AFRICAN exploration with a subtle twist
http://www.globemetalsandmining.com.au/news.php
IF YOU FIND THAT MINERAL exploration example interesting take another look and consider the investment case because unless the simple rules of mathematics have changed, Globe’s share price is about half what it should be.
One explanation is that the stock, like so many Aussies in Africa, is being hit by the “African discount”, a sort of collective concern ingrained in some Australian investors towards any company that does business on the “dark continent”.
“Not so”, says Globe chief executive, Mark Sumich. “It’s the niobium. Few people understand what it is, or the remendous opportunity we have to become a world-class player in the niobium business.”
More about the metal later; right now it’s sufficient to know it is essential in making certain types of speciality steels, and demand is strong – which means so is the price. First, the investment case, which revolves around an August 19 deal in which a multi-disciplined South African engineering firm agreed to pay $US10.6 million for a 25% stake in Globe’s flagship Kanyika project in Malawi. Thuthuka Group’s entry price will fund 85% of the stimated cost of a bankable feasibility study (BFS) into Kanyika, which started the day the deal was signed and is due for completion in December 2010.
But, what investors should be looking at is the financial equation that trails behind Thuthuka.
If the South African engineer is prepared to pay $US10.6 million for 25% of Kanyika then it follows logically that the entire project is worth $US42.4 million at this stage of its exploration and evaluation – which also means that a 75% share (what Globe now has) is worth $US31.8 million ($A35 million).
The question then needs to be asked, how is it possible for Globe to be trading on the Australian Securities Exchange at around 20c a share (in early November), a price that values the entire company at roughly $20 million?
Looked at another way, to use a geological term and magnify the anomaly, it can actually be argued that Kanyika has a net present value of $US200 million, assuming the project can be developed at its currently estimated capital cost, achieve its production targets and the price of niobium stays up.
“I understand the numbers,” Sumich said. “There’s no question that the value in Kanyika is not being recognised, yet. What is equally interesting is that the calculation is based on one of our projects in Malawi, with no recognition of Machinga (a rare earths, niobium, and tantalum project) and the Mount Muambe fluorite project.”
Interesting as Machinga and Muambe might become, the value today lies in Kanyika and its niobium, especially given strong worldwide demand for high-strength steels of the sort used in bridge construction – and other major projects of the sort favoured by government stimulus packages in the wake of the global financial crisis.
The key facts underpinning Kanyika, with further exploration likely to expand the resource numbers being used in the BFS, include:
• a mine and processing facility capital cost of $US152 million;
• three product streams, with 75% of the value in niobium, 15% tantalum and 10% uranium;
• a price for the niobium of $US39 a kilogram, pointing to annual niobium revenue approaching $US117 million;
• capital cost payback achieved in two years of a project with a minimum life expectancy of 20 years; and
• ongoing exploration considered highly likely to double the current indicated and inferred resource base of 55 million tonnes of ore.
Sumich told RESOURCESTOCKS a revised resource statement on Kanyika was expected in early 2010, although from an investment perspective there seems to be sufficient known material in the ground to focus on the next steps in the project, such as metallurgy and process design, and the production of sample product for potential
customers.
The nature of projects producing speciality metals that lack a company profile 58 malawi globe metals & mining
“Interest is high because the world market for niobium has been growing strongly over the past 20 years and there is a limited number of sources.”
MARK SUMICH
globe metals & mining AFRICAN exploration with a subtle twist.
What you see is not always what you get, demonstrated in duplicate by taking a close look at Globe Metals & Mining, an Australian explorer which went looking for uranium and found niobium instead.
JANUARY/FEBRUARY 2010 RESOURCESTOCKS 59
“terminal” market such as the London Metal Exchange, is that they generally require an offtake and funding agreement with a major consumer, rather than rely on bank finance.
Writing a deal with a cornerstone customer is one of the priority jobs for Sumich as Thuthuka gets on with its assigned jobs in the BFS, including mine design and planning, along with studies into metallurgy, social needs, environmental protection, and infrastructure availability, such as water, power and transport.
Another priority is cementing Globe’s relationship with the government of Malawi. The task should not prove onerous given the nature of the country which has English as the official language, British law at its core, and an open door to miners which have included Australia’s uranium leader, Paladin Energy, at its Kayelekera uranium
mine.
Paladin’s deal, which saw the government of Malawi allocated a 15% stake in Kayelekera, has almost certainly provided a template for Globe.
On the offtake (and associated funding) talks Sumich said Globe was already getting inquiries from potential partners.
“Interest is high because the world market for niobium has been growing strongly over the past 20 years and
there is a limited number of sources, but all potential customers will want to see samples of what we propose to
produce,” Sumich said.
“What’s adding to their interest is the rapid growth in niobium consumption. Between 2003 and 2008, global output more than doubled from 30,000 tonnes to 70,000 tonnes, with the bulk of that coming from one country, Brazil, which accounted for 83 per cent of world production.
“There is little doubt that consumers want to achieve a diversity of supply to prevent any severe shortfall in case of disruption at a single source.
“Canada and China are the other producers of niobium, but an additional source would be very welcome in the market.”
With demand growing strongly, and a handful of operating mines, it seems highly likely that Globe will have a choice of offers from offtake partners when it completes its BFS, and delivers product samples to potential customers. Globe’s two other projects in Malawi are playing second fiddle to Kanyika, but do have blue-sky potential, which means the stock is not a one-trick pony.
Machinga, in which Globe is acquiring an 80% stake, has revealed encouraging rock chip samples grading up to 2.64% total rare earth oxides, a brew of odd elements (which sell for high prices) such as dysprosium, a key ingredient in the engines of hybrid cars, magnets and nuclear fuel rods. Exploration continues.
Mount Muambe fluorite is another recent addition in which Globe can acquire up to 90% of a project which produces hydrofluoric acid, which has a range of industrial uses, including the production of niobium – potentially a neat example of vertical integration.
Interesting as the second-fiddle projects might become, all eyes today are on Kanyika, and the sequence of hurdles to be cleared over the next 12 months.
These include completion of the BFS, negotiating a deal with the government, producing niobium product samples for potential customers, and securing an offtake (and funding) agreement.
As news flow builds and investors develop a greater comfort level with niobium (and Africa), Sumich can expect greater recognition for Globe.
– Tim Treadgold
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