minesite article

http://www.minesite.com/nc/minews/singlenews/article/sherwin-and-territory-iron-are-shaping-up-as-perfect-merger-partners-thanks-to-rail-and-port-connec/1.html

November 01, 2010
Sherwin And Territory Iron Are Shaping Up As Perfect Merger Partners, Thanks To Rail And Port Connections

By Our Man in Oz

Near-ology, the mining ?science? of being close to someone with a valuable asset, is a discipline that normally confines itself to mineral exploration tenements. In Australia?s northern city of Darwin, though, there is an unusual example of near-ology at the port. Sherwin Iron and Territory Resources should soon be stacking ore alongside each other, and exporting across the same wharf. In a perfect world they would make a perfect combination, not that Minesite would go so far as suggesting a spot of merger and acquisition activity. Not in so many words. That?s something for management of the two companies to figure out for themselves. Investors, however, are free to consider the possibility of Sherwin and Territory working closer together, because, though they own deposits of different ore types in different areas of the Northern Territory, they share absolutely critical rail and port infrastructure.

Right now there are two big differences between Territory and Sherwin. One company is in production, and the other isn?t, and one has limited ore reserve life, while the other is just starting to unravel what could be a very profitable, long-life mine, with considerable expansion potential. Territory is the company with an operating mine which is performing well, but which has limited growth options. Sherwin, which started life as Batavia Mining, is the new kid on the block. It has ambitions to become one of the next generation of Australian iron ore exporters, and to cash in on China?s desire for sources of supply from somewhere other than the big two, BHP Billiton and Rio Tinto.

The irony, from a BHP Billiton perspective, is that Sherwin is picking up where it left off some 40 years ago, when it abandoned the exploration discovery known as the Roper River iron ore project to fry bigger fish across the border in Western Australia. One company?s fish that got away is another?s fortune, though. Sherwin last week released the results of a highly encouraging scoping study, and announced board and management changes. Both developments are clear pointers to a business that?s moving rapidly towards a development commitment, and through an aggressive growth phase.

Under the operation envisaged in the scoping study include, mining at Roper River will run at a start-up production rate of two million tonnes of iron ore from 2012, and rise to an initial target of four to five million tonnes. The product that will then be exported will be a material assaying around 57% iron ore, with low levels of impurities. Most importantly, the cash operating cost of the project will be in the order of A$52 to A$57 a tonne, less than half the likely price that the ore will sell for. The range in those mooted costs reflects choices Sherwin must make on the transport system, specifically about what mix of road and rail haulage will be used. That choice will also determine the capital cost of the Roper River project, with scoping study estimates as far apart as A$95 million up to A$180 million.

Sherwin?s chief executive, Greg Bittar, who was appointed managing director shortly after the release of the scoping study, said Roper River had the potential ?to become a very profitable iron ore producer, very quickly?. What Bittar likes is the access to infrastructure, particularly rail and port. ?Those assets support our decision to proceed with the feasibility study,? he said.? That study of Roper River will nail down questions about metallurgy and geotechnical issues before moving on to banking and project finance. The current schedule envisages first production in the second quarter of 2012.

Understanding Roper River and Sherwin requires two lines of thought. The first involves the realisation that the infrastructure simply was not there in the 1950s and 60s when BHP was fossicking around amongst Roper River?s ?oolitic haematite? ore. The project lies some 475 kilometres south-east of Darwin, and 125 kilometres east of the grossly under-utilised Adelaide to Darwin railway. But no matter how BHP massaged the numbers, it was never going to make money at Roper River without spending heavily on roads, rail, and port facilities, and without upgrading the ore itself. This comes out of the ground grading 49% iron, and is located in a number of separate deposits. Far easier, said BHP?s management at the time, to dig up 60%-plus ore at Mt Newman.

Times change. Infrastructure improves. Demand and prices rise, and China is now launching itself into the biggest industrial revolution since Britain toyed with steam and amassed an empire. Sherwin today has its foot on the old BHP resource and its orebodies, identified using an alphabet system from A-to-Z. The starting point for the mine is expected to be the W deposit which has already been drilled out to 100 million tonnes of ore. Simple upgrading will produce a product assaying at least 57% iron, with low impurities. Chinese steel mills are forming a queue to secure Sherwin as a supplier. They are led by Jiangyin Huaxi Steel Company which has signed up for a million tonnes a year and chipped in A$4.8 million in capital via a share placement. After W, Sherwin has a series of orebodies to drill and potentially develop. The aim is to prove up between 400 million and 500 million tonnes grading greater than 40% iron.

The second aspect to Roper River, and the key, is the infrastructure, especially its access to rail and port, two essential aspects to iron ore mining which few of Sherwin?s rivals in Australia have. It?s when you consider the rail, already used by Territory and soon to be used by Sherwin, and the port, already used by Territory, and soon to be used by Sherwin, that the penny starts to drop. These are companies with symbiotic locations and assets. All that?s missing is a commonality in shareholders and management, and an interest in building a bigger business.

That could be the next phase of Sherwin?s life. Bittar is a former investment banker with Morgan Stanley, and undoubtedly has an eye more keenly set on corporate moves than the geology of northern Australia. Joining him on the board of Sherwin is Jyn Sim Baker, a rarity among Australian company directors with her Chinese ancestry, western training, and deep understanding of the Australian iron ore industry. Once-upon-a-time she was managing director of Midwest Corporation, where she was instrumental in forging a relationship with one of China?s biggest iron and steel groups, SinoSteel. And she?s also spent time as a director of another successful iron exporter, Atlas Iron.

Even allowing for its ore in the ground, upgrade solution, passing road, nearby rail, port access and savvy management, perhaps the most interesting aspect to Sherwin is actually its share price. A recent squiz at the shares showed them to be trading at around A25 cents, a price which valued the company at a very untaxing A$37 million. For its part, Territory is double the size of Sherwin, with a market capitalisation of A$79 million. Both companies see growth opportunities ahead, but it?s the possible combination of the two which adds to their appeal, and makes it a good reason to dust off your Sherwin file.