by Wally Graham, Resources Roadhouse
A curiosity to find out what Madagascar had to offer led chief executive Scott Reid and director Wayne Kernaghan to cross the Mozambique Channel, having worked on the African continent for a number of years with another Australian company.
“Seven years ago, we started looking at projects in Madagascar,” Reid told The Resources Roadhouse.
“Everyone knows Africa is well endowed with minerals, and it’s no different with Madagascar.
“It is under-explored, under-exploited, and the government needs income from mineral projects coming on-stream to lift the country to a better standard of living.”
After liaising with the country’s government over areas of prospective tenements, Austral became involved with two French ex-patriots who had, for the past 10 years, held the Beravina zircon project.
Beravina, located 440 kilometres north-west of Madagascan capital Antananarivo, is the centerpiece asset for Austral, which expects to list on the Australian Securities Exchange later this month.
The project was discovered by French geologists in the 1950s when Madagascar was a colony of that country, and was further explored in the late 1980s and 1990s by a Russian consulting group.
That work was verified by the two French ex-patriots, who also confirmed the high zircon grades which averaged around 30 per cent.
However it was only four years ago things started moving for Austral when Reid gave a serious nudge to the project’s holders, who were exploring Beravina at a relaxed pace in line with the country’s tranquil lifestyle.
Reid was keen to make something of the project, particularly after having seen its potential, combined with Madagascar’s continuing rebuild following the 2009 political coup that spawned a transitional government keen to move the country forward, significantly reducing the political risk.
Austral would also not be a foreign company going it alone in the country, with mining giant Rio Tinto having set up shop with its mineral sands operation, and the Ambatovy Joint Venture investing billions of dollars to develop a major nickel mine.
“For a small company its great not to be a trail blazer,” Reid said.
Two years ago, Austral inked a deal to buy the Bervina project but a tragedy during the process soon became a paperwork nightmare for the company.
“Unfortunately during the process of acquiring the property, one of the ex-patriot guys, was quite ill with cancer,” Reid recalls.
“He said he had signed the first round of documents, but then he needed to go back to France for tests.
“And soon after he landed, he died.”
To make matters worse, the ex-patriot had not left behind a will; complicating matters for Austral, which only had one of two signatures needed on the sale and purchase agreement.
While the French equivalent of a probate was being sorted out, Austral wasted no time in advancing Beravina.
Austral asked for more funds from seed investors in order to quickly firm up the project.
The funds went towards diamond drilling in 2011 and, following an evaluation by Badger Mining & Consultants, a JORC compliant indicated resource of 1.8 million tonnes at 29.47 per cent zircon, estimated to a depth of around 80 metres, was delineated.
The deposit, which remains open, is ideally suited to a simple open pit mining operation, Reid said, and Austral was not burdened with the prospect of having to remove millions of tonnes of sand to get to the zircon, rather the project contains the source rock.
Reid said pre-development work for Beravina started last year, with Austral sending two tonnes of ore to South Africa for preliminary testing, and a further sample has been sent for work on the proposed plant design.
The quick pace of work Austral is undertaking will be used for Beravina’s bankable feasibility study, due to be completed in September.
Austral is targeting annual production of up to 35,000 tonnes per annum of zircon concentrate over a mine life of about 13 years, based on the indicated resource. It is estimated to cost $20 million to develop.
Reid said those numbers give investors a different value proposition compared to Austral’s peers, some of which have had trouble getting off the ground due to increased cautiousness post-GFC.
“We’re in this unique position where when we list, we’ll have a market cap of $20 to 25 million but we’ll have a capex written up that’s less than our market cap,” Reid said.
“There’s no other story out there at the moment that has that scenario.
“Most of them have really good stories, but they’re three to five years away from developing their project at a cost of $300 million.
“We’re looking at having it operating and producing cash flow within 18 months.”
Austral is also looking to capitalise on the margins Beravina has to offer once it comes online.
Currently, zircon prices have settled at about US$1500 per tonne, down from its high of US$2500/t in early 2012.
Despite the drop, Reid said back of envelope numbers indicate operating costs at Beravina would be about $500 to $600/t, leaving a healthy margin for the company.
“So we know we’ve got a $1000 per tonne margin, that’s $30 to $35 million a year free cash flow and its only going to cost us $20 million to build it,” he explained.
“The cashflow that’s generated can pay off the capital cost in one year.
“There’s not a lot of moving parts, it falls into the low hanging fruit category, the mining is straightforward, and we know we can sell the concentrate.”
China is currently the largest zircon user, consuming about 41 per cent of the global market, followed by Europe at 23 per cent, Asia Pacific (excluding China) at 18 per cent and Americas at 13 per cent, research by Helmsec Global Securities show.
More than 50 per cent of zircon use is for the glazing of ceramics such as tiles, toilets and bathrooms.
With urbanisation, living standards and population growth to continue in developing countries, particularly those making up the BRICS countries, the medium to longer-term outlook for demand is positive, and prices are tipped to remain steady.
At around 35,000 tonnes a year, Reid said Austral will be supplying around one to two per cent of the world market.
“It’s a lot of production for a small company,” he said.
Austral also has an option to acquire four exploration tenements prospective for graphite.
The tenements are located in the Tamatave region of Madagascar, an area that has historically been a major producer of high quality rich flake graphite.
Under the deal, Austral can buy 100 per cent of the share capital of Mauritian company, Big Island Graphite, with the option to be exercised within six months from the date the tenements’ permits are converted to ‘exploration permits’.
Reid said once Beravina is at a stage where the majority of work will be on the development, the exploration team will be released to explore the graphite tenements.
However for now, Austral is focused on quickly developing Beraniva into an operating mine, potentially providing an uptick in value for shareholders in the not too distant future.
Austral Resources Limited
HEAD OFFICE
Level 14, 275 George Street
Sydney, NSW, 2000
DIRECTORS and MANAGEMENT
Terry Willsteed, Scott Reid, Wayne Kernaghan, Glen Tetley
