advfn sharetip frx19 Nov 2015 11:29
Buy the unloved Ferrex on its Aussie gold deal, says Robert Tyerman
Unloved West African manganese play Ferrex (LSE:FRX) is to pay up to £930,000 in shares to buy into gold production in Western Australia. The company intends to follow that with another ‘higher value’ deal before the end of the year. The UK-based company, whose shares have fallen from a 2011 AIM float price of 3p to 0.45p now, is to buy Chaffers Mining, a private gold mining concern which has a five-year agreement to mine the yellow metal at Paddington in the West Australian goldfields for Norton Goldfields, part of Zijin Mining, China’s largest gold producer.
Chaired by ubiquitous sector veteran Brian Moritz, Ferrex, now sporting a stockmarket value of £44 million, is making this move after making a strategic review, described by chief executive officer Dave Reeves, as ‘a long hard navel gaze’. Reeves, an Australian mining engineer and former luminary of Zimbabwe Platinum, says the company has decided ‘iron ore is not coming out of its depressed pricing bracket for a long time’ and intends to sell its existing iron ore assets, at Mebaga in Gabon and Malelabe in South Africa, while a company name change could be on the cards.
However, Ferrex still plans use cash derived from mining a hoped-for 20,000 to 30,000 oz. of gold a year at Paddington from the second half of 2016 to fund development of its flagship Nayega project in Togo, boasting an initial reserve of 8.48 million tonnes with 14% manganese. The company, which lost £1.9 million in the year to September 2014 and another £659,000 in the six months to March, is paying an initial £465,000 in shares for 100% of Chaffers, to be followed by another £465,000 in shares once production reaches an annual rate of 10,000 oz.
Reeves says the acquisition could ultimately give Chaffers’ vendors up to 11% of Ferrex, with two key directors, Peter Hepburn-Brown and Peter George, joining the Ferrex board According to Reeves, mining the Paddington gold leases could cost an average A$900 (£450) an ounce over five years, against a current gold price of A$1,510 an ounce, or US$1,078.67c, yielding handsome profits per tonne, helped by a weak Australian dollar, even after paying a 22% royalty to Norton and without the need for heavy capital spending, as the venture spends the first 2.5 years open-pit mining before going underground for more attractive grades.
But Nayega remains the prize and the Paddington money will go towards developing it for production. With a measured resource of two million tonnes at 17.1% manganese and claimed potential to produce 250,000 tonnes a year, while the overall resource estimate is 11 million tonnes at 13.1%, Reeves insists nitial capital costs will be ‘nowhere near’ the $15 million envisaged in the definitive feasibility study on the project.
Sentiment for the project and the shares would clearly b
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