Now for something quiet different – bauxite in NSW & TAS
Bauxite Australia Limited (ASX: ABZ) has one bauxite project with resources at Inverell in New
South Wales; and there are other projects where exploration is advancing at a pace in
Queensland.
The company has almost reached the stage where it is appropriate to begin making marketing
presentations to potential customers. The company is planning to begin its marketing effort in
3Q10.
The company will initially target potential customers in Asia with a focus on China, but its
announcements indicate that there are other interested parties. At a later stage the company
would like to supply refineries at Gladstone, central Queensland. Other ways of commercialising
deposits with high transport costs are being considered. Bauxite is usually thought of in
association with the tropics. The best known deposits in Australia surround the town of Weipa in
the Gulf of Carpentaria.
It is not widely known that bauxite deposits are dotted down the eastern side of Australia, some
with better grades and thicknesses than Weipa, but the tyranny of distance can be a problem.
ABZ has used quality, proximity to infrastructure and accessibility as the key criteria for the
selection of its exploration licences. The company’s areas of interest are shown in the following
figure supplied by the company.
The company has announced a maiden resource of 22 million tonnes at its Inverell prospect in
northern New South Wales. Only 10% of the prospect has been drill tested and the company
believes that exploration will result in a big increase in the size of the resource. The deposit is
5-9 metres thick, occurs at surface and is relatively uniform – a simple mining proposition.
In the medium to long term the company sees potential to establish three large-scale bauxite
processing facilities in Queensland, New South Wales and Tasmania. Direct shipping bauxite
would be exported to customers in Asia. In the medium term, any of these projects could
become the basis of an alumina refinery project.
The discovery of bauxite in Tasmania is particularly interesting because the material is close to
road, rail and export ports and extends over large areas. However, at this point in time the
deposits have not been evaluated and it is not known if there is any depth potential. Drilling is
scheduled to begin in 4Q10.
Australian Bauxite Limited only has a market capitalisation of A$34.2 million. The
company has around A$5 million in cash which is adequate for the next two years.
The market is only valuing the company’s bauxite assets at around A$29 million. As
the company moves forward we would expect to see step increases in valuation.
It is too early to put an option value on the company but the current asset value does
seem too low.
SHARE PRICE CHART AND COMMENT:
Turning to the charts, ABZ broke out from a wedge formation in play since inception. This
resulted in a surge in price, reaching a recent high of 41 cents on July 19. The short-term trend
has switched to the upside, coupled with rising 50 period moving average (green line), bodes
well for a continued move higher towards the December 30, 2009 high of 49 cents over the
broader
term.
STATE OF PLAY
Australian Bauxite Limited is moving down the path to make the transition from successful
explorer to a producer of high quality product.
The corporate structure is tight with a free float of only 30 million shares. The largest
shareholder is Hudson Resources Ltd (ASX: HRS) which owns 55.4 million shares that are
escrowed for two years. Hudson Resources has just converted an A$1.62 million convertible
note into 5.4 million shares. The total number of shares on issue stands at 85.4 million.
The company is led by CEO Mr Ian Levy. Mr Levy has a wealth of management experience with
many companies that include Western Mining Corporation and Gympie Gold. He was former CEO
of Allegiance Mining and has been involved in the development of many mining projects. He is
Chairman of Dynasty Metals Australia and a former Director of Gloucester Coal.
The other executive Director is Mr Jacob Rebek with a distinguished career as a geologist
including Chief Geologist of CRA (Rio Tinto). He has led teams that made discoveries of zinc,
copper and gold. Since 2006 he has led a small team that discovered numerous deposits of
Bauxite for Hudson Resources that now form the asset base for Australian Bauxite.
The Chairman is Mr Peter J Meers who has broad business experience across a range of
industries. His career includes 25 years with ANZ Bank Limited working in various portfolio
roles. He is currently Executive Chairman of Hudson Resources.
The company has a good management team with the necessary technical and management
skills to lead the company from being an explorer, through the development phase to becoming
a producer.
