Special Report: There are very few small caps that have exposure to iron ore at a time of soaring prices.
But one company has had potentially lucrative projects in its portfolio for nearly 15 years and could be generating cash flow in less than a year if all goes well.
The iron ore price has rallied nearly 70 per cent to its more recent price of $US121.20 ($173.75) a tonne since the start of the year and there is no sign that will abate any time soon.
S&P Global Platts senior managing editor Paul Bartholomew told Stockhead that the iron ore price looked set to stay well supported in the near-term due to ongoing supply tightness.
He noted that at the same time China continued to produce an “incredible amount” of crude steel despite slimmer margins as they struggle to pass through higher iron ore prices to finished steel prices.
“Steel output to date is up around 10 per cent on last year and given there is an expected iron ore supply shortfall of around 40 million [metric tonnes] this year, naturally that will put pressure on iron ore prices.
“Until China trims production in a meaningful way – and at the moment that doesn’t seem to be happening – strong demand for iron ore will keep prices high.”
And China doesn’t just want any old iron ore – it wants the good quality stuff.
On the front foot
And that’s where Strike Resources (ASX:SRK) has the upper hand.
Strike has dusted off its iron ore projects in Peru and Western Australia, which the company acquired in 2005, and is preparing to take advantage of the soaring iron ore price.
Not wasting a minute, in less than a month since announcing it was taking another look at its iron ore projects, the company is preparing to deliver a maiden resource for its Paulsens East project in Western Australia.
Paulsens East is located in the extremely iron ore fertile Pilbara region – well known as the home to iron ore heavyweights Rio Tinto (ASX:RIO), BHP (ASX:BHP) and Fortescue Metals Group (ASX:FMG).
But Strike isn’t looking to rival the big boys, it’s in a potentially very lucrative league of its own.
“We’re not looking to do an FMG here and mine 50 million tonnes a year,” managing director William Johnson told Stockhead.
“We have defined and identified Paulsens East as a really good high-quality, but relatively small deposit of outcropping high-grade hematite.”
Johnson said the top “couple of million tonnes” was just sticking out of the ground – which means Strike can potentially mine with minimal overburden for the first couple of years.
“It should be relatively quick and cheap to mine that and get the material onto trucks,” he said.
Strike is investigating the potential for an up to a 1-million-tonne-per-annum direct shipping ore (DSO) operation at Paulsens East.
DSO refers to minerals that require only simple crushing before they are exported, which keeps costs low.
“In this market there’s still enormous demand out there for iron ore and we’d envisage no problems in finding parties who’d be prepared to take this material because it is a very high-grade material, very low in impurities and this kind of material is in great demand in China,” Johnson explained.
And infrastructure isn’t a problem, with Paulsens East located close to a sealed road that runs to a port 200km away.
On the fast track
Given the work Strike has done on the project in the past, it hasn’t taken the company long to define a maiden resource – which will be revealed on Monday.
Strike is also working to secure a mining lease at Paulsens East and anticipates it could start generating early cash flow in less than a year.
“We’d hope we could get Paulsens East up and running in six to nine months,” Johnson said.
There is, however, the potential to generate cash flow even sooner if all goes to plan at Strike’s Apurimac project in Peru.
While a full-scale mining operation in Peru would still be some years away, legislation allows Strike to start small-scale mining utilising local miners.
“The current regulations potentially allow us to use the community miners to mine up to 100,000 tonnes a year of ore from specified areas in our concessions,” Johnson said.
“Then we could truck that ore to a port facility on the coast and ship it to China.
“And at current prices potentially we could make some significant cash flow from the relatively small operation.
“If we can make the numbers stack up and get all the logistics working, that could generate some tidy cash flow for the company whilst the iron ore price stays high.”
Government sees value
Longer term, there is the possibility the Peru government would build a railway that would connect the Apurimac project to the port.
The government is currently undertaking a study into the economics of building a railway.
This is because there are several big mines in the region where Strike’s project is located, and currently players like MMG (ASX:MMG), which owns the nearby Las Bambas mine, has to truck hundreds of thousands of tonnes worth of copper concentrate by truck.
“The region where the project is located is predominantly an agricultural region and the government recognises the benefits of opening up these mining projects to generate more jobs and income and hopefully taxes for them too,” Johnson said.
“The project in Peru has the potential to become a very large project, based on our pre-feasibility studies we did back in 2008, which indicated that the project had the potential to produce 20 million tonnes a year of either high-grade 68 per cent concentrate material or high-grade lump and fines depending on the infrastructure solution that is eventually developed, at a cost less than $20 per tonne delivered to port.”
The Apurimac project is one of the highest-grade, large-scale magnetite deposits in the world.
Strike has already taken it through the pre-feasibility study stage and increased its ownership from 60 per cent to 100 per cent.
Re-rating potential
Back around 2009, when iron ore prices were just $US70 a tonne, Strike had a share price of $2.80 and a market cap of around $300m.
So investors saw the potential in Strike’s projects at much lower iron ore prices.
Now iron ore prices are almost double that and Strike still has the same highly prospective projects.
But today Strike’s share price is just under 5c, giving it a market cap of around $7m.
And with a couple of high-quality iron ore projects already on the path to production, there will be plenty of catalysts in the pipeline for a potential re-rating.
“We have a lot of history,” Johnson said.
“We’re not a ‘Johnny come lately’ iron ore company. We’ve held onto our fairly significant iron ore assets for about 15 years now.
“That in itself when you look at the iron ore prices today has the potential to significantly rerate the company.”
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