CONFERENCE CALLER: African governments of all persuasions must resist the temptation to increase taxes during times of mining downturn.

That was the blunt message from Paladin Energy managing director John Borshoff, speaking in Perth on the first day of the 2013 Paydirt Africa Down Under conference.

“To us, this is a no brainer,” Borshoff said.

“We understand why the temptation exists – to increase taxes during mining downturn to retain revenue streams.

“But it is during these hard times with low commodity prices that miners have already cut costs where possible – just to survive.

“We still have high fixed costs which cannot be reduced, options to defer expenditure and optimise resource.

“Government and miners need to work in partnership.

“We need to learn to ride out the poor season, recognising the key benefit from a mine is from the relatively constant cost of production and the ‘revenue’ thus derived to the local economy.

“In this case, profit based royalties can be fairer and can help preserve a mining operations during bad times and can provide higher revenue to government during good times.”

During a wide-ranging presentation, titled “The changing mood in the global resources sector (what implications for Africa, its miners and developers”, Borshoff said it needed to be understood that the window of opportunity for mine development is often short and can easily be missed.

And he warned the climate for exploration, new developments and mine growth had changed.

“It’s not summer time anymore, but hopefully it’s not winter either – But we are in a tougher season” he said.

“Mines are becoming marginal with lower commodity prices (gold, uranium, nickel, rare earths, etc.

“We must respond to the environment which is thrust upon us.

“African can become even more competitive on a global scale having higher quality mineral deposits and much upside potential.

“Paladin will continue its commitment through good times and tough times to the African continent, and be ready to expand its operations with an upturn in uranium price.

“Just remember, a mine is like an iceberg – 90 per cent of its benefit lies beneath.

“The top 10 per cent is the profit, but the other 90 per cent is the engine room of the entire operation.

“Africa must do all that is can to ensure it supports as many mines as possible.”

Paladin Energy is a uranium production company with projects currently in Australia, and two operating mines in Africa (Namibia and Malawi).

THE BOURSE WHISPERER: Kibaran Resources (ASX: KNL) has signed a Memorandum of Understanding (MoU) with an un-named major European graphite trader for the sale of graphite material from the  Epanko deposit, located within the company’s Mahenge graphite project  in Tanzania.

 

Watch The Roadhouse’s interview with Kibaran managing director Andrew Spinks now.

 

Under the terms of the non-binding MoU, the mystery buyer proposes to purchase 10,000 tonnes of flake graphite concentrate per year, over a minimum 10-year period.

The unidentified suitor has completed its due diligence on both Kibaran Resources and the Epanko deposit, from which it has concluded the potential quality of graphite from the Epanko deposit is suitable to its needs.

Due diligence on the Epanko deposit included metallurgical test work and analysis of the recently completed Scoping Study, which was based on the maiden Inferred JORC Resource estimate of 14.9 million tonnes at 10.5 per cent total graphitic carbon (TGC), for 1,560,000 tonnes of contained graphite.

Kibaran boasted the key attributes of Epanko graphite to be:

–    Large and very large flake size – favourable distribution with 73.8 per cent in the plus-106 micron fraction and 21.6 per cent in the plus-300 micron fraction;

–    ‘Expansion’ capacity – material is considered suitable for ‘expanded’ graphite market;

–    High-grade – average of 10.5 per cent TGC in the Inferred JORC Resource; and

–    Low percentage of fines.

“The MoU agreement is a milestone event, providing Kibaran with significant independent endorsement of the quality and commercial appeal of the large flake graphite material identified at Epanko,” Kibaran Resources said in its ASX announcement.
 
“Importantly, it de-risks the path to development and commercialisation of the project, and the longevity of the agreement supports a strong long-term outlook for natural graphite demand – particularly for the large flake type.

“Both parties are now in the process of drafting a binding off-take agreement.”

Kibaran described its Dickensian benefactor to be a large sophisticated European graphite trader, which has been globally supplying end-users with natural flake graphite for various applications.

It has to date been sourcing graphite supplies mainly from China, however over the past two years, it has had potential new and additional sources of natural large flake graphite under investigation.

Following a worldwide review of graphite projects, Kibaran’s Epanko deposit in Tanzania was identified as a potential new source.
 

WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.

Aurizon Holdings Limited (ASX: AZJ)

FY13 result in line–with dividend surprise.

On Monday 19 August 2013 Aurizon management announced FY13 underlying EBIT of $754 million, up 29 per cent on the pcp, and largely in line with our expectations of $756 million.

The FY13 underlying NPAT was $487 million against our forecast of $485.2 million.

