How successful a mining company could Ferro Alloy Resources Ltd (LON:FAR) turn out to be?
There are several ways to answer that question. The first is that it’s already pretty well set up.
The company has been producing vanadium on site in Kazakhstan for some years now, and in the current pricing environment its operations look set to throw off an annualised US$10mln per year in free cash flow.
As far as junior miners go, in and of itself, that’s a pretty good marker for success.
But there’s more, much more.
At the moment the cashflow comes from treating secondary vanadium-containing raw materials like loaded catalysts used to extract vanadium in oil refineries.
But there’s also plenty of vanadium in the ground where Ferro Alloys is, and plans for extracting it are well advanced.
The project is known as Balasausqandiq project, and it’s big. Even the fully explored first orebody is big by vanadium standards and there are at least four more, big enough to boast a ballpark US$2bn net present value, as established by completed pre-feasibility work.
What really makes Balasausqandiq stand out though isn’t the size or the existing cashflow, but the unique nature of the ore.
That ore, which is almost unique in the world, looks set to be an order of magnitude cheaper to process than the standard vanadiferous titano-magnetite ores from which most vanadium deposits are produced.
So, although the net present value runs comfortably into the billions, it looks as though it will cost Ferro Alloys only about US$100mln to build a producing operation at Balasausqandiq, and that once up and running the production costs – at under US$2.00 per pound – will be at the bottom end of the lowest quartile.
None of this is new, mind.
Ferro Alloy Resources chief executive Nick Bridgen – a man with plenty of experience running mining companies in Kazakhstan – has been making the case for some time.
What is new is that Sir Mick Davis, the former chief executive of Xstrata and current leading light in mining private equity has cast his slide rule over the Balasausqandiq project and given it an overwhelming thumbs up.
“The Ferro Alloy Resources investment case is compelling, has an attractive risk profile and many qualities that are difficult to find in other mining investment opportunities,” Sir Mick said, after news broke that he was coming in to Ferro Alloys for an investment of as much as US$12.6mln.
“The Balausa project has the potential to become the lowest cost producer of vanadium globally and to deliver highly attractive returns to its shareholders.”
That’s quite some statement from a man who ran one of the biggest mining companies in the world for several years, and represents a real feather in the cap for Ferro Alloys.
Not surprisingly, the shares bounced on the news, and not just by a few percentage points. On the contrary, before Sir Mick’s endorsement was made known to the market the shares were trading at around 10p.
The current price is around 37p, so more than three-and-a-half times higher.
Of course, the share price strength isn’t just about Sir Mick’s endorsement of the project quality. His arrival has tangible benefits too.
For one thing, the new money means that Ferro Alloys will be able to get on and complete a full feasibility at a high quality, without experiencing any further funding pressures. If all goes well, Sir Mick will come on to the Ferro Alloys board as chairman, which in turn has its own implications when it comes to raising the capital required to get the project built.
Not that Ferro Alloys is about to become the Mick Davis show.
“The initial investments take him up to just over 20%,” says Nick Bridgen.
“That’s one of the attractions. We’re not giving away the whole company. But we now have adequate money and good credibility and we can proceed without scrimping and saving. The future is in our hands.”
So, in around six months or so, allowing a bit of give and take for the vagaries of the mining industry in the world of the virus, the full feasibility study at Balasausqandiq ought to be complete.
During that time the existing treating operation will continue to throw off cash, and Ferro Alloys will be sitting pretty from a financial position.
“Time is on our side,” emphasises Bridgen.
“There’s no black hole. We don’t have a burn rate, because the operation is making money.”
That dynamic means that when it comes to the eventual negotiation of finance, Ferro Alloys will be under no pressure but its own expectations of a good deal. And with Mick Davis batting on the same side, the chances of getting one, look very good indeed.
www.ferroalloynet.com
