Over the past six years, Baobab Resources (BAO) has been developing a large mining and processing complex in Mozambique - the Tete Pig Iron & Ferro-Vanadium Project. With prospects for success looking increasingly encouraging, the share price looks well out of step with events.
- Huge potential resource
- Definitive Feasibility Study imminent
- Metallurgical upgrades
- Low cost production
- Binary nature of investment
- Security issues in Mozambique
Baobab has identified a gross resource measuring 759m tonnes (323m tonnes measured & indicated). By the end of this year, it expects to deliver the Definitive Feasibility Study (DFS) for the project, which, it is hoped, will attract the interests of an industrial partner - possibly an Asian steelmaker - to fund future development.
To achieve this, Baobab needs to further de-risk the project by defining the measured resource, annual production and life-span of the project, in addition to details relating to the metallurgical suitability of ore bodies and the state of local infrastructure. Two recent press releases demonstrate that Baobab has made significant progress in defining the Tete resource. Geological modelling by SRK Consulting (South Africa) has increased the resources at Tete's Tenge resource block by 15 per cent to 222m tonnes.
More importantly, the measured and indicated resource categories came in at 156m and 66m tonnes, respectively. SRK also gave an operational life of at least 20 years. This compares very favourably with initial expectations of 32-48m tonnes of measured resource and a 10 to 15-year mine life. The Tenge/Ruoni prospects account for around three-quarters of the overall resource size, so the significant upgrade provided a major fillip to the project - and there's more.
| BAOBAB RESOURCES (BAO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 10p | MARKET VALUE: | £35m | |
| TOUCH: | 10-11p | 12-MONTH HIGH : | 19p | LOW: 10p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 5p | NET CASH: | £1.3m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | nil | -6.1 | -3.6 | nil |
| 2012 | nil | -7.2 | -3.7 | nil |
| 2013 | nil | -8.0 | -3.1 | nil |
| 2014* | nil | -5.6 | -1.7 | nil |
| 2015* | nil | -6.6 | -1.8 | nil |
| % change | - | - | - | - |
Normal market size: 20,000 Market makers: 6 Beta: 2.00 *Shore Capital forecasts | ||||
In April, analysis from Australia's CSIRO provided strong indications that the project is viable from a metallurgical perspective. A round of bench-scale separation ('beneficiation') and smelting tests produced a final alloy containing 99 per cent iron, which is purer than the standard commercial pig iron product specification. What's more, Baobab managed to separate titanium and vanadium as slag by-products. The bottom line is that these tests indicate that a high-quality, low-impurity pig iron can be produced cheaply from Baobab's iron ore resources and locally sourced thermal coal, which is a by-product of the washing process on the project boundary.
The DFS process also received added impetus because Baobab signed a memorandum of understanding with Mozambique's state energy company EDM for a detailed study of Tete's power requirements. In addition, an environmental impact scoping study has been approved by the Mozambique government - all of this helps to de-risk the project. And the DFS should be fully funded as both the International Finance Corporation - which holds a 15 per cent participatory interest in Tete - and Baobab's cornerstone investor African Minerals Exploration & Development (AMED) have built on their investments in the company recently.