Part of the company’s strategy has been to ensure that there are multiple projects. One of the
reasons for this is to make sure that all the apples are not in one basket should a problem arise
with a landowner, or there is an issue with native title or a change is made to environmental
legislation.
Inverell - New South Wales
ABZ has announced its first JORC resource of 22 million tonnes at Inverell in northern New
South Wales. Only a small part of EL 6997 has been explored and the target is 200-300 million
tonnes.
The bauxite is gibbsite-rich; gibbsite is a high grade aluminous mineral with the formula
Al(OH)3, and makes the best feedstock for an alumina refinery. The bauxite is 5-9 metres thick,
which is thicker than most deposits in Australia. This is an important point because there are
environmental issues stripping off large areas of a thin veneer and thick deposits reduce this
potential problem.
Beneficiation tests have been positive and the bauxite is amenable to simple screen upgrading
to a premium product that is suitable for export.
The in-situ grade at Inverell is 38.1% Al2O3, 5.9% SiO2 and 28.1% Fe2O3; LOI (loss on
ignition) is 22.2%. However, screening increases the grade of Al2O3 to over 40%, but
importantly the content of SiO2 falls to below 3%.
The next figure taken from ABZ’s web site shows the location of EL 6997.
On this exploration licence the bauxite was developed from weathering Tertiary Basalt and
forms a horizontal layer. The licence covers 297 square kilometres and is located 20 kilometres
northwest of Inverell. Inverell has a skilled workforce and engineering services that supported
the tin and sapphire mining industry for many years.
EL 6997 is 90 kilometres northwest of Guyra, which in turn is between Glen Innes and Armidale.
The railway used to be active to Guyra, mainly servicing the abattoir. Bauxite could be trucked
to Armidale and then railed to Newcastle. Trucking 120 km to Armidale and then 450 kilometres
rail to Newcastle is unattractive at present bauxite prices.
One solution to the high cost of transportation from Inverell would be the construction of an
alumina refinery, perhaps in Southern Queensland to treat bauxite from Inverell and the
company’s deposits west of Brisbane. This will be investigated and needs to involve a major
partner.
Perhaps the Aluminium Company of China (Chalco) might be interested in a smaller project
after deciding no to go ahead with the Aurukun bauxite project in North Queensland? Inverell
bauxite is attractive because of its low silica content.
Another drilling program was completed in June 2010 and analyses should be completed in
August. Government approval has been given for a 780-hole drill program which ABZ has three
years to complete.
Hampton - Queensland
Two deposits are being actively explored in Queensland; Hampton (EPM 17790) and Binjour
(EPM 18014). A new deposit has recently been identified at Haden (EPM 17830) which is 40
kilometres north of Toowoomba.
At the end of 2Q10 125 drill holes for a total of 1,367 metres had been completed at Hampton
which is located around 150 kilometres west of Brisbane. The bauxite occurs in at least two
deposits, Geham and Pechey. The Geham deposit seems to be a fairly consistent horizon whilst
the Pechey deposit has two layers. The deposits average 4-5 metres thick with a maximum
thickness of 13 metres. The company is waiting for the return of assays which are anticipated
soon. The potential for the Pechey and Geham targets is a combined resource is over 100
million cubic metres of in-situ bauxite.
The following figure taken from ABZ’s web site shows the Hampton and Haden licence areas.
Hampton is relatively near infrastructure than Inverell is. The regional centre of Toowoomba is
only 25 kilometres from Hampton and from Toowoomba there is a railway to Brisbane. Another
option might be trucking 135 kilometres to Brisbane port.
Other Queensland
A reconnaissance drilling program of 57 holes for 1,142 metres has been completed at the
Binjour prospect and a second drill program was completed this month. Binjour is about 125
kilometres southwest of the port of Bundaberg. The thickness of the Binjour Plateau bauxite is
similar to Hampton and exceeded expectations. Assays have not been returned from this
project either.
