re: Ann: Another major increase to McPhee Cre... December 09,...

re: Ann: Another major increase to McPhee Cre... December 09, 2010

Giralia Resources Adds Some Serious Tonnage To Its McPhee Creek Iron Ore Project In Western Australia.

By Our Man in Oz / www.minesite.com

Three strange events have occurred in Australia over the past seven days. It has rained. England won a cricket test, and an emerging miner added US$7 billion worth of iron ore to its inventory and promptly had A$20 million knocked off its stock market value. The less said about the rain and the cricket the better. So on, quickly, to the case of Giralia Resources, which added 50 million tonnes of high-grade iron ore to its inventory, moved closer to becoming a miner, and then suffered an apparently inexplicable share price fall.

Inexplicable because so much seems to be running in Giralia's favour. The price of iron ore is going through the roof, and bids are flying about for undeveloped resources, including Xstrata's grab for Sphere and the bizarre double offer for Brockman Resources and FerrAus from a Hong Kong/Chinese business better known as a supplier of airport limousines and taxi services. What game Wah Nam International thought it was playing is anybodys guess, though it certainly wasn't cricket. Inscrutable, yes, and perhaps even unscrupulous.

Whatever the reason for Wah Nam's raid, it only adds to the growing belief that iron ore is going to get a lot hotter over the next six to 12 months now that the Indian state of Karnataka has banned exports and the newly-important spot market price for iron has soared to a record US$170 a tonne. The reason the spot market is suddenly important in the iron ore business is that the big miners, BHP Billiton and Rio Tinto, have successfully convinced the world's steel mills to use it as a reference for setting the quarterly contract price. This contract price, incidentally, is tipped to rise by nine per cent for the March 2011 quarter, to a record US$140 per tonne.

Hold that new figure of US$140 in your thoughts, and then apply it to what Giralia reported last Friday - a 50 million tonne increase in the iron ore resource at its McPhee Creek deposit in the Pilbara region of Western Australia. In terms of in-situ value that extra ore is valued at US$7 billion, meaning that the value of the total 260 million tonnes that Giralia has in the resource category at McPhee Creek has now soared into an almost meaningless stratospheric in-ground value of US$36.4 billion. The obvious fault with this dollars-in-the-ground argument is that no sensible investor would use such a valuation, unless there was a proven way of converting in-ground ore into a bankable form, and that means a mine, transport, and export plan.

And it's in this regard that the current mispricing of Giralia starts to become apparent. Giralia is working up a transport and export strategy which could see it join the ranks of iron ore exporters as soon as next year. The start-up rate production could be as low as two million tonnes a year, but it would grow quickly because Giralia is working on plans for road and/or rail haulage, and on ways to link McPhee Creek with its other top-ranked iron ore deposit, Daltons.

"We're now looking at operating synergies between McPhee and Daltons," said Giralia chief executive, Mike Joyce. "Earlier, we couldn't see that, because they're on different arterial roads to Port Hedland. We're now of the view that there is an opportunity to link the two, either by private haul road, or ultimately with rail." Talk of a rail option was not, until recently, taken seriously in the Australian iron ore sector, because the big miners refuse third party access to their lines. But, due north of McPhee Creek is the start of the rarely used Goldsworthy line of BHP Billiton which is currently the subject of detailed talks between BHP and Atlas Iron. If those talks lead to the re-opening of the Goldsworthy line Giralia will have a seriously big business on its hands.

"We're not going to wait for any rail access agreement, we're keen to get started as soon as possible with road haulage," Mike said. "Between McPhee and Daltons we now have substantially more than 300 million tonnes of high quality ore and if we can put them together with an infrastructure corridor than we're looking at a business exporting 15 to 20 million tonnes a year. There are a number of ways of building the business, perhaps starting with road haulage, but we're also talking to infrastructure providers who want to get a toe-hold in the Pilbara, and have been waiting for someone to provide a catalyst which might drive the infrastructure build."

It's the speed at which Giralia is pulling together its Pilbara iron ore mining plan, coupled with the evolution of new transport solutions, including possible new haulage roads, a hub for pooling ore, and a potential plan to hook up with BC Iron, which is adding to interest in the company. But in a way the hard numbers speak for themselves - last month, when Giralia finalised a scoping study on McPhee Creek, which revealed a 47.4 per cent internal rate of return (IRR) after a capital outlay of A$129 million, it used an iron ore price of US$70.18. That iron ore price is exactly half the expected March quarter contract price. Plug in the new contract price and the IRR rises substantially. Quite a mouth-watering prospect.