BULL POINTS:
■ Iron ore in high demand
■ Owns huge iron ore deposits
■ Infrastructure investment secured
■ Some early revenue possible
BEAR POINTS:
■ Political risk in Guinea
■ Loss-making for some years
Bellzone Mining is a small company that owns 100 per cent of what is developing into a huge iron-ore resource at Kalia in Guinea, West Africa. An agreement in principle with China International Fund (CIF), a sovereign fund, to finance most of the required infrastructure has propelled Bellzone to the forefront of the world's emerging iron ore producers and has taken much of the risk out of the project.
| IC TIP RATING | |
|---|---|
| Tip style | Speculative |
| Risk rating | High |
| Timescale | Long term |
| What do these mean? Find out in our | |
Iron ore is in huge demand. It is vital for infrastructure development, which makes it of key importance both to rapidly-developing countries and to developed economies that need to modernise their infrastructure.
Kalia is targeting annual production of 50m tonnes of iron ore. Drilling has already identified a resource of 2.4bn tonnes based on drilling a 4km length of ore body. With two lengths of mineralisation stretching for 39km across the Kalia permit, Bellzone's management estimates that the total resource could reach 13bn tonnes. This scale makes Kalia a big project by any standards and explains China's keen interest.
The Chinese fund will inject $2.9bn (£1.9bn) of infrastructure finance to build a 170-mile rail system, port and power development and the other facilities and services that would be needed to produce 50m tonnes of ore annually. CIF's finance should cover 77 per cent of the capital cost, leaving Bellzone to find around $0.9bn. Bellzone will have perpetual priority access to the infrastructure and CIF will have rights to purchase all the iron ore produced at market prices.
The viability of many iron-ore projects depends more on the state of the infrastructure than on mining considerations, so Bellzone's agreement with CIF takes much of the risk from the Kalia project. What's more, the capital required to lift the project to full-scale production should readily be met from the initial cash flows.
| BELLZONE MINING (BZM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 35p | MARKET VALUE: | £186m | |
| TOUCH: | 34-36p | 12-MONTH HIGH: | 61p | LOW: 26p |
| DIVIDEND YIELD: | NIL | PE RATIO: | NA | |
| NET ASSET VALUE: | 2p | NET CASH: | A$14.5m | |
| Year to 31 Dec | Turnover (A$m) | Pre-tax profit (A$m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | nil | -16.5 | -3.9 | nil |
| (US$m) | (US$m) | (¢) | (¢) | |
| 2011* | nil | -11.0 | -2.1 | nil |
| 2012* | nil | -76.0 | -14.4 | nil |
| % change | - | - | - | - |
Normal market size: 14,000 Matched bargain trading *Canaccord Genuity estimates £1=A$1.77, £1=US$1.52 | ||||
Even so, large-scale mining projects are vast undertakings, so Kalia won't be in full production until 2018 and Bellzone will remain loss-making for many years. However, the occurrence of surface oxide ore should enable the company to generate some early cash flow from selling maybe 20m tonnes of ore from 2014.
In addition, Bellzone will generate other revenues from selling the use of the Kalia railway line to BSG Resources, which holds iron-ore licences in the east of Guinea. Indeed, development of the railway line could provide a useful revenue stream for Bellzone, which has a 10 per cent interest in the railway.
Guinea is an established mining country and major miners, including BHP Billiton and Rio Tinto, have mined there since the 1970s. However, operating in Guinea is risky, as highlighted by Rio Tinto's current dispute with the government, which is threatening to strip Rio of some of its rights over a disagreement on a contract concluded with an earlier administration.