Tasmania
Earlier this year the company lodged applications for eight new exploration licences in northeast
Tasmania. These new licences cover a large area of 1,441 square kilometres.
Bauxite extends over a large area and if there are economic deposits they are close to freely
accessible rail and port.
Drilling is scheduled to commence in 4Q10. The thickness of the bauxite horizon is unknown.
Surface sampling has started and the assay results from the best results have been
encouraging with available Al2O3 between 35% and 51%. Reactive silica values range from
below 2% to 6.2%, and iron ranges between 7% and 20%.
A sample assayed from the Deloraine prospect in EL 9/2010 compares favourably with gibbsitic
bauxite from Gove with available Al2O3 above 51% and low in reactive silica, less than 3%.
Tasmania looks promising and ABZ has found occurrences of high grade bauxite with favourable
logistics. To what extent there might be high grade reserves is yet to be determined.
The Tasmanian licence areas are shown in the next figure taken from the company's web site.
Strategy
Australian Bauxite is keen to establish an early cash flow from the production of direct shipping
bauxite. This approach requires minimal capital for a simple operation of digging, screening and
shipping. The company has several prospects with direct shipping ore but deciding where to
start in terms of transport economics will take time to figure out.
Moreover, the company believes that it has the potential to produce a premium grade product
which attracts a higher price that would help alleviate the high cost of transport for some of its
larger project areas.
The company will test the waters to seek a potential partner to help finance the construction
direct shipping projects and potentially, a new alumina refinery. This would be sure to raise the
ire of the Australian Greens that have done a deal with Labor and whom look set to control the
Upper House in five weeks time. An alternative would be to shift refining to Indonesia where
tropical forests would be threatened.
Australia has aluminium smelters in Tasmania, Victoria, New South Wales and Queensland so
there are potential domestic customers for a new supply of alumina. The initial focus will be on
bauxite sales to customers in Asia but there is potential for sales of alumina to refineries in
Gladstone.
It takes 4-5 tonnes of bauxite to make 2 tonnes of alumina and finally 1 tonne of aluminium.
Competition for high grade bauxite is rising apace largely because of the emergence of China as
a major producer of aluminium.
The thesis behind the company’s focus on bauxite is that there is strong growth in demand for
bauxite and alumina. Many large bauxite deposits are tied to refineries and smelters that acted
as a barrier to new entrants. There is strong competition to secure supplies of Australian
bauxite from all corners of the world. China has been a late developer and produces little
bauxite of its own.
China has established a market price for bauxite as it has done for iron ore. The suggestion is
that as Chinese demand for bauxite grows, that the price will have to increase to ensure reliable
supply. This seems quiet likely and US$10-20 per tonne increase would have a profound impact
on some of the company’s potential projects. ABZ is highly leveraged to world economic
recovery and expansion in Asia.
Summary
Bauxite is a low value product and sells for around US$50 per tonne. Its low price compared
with iron ore and some coals means that it cannot be transported great distances. Because the
material occurs at surface the mining cost is low. After any beneficiation costs and rehabilitation
costs an operating margin of 10-15% seems possible. However, the price of premium bauxite is
expected to rise driven by strong growth in demand and so expand producer margins.
A major partner would help the company succeed and this would be very acceptable to
shareholders. As an example, a joint venture with Chinalco would be welcomed by investors.
We do not consider Australian Bauxite as a short term play; rather the company is a
long term investment based on a thesis for improving demand for bauxite and higher
prices.
We see merit in the company’s bauxite strategy and see the potential for step
increases in valuation. The path forward might be a little rocky at first but looking
into the future, we expect shareholders to be rewarded from the company’s current
low valuation.
We see Bauxite Australia as a good fit for a portfolio of junior resource stocks with growth
potential.
Bauxite Australia is a speculative play on aluminium and there is a lot of work to do
before the first tonne of product is shipped overseas. Be that as it may, with a
valuation of only A$34.2 million, and with A$5 million in the bank we see limited
downside.
Australian Bauxite Limited is recommended as a BUY for all Members.
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