Hot on the heels of selling a gold project to an Aim-quoted peer, getting a new boss and proposing to change its name, African Mining & Exploration (AME:AIM) continues its transformation with a move in to mineral sands. What's really grabbing the market's attention is that the project is adjacent to Rio Tinto's (RIO) big Mutamba asset in Mozambique (see pic below), sending the junior's shares up 26.3% to 3p.
African Mining, which has proposed a corporate rebrand to Savannah Resources, is buying 80% of a private business called Matilda, which owns the 180 square kilometre Jangamo tenement. Drilling will start in November to ascertain the quality and quantity of zircon, ilmenite and rutile in the asset.
Chief executive officer David Archer reckons drill results will be published in February 2014. He reveals that Matilda has owned the project licence for two years, having won a tender to pick up land formerly owned by Rio Tinto. The major was forced to reduce its land holding 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, similar to a mining land strategy strategy seen in other parts of Africa including Guinea.
The acquisition will be funded in phases, dependent on hitting pre-determined exploration milestones. The initial money will be £72,000 cash and £231,000 worth of shares.
On paper, this looks very interesting but there's two negatives to acknowledge. Firstly, African Mining is going to be under considerable pressure to prove the validity of Matilda's exploration licence. This is following a high-profile court case surrounding the licence for Pathfinder Minerals' (PFP:AIM) mineral sands project in Mozambique. While that is a company-specific issue, it will certainly hang over African Mining for the foreseeable future, simply because the market doesn't forget big licence fights and investors will assume the risks apply to everyone in the region looking at that group of commodities.
Secondly, commodity prices for mineral sands underwent a significant correction in 2012 and there's still volatility. While investors may assume these prices don't matter to African Mining because its project is so early stage, commodity prices are entirely relevant. They will dictate market sentiment towards this segment of the mining sector for both explorers and producers.
On the plus side, long-term forecasts for minerals sands prices do look good. Base Resources (BSE:AIM), which is a running Shares Play of the Week, is on the verge of starting mineral sands production in Kenya. It is forecast to generate significant amounts of cash, as we explain in this article.
For now, Panmure Gordon reckons a supply surplus in zircon will be longer lasting than for ilmenite. However, it adds: 'We expect zircon prices (to) recover marginally over the medium term, driven by growth in the developing world.'