The commodities crisis has forced junior miner Ferrex (FRX:AIM) to abandon three projects and find its fortunes elsewhere. It hopes near-term cash flow from a collaborative gold project in Australia will help fund development on a bigger project being sought by management.
The market likes the news, sending the share price up 22.2% to 0.55p.
Ferrex will try to sell iron ore interests in Gabon and South Africa, saying the assets cannot compete on a cost basis with the major iron ore producers. As it cannot achieve the objective of being a lowest quartile producer, it is in talks to ‘realise value’ for shareholders from these assets.
Managing director Dave Reeves warns investors not to get their hopes up in terms of the sale price. ‘No-one will pay a huge slug of cash for anything in this market,’ he says.
It will also find someone else to develop a manganese project in South Africa, saying this asset no longer fits the company’s investment criteria. However, it will persevere with a manganese project in Togo. The Nayega project has been held up by delays in getting the mining licence. Reeves says he sees no reason why it cannot be granted and will travel to Togo next week for an update.
The small cap miner is paying £465,000 to buy Chaffers, the private company that has an agreement with Norton Goldfields to work part of its land in Australia.
Norton bought former AIM-quoted Bullabulling Gold in 2014 and was itself taken over by Zijin Mining earlier in 2015.
Ferrex will pay mining and processing costs and a 22% royalty on gold recovered to Norton. That royalty rate looks extremely high, yet Reeves argues that Ferrex has no capital expenditure requirements and walks straight on to a project that is already drilled and ready to mine. ‘You have to pay something (extra) for that,’ he adds.
Norton benefits from the deal by the commercialisation of ground that wasn’t previously on its plan to mine in the near future.
Reeves says Chaffers agreed to become part of the Ferrex group because of the opportunity to develop other projects.
Ferrex’s plan is to take the cash generated from both the gold project and the manganese asset in Togo (assuming it gets the licence) to provide money for development work on any bigger project it acquires in the future. Shares understands that a high-grade project has already been identified as a potential acquisition.
The gold asset is expected to have all-in costs (apart from royalties) of A$900 per ounce. Gold presently trades in the local market at A$1,550 per ounce. Reeves believes Ferrex should make a $300 to $400 per ounce profit margin.
There is a small working capital requirement to start the Australian gold project to the tune of £200,000 to £300,000, says Reeves. He is looking at financing options to get this money.