Tap Into Tantalum
By Jackie Steinitz
19 Jan 2007 at 04:24 PM EST
resourceinvestor.com
LONDON (ResourceInvestor.com) -- If you are looking for a major future mine in a minor metal then Australian-based Gippsland Ltd [ASX:GIP; AIM:GIP] may warrant further investigation as it can tick many of the boxes on an investor’s checklist, has a number of unique selling points and is scheduled to be the world’s second largest producer of tantalum from 2009.
Tantalum
Before looking further at the company a digression on tantalum may be in order. Number 73 in the periodic table it is a heavy grey-blue metal with a high melting point (2997°C), a high dielectric (resistance to electrical current), a low thermal coefficient of expansion and excellent ductility and malleability. It is highly corrosion resistant and has a high level of biocompatibility (it can resist fluids in the human body).
These properties make it ideal for use in a number of high growth industries. It is used particularly in capacitors in the electronics industry for mobile phones, laptops, Playstations, GPS and ABS systems, and medical appliances such as pacemakers and hearing aids.
It is also used in jet engine turbine blades, bone replacements, stents to support blood vessels, cutting tools, ink-jet printers, cameras, spectacles and a whole host of other applications which you can read about on the Tantalum and Niobium International Study Center website.
Annual global demand is estimated at around 5 million pounds (2,200 tonnes). Future growth will fall below the rate of growth in the end-use industries as there will be further thrifting, further loss of market share to substitutes and an increased rate of recycling. Nonetheless demand growth is expected to average around 7% per annum.
Tantalum is typically found with tin. According to the U.S. Geological Survey it is produced in about 17 countries, though three account for over 85% of supply with Australia taking 62% of the cake, Mozambique 14% and Brazil 11%. The biggest producer by far is currently the Perth-based Sons of Gwalia [ASX: SGW] which supplies around 55%-60% of global demand.
Unlike the major metals Tantalum does not have a regulated market. The spot market is thin as tantalum is mostly sold by long-term offtake agreements which are privately negotiated between the miner and the refiner/metal producer. Pricing is further complicated by the many different types and grades of tantalum material. There is no published price - though it is currently in the order of US$50-$60/lb.
Estimates of the long run tantalum price are available from the USGS. These show that over the last half century prices have been reasonably stable for long periods of time but the stability has been punctured on half a dozen occasions by a price bubble caused, in each case, by fears (usually unfounded) of a shortage of the metal.
The last bubble, which was driven by fear of shortages as mobile phone production rocketed, occurred at the beginning of this century. Spot prices soared to over $200/lb as users stocked up on tantalum, only to plummet to $15/lb as users substituted to other materials where possible and it became clear that the market was awash with stocks. The bubble and its consequences were ably documented by Jack Lifton in an article last year on Resource Investor.
A key learning from the last bubble was the need both for suppliers and consumers of tantalum to ensure security of demand/supply. A point to note as you read on! Back then to the company.
Gippsland Limited
Gippsland Limited was formed to focus on world-scale projects which have undergone detailed exploration and so can be brought into production quickly but which have been over-looked by major resource groups. It is named after the region in Victoria, Australia of the same name.
But while Gippsland Australia is characterised by rainforests, snowfields and farms, even penguins are close by, these landscapes are a far cry from the projects of Gippsland which are focussed for the most part on the Central Eastern Desert of Egypt. Since a picture is worth a thousand words here’s a picture of the setting for Abu Dabbab, Gippsland’s flagship project.
Gippsland currently has three projects in Egypt each of which is held in a 50% JV with the Egyptian government. The projects are:
*
The Abu Dabbab tantalum, tin, feldspar deposit: originally explored by a joint Soviet-Egyptian team in the 1970s and then in the 1990s by an Italian-Egyptian team. It is an area of 20 square kilometers located 26km inland from the Red Sea.
*
The Nuweibi tantalum niobium feldspar deposit: another site of 20 km2 located just 17km from Abu Dabbab and well located to use the same plant and thus extend its project life.
*
The Wadi Allaqi gold, copper nickel exploration projects: which comprise nine tenements (eight gold and one copper/nickel), each of 16 km2, located on sites that were originally mined thousands of years ago in the times of the Pharaohs and the Romans. Exploratory drilling began in April 2006.
Gippsland also has a 40% interest in the Zeehan tin project in Tasmania, Australia
So far resources have been defined to JORC standards on the two tantalum projects (total 138 million tonnes) and one of the tenements in Wadi Allaqi, Seiga, which has an intial inferred resource of 93,000 ounces.
Resources will be defined for two further tenements later this year.