A final dividend of 8.2 cents per share was declared (pcp 4.6cps, forecast 7.0cps).

Investment case

While the result was largely in line with expectations, the higher dividend and commitment to a higher payout ratio were key positives. With increasing confidence in the transformation of the business, we see the next key catalysts for the stock as being the delivery of further growth initiatives, coupled with the potential partial sell down of the CQCN.

Outlook

Management has provided coal haulage guidance of 200 million tonnes to 205 million tonnes, or an increase of 3.2 per cent to 5.8 per cent on FY13. While modest, this growth is despite the loss of some Rio Tinto contracted tonnes to Asciano in November 2013. Consequently, we consider this a solid volume growth. Management also confirmed they have seen coal volumes continue to improve in August, following strong growth in July.

Commitment to timing of cost saving delivery

Management have given guidance of $90 million of cost savings of the $230 million total will be delivered in FY14, with the remaining $140 million-plus to be achieved in FY15. We see the market as increasingly confident in the delivery of the 75 per cent operating ratio, particularly with the scope to materially reduce labour costs, which is the largest contributor to the $230 million cost savings.

In our view, the announced timings are positive as they give further confidence in the delivery by management.

Earnings changes and valuation

We have made minor composition changes to forecasts in the forecast period. Consequently, our valuation and 12 month target price remain unchanged at $5.00 per share, giving a Neutral rating.

 

Citation Resources Ltd (ASX: CTR)

Citation Resources has an approx. 60 per cent working interest in block 1-2005, located onshore Guatemala in the prolific South Peten Basin.

The company recently flowed 37 degree API oil from its Atzam #4 well at an equivalent rate of greater than 1,000 barrels of oil per day.

Current production is restricted to 140 barrels per day due to storage constraints.

Several prospective zones remain untested.

Resource potential for Atzam is estimated at 20 million barrels (gross).

Fiscal terms in Guatemala are favourable, with operating netbacks of approx. 50 per cent of WTI.

The company is scheduled to spud a follow-up well, Atzam #5, in September 2013 and may also work-over two wells at the Tortugas Salt Dome, which flowed at historic rates of greater than 1,500 barrels of oil per day and proven 2P reserves of 0.6mmbbl have been certified.

Atzam – 20mmbbl Potential:

The 600bopd achieved on test at Atzam #4 was from a secondary target, with several other (potentially more) prospective zones remaining to be tested or behind pipe.

The implication is that the excellent result to date is just the tip of the iceberg.

An historic Independent Reserve and Resource Assessment has indicated 2.3mmbbl based on one well alone, with greater than 20mmbbl potential for the entire field.

Net to CTR’s working interest this represents value of up to $220m or $0.17.
 
Guatemala – Great Place to Find Oil:

The South Peten Basin, in Guatemala, is an extension of the prolific basins found in neighbouring Mexico; however, the region remains relatively underexplored despite a high success rate (58 of 153 wells drilled have produced oil).

Attractive fiscal terms mean that the 20mmbbl potential at Atzam alone could be worth approx. $370 million (gross NPV10 unrisked).

Tortugas – Proven Reserves:

The company has development potential at the nearby Tortugas Salt Dome where proven 1P and 2P reserves are estimated at 0.3mmbbl and 0.6mmbbl, respectively.

Two historic wells flowed at greater than 1,500 barrels per day on the field.

We estimate upside potential of approx. 4mmbbl at Tortugas.

Forward Work Program:

CTR has a busy 6 months ahead with upgrade of surface facilities and offtake likely to be completed within weeks.

Follow-up drilling at Atzam #5 is scheduled for September and two workovers are also possible by the end of the year at Tortugas.

The forward work program is now fully funded via a recent $6 million raise.

Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.

WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.

Peel Mining (ASX: PEX)

Peel Mining is an exploration company focused on projects located within Australia and New Zealand.

The most advanced project is Gilgunnia (PEX 50 per cent, CBH Resources earning 50 per cent) which is located within the Cobar Superbasin in central New South Wales.

The project encompasses two licences areas; ML 1361 which hosts the historic May Day polymetallic deposit and EL7461 which hosts the ‘Mallee Bull’ polymetallic deposit and the ‘4-Mile’ goldfield (comprising approx. 60 historic shafts).

At Mallee Bull, recent drilling has intersected multiple broad widths of high grade mineralisation including 84 metres at 4.42 per cent copper, 38 grams per tonne silver, 0.14g/t gold.

The orebody is interpreted to be open in multiple directions with ongoing exploration set to test possible extensions of the known mineralisation whilst also targeting the immediate area for potential new discoveries.

