Blast Off: A New Chromite Producer' In Town

By Jackie Steinitz
04 Sep 2008 at 04:07 AM GMT-04:00

This junior has a simple and compelling story, a prime address, a track record of success in bringing a mine into production, and is operating in a sector with highly positive long term fundamentals.

LONDON (ResourceInvestor.com) -- When Chromex Mining [CHX] listed on London’s AIM market in September 2006 with the objective of acquiring, developing, mining and processing chromite it had just one exploration prospect, albeit an advanced one.

In the last two years, and in spite of regulatory delays, Chromex has succeeded in transforming itself into a producing company with two substantial chromite assets in South Africa both with New Order Mining Rights and a combined total of 24 million tonnes of resources, of which 17.7 million tonnes (74%) are attributable to Chromex and the remaining 26% to its BEE partner, Umnotho weSizwe.

Chromex and its partner own 100% of the:

• Stellite chromite project, which started production in July (see the picture below of the first blast); and
• Mecklenburg chromite project, scheduled to come on stream in 2009.

Both are located in the Bushveld Complex of South Africa, one of the richest mining districts in the world and best known for hosting 70%+ of the world’s platinum reserves, though it is also home to more than 70% of the world’s chromite resources and 40% of world production. Stellite, on the Western limb of the Bushveld, is adjacent to Xstrata’s Boshoek chromite operation, while Mecklenburg, on the Eastern limb is next door to the Twickenham platinum mine owned by Anglo Platinum.

Chromex’ objective is to mine chromite at the lowest possible cost and to reduce the processing undertaken by the Group to the minimum required to sell the chrome products profitably. Production will rise from 30,000 tonnes per month to 80,000 tonnes during 2010 which it will sell both locally and internationally.

Around 85-90% of chromite (FeCr2O4) production is metallurgical grade and used as feed in ferrochrome which in turn is used in the manufacture of stainless steel (it is the alloy which makes stainless steel resistant to corrosion and oxidation and thus makes it stainless and shiny). The remainder is either chemical grade, used in chemical products such as colouring agents, timber preservatives, leather tanning and chromium plating, or foundry grade which is used primarily for steel castings. There is no economically viable substitute for chromite in the production of ferrochrome, chromium chemicals or chromite refractories. Currently substitutes without chromium either compromise product quality and/or increase costs.

Demand for stainless steel, the primary determinant of chromite demand, has been growing at close to 7%pa for the last decade, and is forecast to grow at an average rate approaching 6% annually until 2020 according to consultants Heinz H. Pariser. While the stainless steel market has softened recently in line with the global economic slowdown the long term fundamentals still underpin the market. Demand for ferrochrome is being further bolstered by the relatively high nickel price which is driving the stainless steel industry to substitute away from austenitic 300 series in favour of the chrome rich ferritic 400 series.

Chromite and ferrochrome prices have therefore been rising rapidly. Ferrochrome for example averaged 47 cents/lb in September 2006 when Chromex listed on the LSE but the price is now over $2/lb despite some softening in recent weeks. Prices are forecast to remain high given the prospects of high demand but relatively restricted supply.

The Investment Case and Future Plans

In addition to the buoyant outlook for chromite demand and prices an investment in Chromex could benefit from a number of factors:

• Favourable geology at a prime address: As discussed above the Bushveld accounts for 70%+ of world reserves. The 9 million tonnes of resources (of which 5.7 million tonnes are reserves) at the Mecklenburg project are in the LG6 and LG6a seams. The LG6 seam is considered the most important target in the Bushveld complex as it has favourable chemistry and uniform thickness. The Stellite project comprises four seams, the LG6, MG1, MG2 and MG4 all of which outcrop on the property. It has estimated inferred resources of 15 million tonnes (though these are directors’ estimates which are currently being recalculated to comply with South African SAMREC regulations);
• Relatively low geological risk: Both Mecklenburg and Stellite have a history of past mining, have been extensively drilled and have comparable chemistry and grade to other operations in the area;
• The potential for low costs. Inexpensive and uncomplicated mining methods can be used at both projects;
• A strong management team with experience both of moving from exploration to operations and of Southern Africa. CEO Russell Lamming previously led the commercial process at African Platinum which was sold to Impala for £300 million and he is particularly experienced in the mining in the Bushveld. COO Graham Stacey has more than 12 years’ operational experience in the sector;
• The availability of strong local technical expertise: due to other mining operations in the area;
• A strong and well connected BEE partner with interests in the mining and minerals sector;
• Abundant smelter capacity in the near vicinity;
• Strong local support for projects;
• Significant barriers to entry;
• An agreement with Anglo Platinum for the Mecklenburg operation to tap into the water, power and tailings infrastructure at its Twickenham mine; and
• Healthy cash reserves of over £2 million ($3.5 million), and cash flow from the Stellite mine.

Particular risks, in addition to the usual development and mining risks, include the strength of the dollar (since chromite prices are mostly dollar-denominated while costs are more rand-based), the prevalence of HIV/AIDs in Southern Africa, and chromite prices, though CEO Russell Lamming confirmed to RI that margins are still robust and the company could sustain further decreases in price. The power situation in South Africa could also be an issue, though as Lamming notes, Chromex is not a power-hungry company.

Looking ahead Chromex’ long term strategy is to continue to identify, acquire and develop further chrome projects particularly those offering new early production, and to develop strategic partnerships with chrome players.

Valuation

Chromex listed at 20 pence per share in September 2006. Since then it has had two further placements, (7 million shares at 25p per share in June 2007 and 2.8 million shares in June 2008 at 40 pence per share), both at a premium to the market price, to take the total number of shares to 83.8 million. The price peaked at 46 pence at the end of July but in the last month has fallen in tandem with mining shares generally to 37.5 pence. Its market capitalisation is thus currently £31 million ($54 million).

Few mining shares are immune from these turbulent times, and the price of Chromex fell by 4% today. But a stream of newsflow is expected in the next few months including an update on the Stellite resource statement, an update of the BFS for Mecklenburg and the commissioning of the Stellite plant scheduled for December. Longer term Mecklenburg should be coming onstream in 2009, and the company has a simple and compelling story, a prime address, a track record of success in bringing a mine into production, and it is operating in a sector underpinned by positive long term fundamentals.