Investment Case
There are a number of points in favour of investment in the Abu Dabbab/Nuweibi projects:
*
The geology is favourable: Abu Dabbab is a relatively easy open cast project with low start up costs. It has significant reserves. Together with Nuweibi the estimated project life is 40 years. There is a favourable ore:waste ratio of 1.0:1.1.
*
The sites have a good location and infrastructure: The Abu Dabbab plant site is just 5km from the Red sea coast where there are numerous tourist resorts which will provide accommodation at very reasonable prices for the workforce. The site is accessible by road, 75km from Quesir port and 20km from an airport. Water is not a problem as the process plant will use seawater.
*
The JV arrangement with the Egyptian government brings many advantages: There is a 30-year tenure on the sites with an automatic extension for another 30 years. There will be no royalties, no sales, no import taxes and no export licences for 20 years. Fuel is currently available at $0.13/litre.
*
Most of the hurdles prior to mine construction have been overcome and all permitting is complete: The Bankable Feasibility Study (BFS) was completed in 2004 and the Environmental and Social Impact study (ESIA) in 2006. The ESIA complied with international best practice standards as specified both by the World Bank and by Egyptian legislation. Both the BFS and the ESIA were the first ever concluded in Egypt to international standards.
*
There is the potential to produce more than 650,000 pounds of tantalum: which would make Gippsland the second largest producer in the world from 2009.
*
The plant will be well located to treat concentrates from other African mines to produce tantalum metal and tantalum powder.
*
Gippsland has negotiated offtake deals for almost all its production: A confidential sale and purchase off-take agreements for 480,000 pounds per annum for a fixed period of 5 years has been negotiated. The same purchaser has been granted right of refusal on a further 70,000 pounds if it is available. Another purchaser has negotiated a Heads of Agreement (ie non-binding arrangement) for offtake of 100,000 pounds of tantalum per year.
*
Feldspar production will be a bonus. The mine has the potential to produce about 1.5 million tonnes of ceramic grade feldspar. The feldspar can be sold to the European ceramic industry - indeed Gippsland already has a Heads of Agreement with a major Italian group for the offtake of 2.65m tonnes over a 4 year period. Feldspar production is scheduled to begin in 2011 and would raise revenues of $28m pa and reduce costs of waste storage; once feldspar production is in place then 80% of all material mined at Abu Dabbab would be marketable. Credits from the Feldspar production were not included in the BFS.
*
Discussions are in progress with German authorites in regard to provision of both a low interest rate loans and low cost political insurance: Germany is the biggest processor in the world for tantalum. The German government have a scheme to support commodities which are of national importance.
From the Wadi Allaqi area there have been strong drilling results from two of the tenements suggesting that these projects will be of meaningful size.
The Downside
Reports by house brokers Hoodless Brennan and Partners identify a number of weaknesses. The biggest risk is seen as the product risk. There is no spot market for most of the commodities being mined, with the exception of tin. So once the forward contracts for the initial 4-5 years have expired Gippsland may have to go back to the drawing board. Their success in negotiating further contracts will be crucial, though so far they have proved successful in this field.
Another consideration is dilution. There will be a 27% dilution to existing shareholders when outstanding options mature at the end of 2007. There may also be further dilution if further funding is needed for the Wadi Allaqi drill campaign.
Hoodless Brennan also comment on poor drilling results from Tiur, one of the nine tenements at Wadi Allaqi. However recent drilling results from two other tenements, Seiga and Shashoba, are encouraging.
Valuation
At the today’s ASX and AIM share prices of 9.7 Australian cents and 4 pence respectively Gippsland has a market capitalisation of £9.3 million (US$18 million).
The Bankable Feasibility study, which was completed in December 2004 calculated an NPV for Gippsland’s share of the Abu Dabbab project as $35 million equivalent to 8 pence per share (compared with today’s 4 pence). This was calculated on a low discount rate of 5%. However a number of developments since the BFS would tend to increase the NPV.
Royalties were assumed to be 5% but they are now zero, no allowance is made for the feldspar and niobium credits, and the calculations are based on just the first 13 years of production but the mine life is considerably longer.
Moreover, from a company perspective, the NPV is only for the Abu Dabbab project and takes no account of the projects at Nuweibi with its JORC resource of 98 tonnes, Wadi Allaqi or Zeehan. The IRR was calculated at 33.2% based on an 80:20 debt:equity ratio.
A revised NPV has been calculated and will be published later this year. Other milestones this year will include the publication of resources from two further tenements in Wadi Allaqi and a reserve upgrade and commencement of mine construction for Abu Dabbab.
In summary, and as Executive Chairman Jack Telford told Resource Investor "2007 is destined to be an exciting year for Gippsland. Before long the market will realise that Abu Dabbab is a world scale project which will become a very important component of the global tantalum industry." |
