AZR aztec resources limited

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    Long-abandoned ore deposits offer tantalising riches but punters need to strike while the iron's hot and take advantage of the mining explorer's inexplicable share price dip.
    Iron ore hopeful Aztec Resources is trading at a sharp discount to what supposedly sophisticated investors paid for a share placement earlier this year, yet the shares are still full of promise. Until a bit more than a year ago, Aztec (ASX code: AZR) was little more than a shell and the plaything of the day traders with a low price in the past 12 months set in July 2003 at 2.6¢. Then, in an inspired move as the world iron ore price began to surge, the company lodged tenement applications over the abandoned iron ore deposits on Koolan Island in Yampi Sound, off the north-west Kimberley of Western Australia.
    BHP extracted 68 million tonnes of the highest grade hematite (67.5% contained iron) between 1965 and 1993 with low silica, alumina and phosphorus impurities. It was still producing at the rate of 3 million tonnes a year when BHP quit to source its needs from the almost immeasurable resources it mines on the mainland in the Pilbara province. But left behind is a known resource of 24.9 million tonnes of high-grade ore containing 67% iron.
    Late last year, Aztec also won the services of executive chairman Ian Burston, a former chief executive of Hamersley Iron, Aurora Gold and Portman (which is also mining another old BHP property on Cockatoo Island, a few kilometres west of Koolan Island). Burston is the driving force behind the company, which hopes to prove up a sufficient resource to launch a mine producing 2 million to 3 million tonnes of export ore over a minimum 12-year life.
    Burston praises BHP-Billiton for having been very co-operative in supplying its previous drilling results to correlate with present work. After monsoonal weather delayed any field work until after February, the company with a single rig managed to put in 60 holes out of a planned first-pass drilling exercise of 100 holes during March, for a total of 1250m. That has confirmed continuity of iron ore remaining in the main pit area, in satellite deposits and extensions. Further drilling announced last week confirmed extensions totalling 1650m of ore-bearing strike length along the main pit and three other satellite deposits.
    Aztec hopes to have a larger 24-hour drilling rig on the island by mid-year, together with a permanent 20-man camp. Another 4000m of drilling is planned to be completed by the end of June, with a start on a feasibility study to begin shipping ore by the third quarter of next year.
    The story sounded so good earlier this year, before any field work was undertaken, that the company was able to place 42 million shares at 15.5¢ during the March quarter to raise $6.5m as it successfully listed on London's Alternative Investment Market (AIM).
    Participants in the placement and the percentages each hold in Aztec now included: the Commonwealth Bank's Colonial FS Global Resource Fund (5.2%) and the Chinese investment funds Sinom (9%) and CITIC Australia (5%), which had both already become shareholders. Issued capital stands at 322.1 million shares plus 142.6 million options. The shares have sold as high as 18¢ this year but last week drifted back to 10.5¢ to 11¢. That's 5¢ to 4.5¢ cheaper than the placement made to the smart money only four months ago, despite rising levels of confidence in the project.
    It will probably cost as much as $50m to restore production, including about $25m for a new jetty, ore crushers and ship loader. The company believes that could be financed with a mix of debt plus, hopefully, the exercise of options exercisable at 20¢ at the end of next January, which would cover more than half the development cost. First, however, the stock price will need to rise above 20¢ to put the options in the money.
    Broker Grange Securities, which has been following the stock, put a net present value of 24¢ on the stock earlier in May, based on a likely case mining scenario of 35 million tonnes of ore over 12 to 15 years. The broker points to an opportunity cost saving of $5 a tonne to $10 a tonne on ore transport over the Pilbara iron ore producers. For, being on an island, no rail transport is needed to the port.
    That being so, and because of the ore's historic high quality, the broker envisages a cash margin of more than $10 a tonne is achievable, resulting in a total free cashflow of as much as $360m over a 12-year project life at 3 million tonnes a year. In the highly likely event that the project will get the go-ahead, this is a stock with attractive recovery prospects over the coming months. l
    1430 Gleneagle Gold @ 37.5¢ $511
    (Bought @ 35¢; 30.4.04)
    20,000 Aztec Resources @ 10.5¢ $2142

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