Chromex Mining begins production at Stellite

by Stuart Watson

It’s been about a year since Proactive last looked at Chromex Mining, a company with two chrome projects based in South Africa. It’s been an eventful twelve months that has seen a mixture of good and bad news, but its share price has doubled and not many junior miners can match that feat.
A quick recap to begin with. Chromex came to the market in September 2006 at 20p per share. At the time, it had one project in the eastern limb of South Africa’s Bushveld Complex, called Mecklenburg. The Bankable Feasibility Study for this was completed in March 2007 but the Mining Right was only granted last month due to a delay caused by a conflicting claim from Samancor that was eventually thrown out.

Chromex didn’t hang around while Mecklenburg was in limbo however. In August of last year it announced the purchase of an initial stake in Stellite, a second chrome deposit in the western limb of the Bushveld. In May, the company increased its stake and production began there last month with the first revenues expected in a few weeks’ time.

So today Chromex has 74% stakes in two projects – the remaining 26% held by its Black Economic Empowerment partners. Stellite is expected to produce 30,000 tonnes of chrome ore per month by the end of 2008 and Mecklenburg’s target is 40,000 tonnes by the end of 2009.

On the resource front, Stellite has 15 million tonnes of which 3 million is expected to be open pit and will be mined first before venturing underground for the remainder. Initially, run of mine ore will be sold and the proceeds will be used both to build a processing plant later this year (costing about £3m) and to part fund the development of Mecklenburg (estimated at £9m last year but possibly nearer £10m-£12m now). Neither mine will have its own smelter as their size does not justify the additional cost this would incur.

Mecklenburg’s resources are slightly smaller at 9.6 million tonnes of which 5.7 million tonnes have been classed as reserves. As well as the funds from Stellite, Chromex expects to take on debt and raise more equity to complete the development of this project. Operating costs will be kept down by using board and pillar mining, where sections of the orebody are left to act as supports rather than installing equipment to bolster the roof of the mine. The proximity to Anglo Platinum’s Twickenham mine will also help as Chromex will be able to use its water, electricity and tailings infrastructure.

Chromex remains on the lookout for other projects. Demand for ferrochrome, being a key component in the manufacture of stainless steel, remains strong. South Africa is the place to be, despite its ongoing power problems, as it has an estimated 70% of the world’s chrome reserves and accounts for almost half of all production. Chromex’s aim when it listed was to build a mid-tier player with 100 million tonnes of reserves. So far it’s only a quarter of the way there.

Although fresh funding will be required for Mecklenburg, the cash situation is otherwise pretty healthy. Cash reserves totalled £2m at the end of March since when £4.5m was raised in a placing with £3m of these proceeds used to fund the final acquisition cost of Stellite.

What sort of revenues might Chromex generate from its operations? A recent note from house broker, Blue Oar, provides some clues. Once the processing plants have been completed, about 40% of the monthly production will be waste. The remainder will be a combination of lumpy, chip and concentrate material, all of which attracts different prices. The concentrate can also be split into metallurgical, chemical and foundry grades. Overall, Blue Oar expects the average price per tonne for the ore sold to be around $180 but operating costs to be in the region of $50. With low ongoing capital costs, both operations should be strongly cash generative.

Using these assumptions Blue Oar estimates revenue of £17m and £38m for the years ended September 2009 and 2010. Profits after tax work out at £6m and £10m. However, this note was issued in April before the company’s holding in Stellite was increased from 51% to 74%. It also assumes Mecklenburg begins production in March 2009. Both projects have been pencilled in as having a ten-year life but clearly from the level of resources there should be scope for them to carry on for longer than this.

The move towards production has also seen Chromex shuffle its management pack. Former CEO Nigel Wyatt has remained as an executive director with Russell Lamming, a 38-year old who led the commercial operations of African Platinum before its sale to Impala, taking his place. New faces have also been installed as finance and operations directors. The company’s chairman remains Brian Moritz, who is involved in several mining companies based in Africa.

The recent rally in Chromex’s share price is impressive but is there more to go for? The original feasibility study suggested production at Mecklenburg could hit 60,000 tonnes per month after three years. No doubt the study will be updated in due course and revised estimates for production and costs will be forthcoming. The delay in the issue of the Mining Right for this project could be to Chromex’s advantage. Although costs are significantly higher than eighteen months ago, the doubling in the ferrochrome price has more than offset this. With China’s voracious demand expected to continue, few people expect the ferrochrome price to fall back anytime soon.