breaking with tradition and going into product

August 23, 2010

Giralia Increases Its Iron Ore Resource Base, And Is Now Thinking Carefully About Breaking With Tradition And Going Into Production
By Our Man in Oz



When a company adds US$14 billion to its mineral inventory from a few months drilling you might reasonably expect investors to get a little excited. The fact that they didnt when Giralia Resources reported a big resource upgrade at its McPhee Creek project on July 30th tells a story about Australias iron ore industry. It really has little to do with whats in the ground, and everything to do with finding a transport solution linking the ore to customers.
And thats why Minesites Man in Oz reckons the market is missing the point about Giralia. Not only is it adding ore reserves at a remarkable rate, but it is also within sight of a transport solution that includes a route to port, as well as all-important space at the port. In other words, Giralia is in danger of frightening itself by actually going into production, a drastic departure from its traditional value-creating position of spinning off an asset into a new float.

Weve always had a very commercial focus on what we do, is how Giralias chief executive, Mike Joyce, describes the companys business philosophy, a fact underlined by a historic six ASX-listed spin-offs. This time, however, maximum value creation could come from Giralia taking the bold, and largely unexpected step, of going into production. Production is the possibility ahead of us, said Mike. Its never been done before in this group other than on a toll treatment basis way back in the 1980s. But the assets weve put together in the iron ore space are presenting some significant short-term development opportunities, though were always looking around for any way to make money out of this suite of assets.

Mike then adds a comment in his chat with Minesite that ought to have investors sitting bolt upright, and reaching for their Giralia file. Right now I reckon were everyones favourite dance partner because weve found deposits in good locations. Were getting inundated with co-development options and M&A talk, but if the port solution unfolds as we think it will then we have a chance to add significant value. The best deal for shareholders then becomes to drive forward to development with Mt Webber initially, and then look to grow from that point.

Analysing all seven direct shipping ore (DSO) targets that Giralia has on its books takes too long. The best approach is to recognise that the company has a long pipeline of projects and focus on those at the top of the list, and then factor in the all-important transport solution. First cab likely to leave Giralias rank is Mt Webber. This is a 75 per cent owned asset, with Haoma Mining holding the balance. It contains 40 million tonnes of ore grading 57.3%, or 62.3% on a new fangled measuring technique called calcined iron (CaFe), which is what you get after the rubbish is burned off. But using CaFe to report iron content is something Minesites Man in Oz believes should be ignored. Best to stick to the raw iron assays which, in the case of Mt Webber are excellent without the notional uplift.

If all goes to plan Giralia could have its Mt Webber project in production around this time next year at an annualised rate of two million tonnes. That tonnage will be sent by road train to Port Hedland where space at a new berth has opened up thanks to other projects falling over. Developing Mt Webber is not a heavy lift for Giralia. The deposit is located on half a flat-topped hill about 150 kilometres from Port Hedland, with the other half of the hill owned by Atlas Iron. Between the two companies a near-term mining operation is as close to a certainty as you can get, especially with the price of iron ore hovering around the US$130 a tonne mark. Even a forecast fall to US$100 a tonne means ore trucked from Mt Webber would still be at a gross margin of around US$50 a tonne which, even mining at a rate of just two million tonnes, leaves US$100 million a year in the bank for Giralia.

If Mt Webber is the entry point for Giralia as a producer, then McPhee Creek could be the asset which delivers the big bucks. Its also the source of the US$14 billion number cited at the beginning of this story. To understand how quickly that value has been created, consider a few numbers. Last December Giralia reported an initial resource at the 100 per cent owned McPhee Creek of 52.1 million tonnes assaying 56% iron (or 61.7% using the trendy CaFe reporting technique). Nice, but at a distance of 220 kilometres, further from Port Hedland than Mt Webber. Three weeks ago Giralia announced fresh numbers of McPhee Creek, 161.4 million tonnes, an addition of 109.3 million tonnes in little more than six months. Given the ruling iron ore price of US$130 per tonne that extra ore has a gross, in-ground, value of US$14.17 billion. Not bad for half a years drilling on one of seven projects.

Monetising whats in the ground is always front of mind at Giralia and, until now, spin off floats have been the preferred option. That might still happen, and other options are still open too. But two points indicate that this time Giralia will go all the way and actually maximise shareholder value by making the leap from explorer to producer. Firstly, the drilling at McPhee Creek is far from over. Work so far has only covered 2.3 kilometres of the main deposit, or between 25 and 30 per cent of the potential. As work continues Giralia is confident it is looking at an exploration target of between 250 million and 350 million tonnes, at least double what is currently in the bag. Secondly, there is the even more important opening up of a transport solution.

At Mt Webber there is a road transport option in place. Expensive relative to rail, the road trains currently running in the Australian coal and iron ore industries are still valid rail substitutes. Port access has been a sticking point, though, in Mikes words, we expect a bit of movement in the next month or so, and think its unfolding in our favour. The movement he is referring to is access to the new Utah Point berth at Port Hedland which is being developed to handle ore from a number of small iron ore and manganese miners. It seems that a number of proponents of that berth are falling away and its possible that the berth will be under-utilised, Mike said. Its still a bit muddy, but the ship loader is in place and the berth is going to open in a couple of months at about 50 per cent capacity. Long-term followers of the port access debate in Australia will recognise instantly that vacant space at a new berth is in the licence-to-print-money category.

Newsflow from Giralia, always brisk because of its multiple exploration projects, will develop a sense of urgency over the next six months. Studies into developing Mt Webber are nearing completion, and, with Utah Point shaping as a port option the first ore could be on its way to Asian customers in little more than 12 months. McPhee Creek will continue to generate drilling news. A recent example was an assay released on August 9th which showed 108 metres at 55.4% iron. Even better, the hole ended in ore, a clue to how easy it will be to hit the upper resource target of 350 million tonnes. And just for the record, coming along behind are Yerecoin, Western Creek, Anthiby Well, Beebyn, and other projects on Giralias books. All told, that little lot should provide plenty of excitement for a long time to come.