conceptual modelling should be banned imo, page-83

Shock and ore as Epsilon frenzy takes hold
Email Print Normal font Large font AdvertisementMark Hawthorn
May 22, 2008

THE market has seen few frenzies like it — mineral sands explorer Epsilon Energy, which opened at 17¢, was up an extraordinary 410% by lunchtime — touching a high of 87¢ in the morning session.

Sanity finally prevailed and Epsilon's directors called a trading halt with the stock at 68¢ a share, up a hefty 300% for the day and shattering the previous closing high of 56¢.

Pity the poor sod who bought 400,000 shares at 87¢ each not long before the trading halt was called — sleep must have come with some difficulty last night as he pondered what Epsilon might announce next.

What sparked the trading frenzy was an investor briefing at which Epsilon announced an "exploration target" of 1 billion tonnes of iron ore for its wholly owned Mardie project in the Pilbara.

For a company with just $1.4 million of cash in the bank, a market capitalisation of $16 million and 42 million shares on issue, news of a possible 1 billion tonne iron ore find sent the share price soaring. On a normal day, Subiaco-based Epsilon is lucky to break trading volume of 25,000 shares. By yesterday's enforced close, more than 6 million shares had changed hands.

It was certainly good news for Epsilon's founders, directors and associates, who together own 30% of the 42 million shares on issue.

The company was spun out of nickel explorer Heron Resources in 2006, floated at 20¢ a share and holds a portfolio of seven projects across four Australian states. Scimitar Resources director Matt Gauci is managing director while former Rio Tinto executive Bruce Larson is the company's chairman.

Despite the quality of the board, not all are happy with how the Mardie news reached the market.

The Epsilon investor briefing was titled "1 billion tonne Pilbara iron ore target". At the briefing, brokers, analysts and investors were told that the Mardie project's geology was "comparable" in both size and quality to the nearby Australasian Resources-owned Balmoral South deposit,

which has a defined resource of 1.1 billion tonnes.

Those at the briefing were told that an "independent report" suggested Mardie's magnetite ore quality was "similar" to that of Balmoral, plus there was "potential" for hematite iron — unlike magnetite, it can be shipped directly to customers.

The company also spruiked Mardie's proximity to potential port sites, infrastructure and the nearby towns of Dampier, Karratha and Port Hedland.

There's a very old saying in business: if it sounds too good to be true, then maybe it is.

In a written disclaimer that was presented at the briefing, Epsilon omitted to say that the potential quantity and grade of the Mardie iron ore target is "conceptual" in nature.

The Mardie estimate is based on computer modelling of a magnetic anomaly located in the region. In other words, little or no drilling has actually been done — there has been insufficient exploration to actually define a mineral resource.

The Joint Ore Reserve Committee (JORC) Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves provides "minimum standards for public reporting to ensure that investors have all the information they would reasonably require for forming a reliable opinion on the results and estimates being reported".

That code was introduced to try to avoid frenzies like the one witnessed yesterday.

Some argue that computer modelling, like that undertaken by Epsilon at Mardie, can be useful, particularly in searching for iron ore deposits. After all, Lang Hancock famously spotted the Pilbara's iron ore deposits from the passenger seat of an Auster single-engine plane.

But the more uncharitable have suggested that, with just $1.4 million in the bank, positive computer modelling of Mardie might just help Epsilon to raise enough money to actually start digging.

But computer modelling doesn't meet the JORC code of practice. It's one area where the ASX will have a good look.

Epsilon is due to come out of its trading halt tomorrow morning, and will be waiting for the market's more considered response to the investor briefing.

We certainly hope our friend up to his neck for 400,000 shares at 87¢ can get some shut-eye before then