magnesium metal, which turned out to be a more complicated and expensive undertaking than they were hoping for.
In 2005 we established a Joint Venture for the project, under which we carried out enough exploration to convince us to buy them out of the project in 2007.
The economics for a smelting operation prove to be prohibitive, so we looked at the project as a Direct Shipping Ore (DSO) operation.
From there we went looking for funding and offtake agreements, which has all culminated in the last couple of months with the signing of an offtake agreement with Rescap Investments for 25% of production from the quarry. Rescap also wants to provide financing package for capex and working capital. The financing part is currently going through due diligence process.
RR: Korab is looking at producing magnesite as opposed to magnesium metal. Magnesite is mineral that is probably not all that well known by market followers. Could you give us a brief rundown on what it is?
AK: Magnesite is magnesium carbonate, which is used to produce magnesia [magnesium oxide]. Most of magnesia is used to produce refractory bricks to line the inside of steel furnaces.
It can also be used as an additive to steel to remove sulphur. Some of it is used to produce magnesium metal used as alloy in car making. Magnesia is also used in construction industry to make magnesia cement – which is stronger than normal cement. There is also some use for magnesia in agriculture – Magnesia really does have quite a range of uses.
RR: For a mineral that a lot of people would probably be unfamiliar with, it does have plenty of applications?
AK: There is a very big market for it, primarily because it is the best – and the cheapest – element to use for a variety of purposes.
For example, there is nothing that can replace it – for the same cost – in the manufacture of refractory bricks for steel furnaces.
As long as people are making steel and there is demand growth in the steel market, there will be demand for magnesite.
RR: The expanded pre-feasibility study you have just finished delivered some pretty good news?
AK: It demonstrated that we have a project that can be developed in approximately 12 months with a capital expenditure of around $4 million.
It is a very simple project, so much so I would refer to it as a quarry rather than as a mine.
It can be developed in stages, in which case the pit will be stripped in stages, bringing down the stripping costs from approximately $1.2 million to around $600,000.
That means the capex is quite flexible – it could end up being as low as $2.5 million if we were to develop the project in stages.
RR: The PFS also showed low costs involved?
AK: Because it is essentially a quarrying project we will be drill blasting the mineral and then crushing and screening it, our costs are about $20-$30 per tonne depending on annual output.
Access to port is 85 kilometres via sealed road on the Stuart highway to East Arm Wharf in Darwin. Port loading facilities that are available there can accept Panamax class ships. All of which makes our project very competitive when compared to others.
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Our all in costs when you add haulage and port loading will probably be around $35 per tonne if quarry runs at full capacity. If the quarry runs at 25% capacity the cost will be around $45 per tonne. The current prices for magnesite are around US$80. So with an exchange rate of 80 cents we will be looking at a selling price of about $100.
That is a fairly significant profit margin. At full capacity, we anticipate making an after tax profit of around $22 million a year over a predicted quarry life of 14 years. This is after the payment of royalties and taxes and so on.
At the moment it looks like we will be staring at a lower level than that – approximately one quarter of capacity – eventually ramping up to full capacity. But we could start at the full capacity if at the time of star-up we have offtake agreements in place for the full output.
RR: It is pretty much a company making project for Korab, isn’t it, in that you are a relatively small-cap company, around $6 million with a project that has potential to produce after-tax cash flow of around $275 million?
AK: Overtime, I’m confident the market will re-rate the company. I think the key focus for people will be the cash we will earn, not so much as the product we are producing.
When investors look at a business they should be considering whether it is going to be able to pay dividends.
Is the company going to be in the position to generate sufficient income to do so?
Is it going to be able to operate at such a margin that it can sustain operations even if there is a drop in price for its product?
Does it operate in a sector where the price for its product is stable?
Our project ticks all those boxes in the affirmative column, because magnesite is usually sold on long-term agreements rather than on the spot market.
The pricing doesn’t change much – any variations are negligible – so the risk from market pricing perspective is low and our profit margin is very high. As a result the project should generate a lot of cash.
If we find ourselves in a position allowing payment of dividends, we would be very interested in doing so.
With a $6 million market cap, a company that could potentially pay dividends from an annual after tax profit of $22 million, is a very attractive proposition for investors.
RR: Is that what differentiates Korab from other mining companies?
AK: I would be looking at Korab as not being a typical mining company that generates a profit of say $22 million per annum and then uses that money for acquisitions, expansion or for exploration.
We don’t have to do that. We would be basically in the business of generating cash flow.
As for the others – they need to spend a big part of their free cash on maintaining infrastructure, expanding production or maintaining their presence in the market.
We don’t. All we need to do is make sure that when we mine and haul our magnesite, we do it as cheaply as possible.
RR: Sometimes the simplest things in life are the best aren’t they?
AK: They’re often not the most exciting, but they potentially can be the most profitable.
Email: info@korabresources.com.au
Website: www.korabresources.com.au