Peel also has a 100 per cent interest in approx. 3,000 square kilometres of exploration tenements within the Cobar Superbasin.

Two early stage prospects; Mundoe and Sandy Creek, exhibit similar geochemical and geophysical characteristics to Mallee Bull when it was at the same stage of exploration.

Polymetallic mineralisation has already been intercepted at both prospects with follow up drilling campaigns planned for the near future.

Peel Mining also has a strong pipeline of exploration projects prospective for silver, tungsten and gold, all at various stages of advancement, bringing welcome diversity to the portfolio.

The Cobar Superbasin project encompasses approx. 3,000sqkm of highly-prospective tenure and hosts numerous early stage and developed prospects.

The most advanced is the Mallee Bull prospect which is a shear hosted, steeply dipping ‘shoot like’ polymetallic deposit where recent drilling has intercepted some impressive results including 84m at 4.42 per cent copper (including 26m at 11.39 per cent copper) and 53m at 4.08 per cent copper.

Encouragingly, the grade of the mineralisation appears to be increasing at depth as well as still being open in multiple directions.

The Mallee Bull prospect is located within EL 7461 and together with the historic ML 1361 form the Gilgunnia project.

In May 2012, Peel entered into a staged farm-in agreement with CBH Resources where by CBH could earn up to a 50 per cent interest in Gilgunnia by spending a total of $8.33 million.

CBH has spent $5 million to date and recently agreed to spend a further $3.33 million (over the next 12 months) to move to a 50 per cent interest.

The CBH cash injection will provide the necessary funds to continue exploration around the Mallee Bull deposit.

Ore bodies of this nature are often ‘stacked’ and as such, Peel (and CBH) aim to concentrate exploration (geophysics/geochemical/RAB drilling) within the immediate area of the deposit.

Peel will also continue the testing of a large and highly prospective ‘off-hole’ EM anomaly identified at Butchers Dog (approx. 1km north of Mallee Bull).

 

Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.

IN THE LOBBY: The South Australian Chamber of Mines and Energy (SACOME) is the latest state-basd lobby group to claim a Federal minerals exploration tax credit (METC) scheme  is essential to inject some life into the exploration said of the mining sector and stimulate the Australian economy through job creation.

The METC is a tax reform initiative SACOME believes will enable Australian junior minerals exploration companies with no taxable income to voluntarily pass current losses on to Australian resident shareholders in the form of a tax credit.

This, it says, will provide a strong incentive for shareholders to commit capital to the exploration sector, making investment in the junior sector companies more attractive and addressing the lack of start-up capital in a competitive market.

SACOME has been calling for an exploration tax credit scheme since before it was first promised by the Rudd Labor Government in 2007 and subsequently dropped upon development of the mining tax.

“Many people do not realise that the junior sector is critical to resource development, being the ‘engine room’ needed to find the mineral resources upon which the economy is so dependant,” SACOME chief executive Jason Kuchel said.

“An METC policy will reinvigorate Australia’s mining sector, which has recorded a drop in share of worldwide exploration over recent years – from around 21 per cent of world exploration spend in 1996 to just 12 per cent in 2011.

“This decrease, combined with softening commodity prices and the constrained capital markets we are experiencing right now, is providing an extremely challenging environment for our junior resources companies trying to develop their deposits into economical projects.”

In 2008 SACOME councillor and taxation expert Alice McCleary developed an METC model suitable to Australia, based on Canada’s highly-successful Flow Through Shares scheme which has resulted in that country growing its exploration spend to 18 per cent in 2011 and hosting more mining companies than any other country in the world.

The industry preferred Australian model designed by Dr McCleary has also been adopted and championed by the Association of Mining and Exploration Companies (AMEC).

This model is based on Australia’s franking system and has several key advantages, including the minimisation of administrative and tax compliance costs, minimisation of risk for investors and minimisation of distortions between shareholders.

“The key aspects of the model are that it aligns with current taxation laws – minimising additional red tape; it provides a credit to shareholders which are akin to franking credits; it is only eligible to junior explorers; and it stimulates investment in greenfields exploration to discover the mines of tomorrow,” Kuchel said.

According to SACOME, the additional economic activity and taxation revenue created by the introduction of a METC would offset the cost of the scheme, and could potentially add billions of dollars to GDP.

This was supported by a recent KPMG report, which found that at a minimum, the scheme would create 534 jobs across the exploration and associated mining services sectors and contribute $231 million to GDP.

If some of the exploration resulted in viable projects, flow on effects could support over 4,000 jobs across the sector and up to an additional $2.2 billion in GDP.

 

 Source: SACOME.