The prospect of a mineral sands joint venture between small cap Savannah Resources (SAV:AIM) and FTSE 100 miner Rio Tinto (RIO) has sent investors into a spin. The share price more than doubled in early trading (22 Jun) and now sits 65% ahead at 3.43p. The news that the two companies will combine adjacent projects has breathed renewed interest in the junior's stock; unfortunately this doesn't look like an easy ride for Savannah.
Generally speaking, David and Goliath-style joint ventures see the larger player fund the work and the junior acts as the feeder – providing the initial project and helping with further exploration. In the case of Savannah, chief executive officer David Archer reveals to Shares that the junior has to fund every penny of the Mozambique joint venture until publication of a definitive feasibility study.
Archer says Savannah has adequate cash at the moment, but says a fundraising will have to be considered at some point in the future.
Rio Tinto is effectively regaining partial ownership of land it used to own. It will be the offtake partner if the mine gets into production and has the right to acquire the whole of the joint venture. Rio was forced to reduce its land holding of the Mutamba asset in Mozambique several years ago as part of a compulsory reduction scheme that aims to stop miners hogging large amounts of land. Rio was made to prioritise certain areas and give up a small proportion of the licence, which was picked up by African Mining & Exploration – the old name for Savannah Resources.
Archer says Savannah will take existing Rio Tinto data to formulate a maiden resource on the combined project, to be published within the next three to four months. He claims Rio has undertaken extensive work on the asset.
'We will frame up a different style of development, focusing on dry mining and smaller scale than Rio's large-scale dredging strategy,' says Archer.
Savannah approached Rio to form the joint venture. 'It is consistent with Rio's strategy of reducing costs and spending,' says Archer, who adds that Savannah's other interests in Oman won't suffer as a result of the larger mineral sands asset now under the junior's belt. He says work is accelerating in that country on a copper project.
In Savannah's defence, the project looks very interesting but we must remind investors that size isn't everything. In the current environment, the market is looking for projects that provide a good return on investment, even if it means they are smaller than the mega-sized assets which everyone desired at the height of the commodities boom.