AZR aztec resources limited

iron, the glamour metal!

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    Irons in the fire

    China's enormous demand for iron ore will revive smaller producers in Australia

    It stretches The Speculator's memory to recall the last time iron ore ignited the junior end of the mining sector but it is certainly doing that now. We are far more used to the likes of BHP Billiton and RTZ snatching any new contracts on offer from Japan and enlarging their massive operations deep within the Pilbara region of Western Australia. But, as China's economic miracle spurs strong demand, a feverish feeling is percolating down among the tiddlers.

    The Chinese consume 31% of world iron ore production, three times that of Japan and the US and twice that of Europe. Imports rose by an estimated 25% in 2002, and are expected to continue at annual rates of 20% in the near term – so long as they can get it. Therein lies the rub. The big producers can't keep up with demand, so enticing opportunities exist for other hopefuls if they are quick to act.

    Mt Gibson Iron is showing what can be done. It plans to ship the first ore next January from its 1.5m tonne-a-year Tallering Peak mine inland from Geraldton, Western Australia. It is following in the footsteps of Portman, which made the leap to become a producer in the early 1990s by reopening the Cockatoo Island workings near Derby. Portman is now capitalised at $230m. Another starting down this path is Aztec Resources (ASX code: AZR), which aims to do a Portman after winning title over nearby Koolan Island.

    Aztec has 239.3 million shares on issue and 89.6 million listed options that expire in January 2005, with an extra 18 million unlisted options. Its market worth is about $12m. While about a year behind Mt Gibson to develop its mine, it is being priced at one-third of Mt Gibson's capitalisation of $35m. Aztec's venture could yet be more alluring, however.

    It has taken over the leases on Koolan Island formerly held by BHP, and has hired iron ore industry notable Ian Burston as its new chairman. While BHP dug 68 million tonnes of high-grade hematite from the pit during its 28 years of operation, significant amounts remain.

    The workings were shuttered in 1993 simply because the annual output of 3 million tonnes was too small to bother with. Aztec has released upgraded reserve figures showing that 24.8 million tonnes remain in the main orebody, grading 66.95%. Critically, there are low levels of impurities.

    There are no immediate plans to mine this resource, however, because most of it is covered by water filling the old pit. Instead, Aztec aims to drill along the western and eastern extensions of the orebody to find more reserves, and also to drill into four satellite zones called Mullet, Acacia, Eastern and Barramundi. These neighbouring targets are attractive because they have low stripping ratios and could be mined first to generate early cash flows. The plan is to fast-track the venture, completing a feasibility study during 2004 and start up in 2005.

    What makes Koolan Island so attractive is its high grade of ore, its scale and the fact ships can load at the island. There is no need to build a long and costly railway line.

    Stockbroker Intersuisse reckons this alone could save about $15 per tonne. It estimates that a mine producing 2 million tonnes would return earnings before interest and tax of $20m, while a possible 4 million tonne operation would double that figure. Société Générale recently took a 4.2% share placement, and is on board for any debt funding of the project.

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