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Issue 08 West African Iron Ore (WAI, TSXV) – Project Update
The Iron Ore sector continues to be a major story for 2012. The amount of cash pouring in for mergers, acquisitions and development projects is in the billions. West Africa is the place to be for exploration and infrastructure spending. West African Iron Ore whose prospects looked good just a few months ago, are now looking exceptionally prospective due to a new discovery area which I believe is a proverbial “company maker.”
Summary
WAI is an early stage iron ore exploration company working in Guinea, West Africa. They hold two large iron ore permits. The Forécariah permit covers an area of 1468 square kms and the Kérouané permit that covers 500 square kms.
This is an area of the world where iron ore mining is getting international attention. Three of the world’s largest mining companies are investing heavily in the region. In fact Rio Tinto is not only developing a mine but a rail line which will run across WAI’s property. The Chinese are also investing heavily in Guinea to secure their massive requirements for iron ore and are proposing infrastructure spending in Guinea for rail lines and port facilities which will run into the hundreds of millions of dollars.
Worldwide, mergers, acquisitions and project infrastructure spending in the iron ore sector are in the tens of billions of dollars. Make no mistake the iron ore sector is red hot.
In the current state of the junior resource market though, the valuation of small iron ore exploration companies like WAI are shockingly low. And among the junior’s, WAI shares specifically seem to be the most undervalued. A recent report by Fundamental Research Corporation done in February compared West African Ore to ten other junior exploration companies based on Enterprise Value and Resources. The EV/Resource ratios showed WAI placing last with a rating of 13 cents per Fe tonne versus the average ration of 52 cents per tonne. From a speculator’s point of view, this is a great opportunity. Fundamental Research concluded that WAI was a buy and gave a fair value estimate of 46 cents per share.
However recent news has me believing the speculative premium given by Fundamental Research could be conservative based on a new discovery at Wondima. Without much fanfare, WAI’s management has started an ambitious 8,000 meter drill program to explore an oxided iron ore cap that very well could prove to be a “company maker” discovery in and of itself.
There are two important factors for any iron ore prospect. One is infrastructure and the other of course is having an economic deposit. On that front, WAI has been working toward building a 43-101 resource.
Historical data suggests that WAI could be sitting on a sizable deposit. The lead Forécariah Project has been given a projected deposit size of between 2.9 – 5.1 billion tonnes.
Forécariah Iron Ore Project Update- Moving Towards Initial Resource Calculation
West African Iron Ore’s lead play is the Forécariah iron ore project in Guinea, where the company has been actively drilling with the goal of completing a 43-101 resource estimate by the end of Q4 2012.
Historical geological data suggests four separate areas where the key elements magnetite quartzite and magnetite schist are found in thicknesses ranging from 30 to 400 meters and mineralized strike lengths of 3 to 11 kilometers. In March 2010 Sky Alliance did a 9,464 line airborne survey of a series of target zones with the largest showing a 1500 meter width over a strike length of over 16 kilometers.
SRK Consulting has been hired to provide a compliant 43-101 resource report on the project. Initially WAI management was expecting to prove up 750 million tonnes in short order. Based on historical data, SRK is theorizing that the iron ore deposit could be a massive 5 billion tonnes or more spread over 10 target areas, and that the mineralization could extend to 200 meters from the surface.
Of course this conceptual target can only be proven out by drilling. To that end, last April WAI initiated a 15,000 meter Phase I drilling program. The drilling was initially hampered by rain but by October WAI announced that they got their first indication of high grade mineralization at the Sambalama target where hole SAM 3 had an outstanding return of 14.2 M of 70.53% Fe. The high grade results initiated an aggressive Reverse Circulation drill program along a 9,000 meter strike at Sambalama.
In early November 2011, the results of the first six RC holes again showed high grade intersects with two of the holes SAMRC 001 & 008 having grades and chemistry suggesting that the ore could be shipped with minimal processing, called Direct Shipping Ore or DSO. Later in November more results showed substantial intersections of near surface and sub-surface, high-grade iron ore mineralization. Three more RC holes, SAMRC 012,013 & 018 were identified as DSO. Another hole SAMRC 011 had high grade mineralization from the surface to 120 meters grading 28% Fe.
On January 23rd of this year WAI reported more high grade intersections and a summary of results from a new total of 19 RC holes. Mineralization was found from the surface to as deep as 120 meters with an average mineralized interval of 46.63 meters.
To date on Sambalama WAI has reported completion of 12 diamond drill holes totaling 2,169 meters and 57 reverse circulation drill holes totaling 7,125 meters. Sambalama is but one of ten targets identified that cover a combined 45 km strike over the Forécariah permit.
On the Kalyadi prospect 9 diamond drill holes totaling 1,924 meters and 3 reverse circulation drill holes totaling 321 meters have been completed.
Assay data has been received for 15 DDH on the Sambalama/Kalyadi prospect and 12 out of 20 RCH on Sambalama. The grades and the analytical results for 7 of these holes appear to demonstrate that this material could be favourable for shipping with minimal processing (Direct Shipping Ore or DSO).
The Wondima/Amaraya Prospect- This Discovery could be a Company Maker
The Wondima target was found along the northern extension of the Sambalama/Kalyadi magnetic anomaly and consists of several zones in excess of 50 square kms.
After completing initial exploration work on the Wondima/Amaraya prospect WAI management were significantly encouraged to mount an extensive 8,000 meter drilling program covering an area of over 40 square kilometers. The target is an iron rich oxide cap which runs from surface to a depth of 20 meters. The central part of the target is about 26 square kilometers of a raised plateau with a flat and hard iron cap. 224 surface samples from this area found Fe content estimated to be 34.73%.
At last report WAI had completed 141 reverse circulation drill holes totaling 4,375 meters out of a planned 8,000 meter program. 380 samples, representing 62 RCH have been shipped for analyses to Inspectorate Exploration & Mining Services in Reno, Nevada. Results are anticipated to be received by the end of May 2012.
A diamond drilling program is planned to start on this prospect during the first week of May 2012. This shallow drilling program has been designed to define a 43-101 compliant resource by Q4 2012.
There is a good possibility that the ore from the iron rich cap will prove out to be of high enough grading such that it can be classified as DSO or Direct Shipping Ore.
Ongoing drilling on the Sambalama/Kalyadi prospect and Wondima/Amaraya prospect will help to compile WAI’s first compliant 43-101 resource calculation which they expect to have available in Q4 of 2012.
Also of note, another new target called Kantinbanga appears to have a strike length of approximately 2 kms by a width of at least 500 m.
Well Located Near Infrastructure
For any buyer or joint venture partner who is looking to acquire an iron ore project, especially in West Africa, a major concern is having the transportation infrastructure in place to get the ore from the mine to a port for shipping.
The Forécariah property is just 90 kms east of the capital city of Conakry and has good road access. From the map below, the property is outlined in white. Rio Tinto is currently developing a mine in Guinea with a proposed rail line which crosses over the Forécariah project. Company president Guy Duport hypothesized that WAI could perhaps utilize that rail line which would be
a huge coup for the company. Alternatively, their close location to the shore provides the opportunity for a conveyor belt system to be used to transport the ore to a deep water port.
A proposed deep-sea port is located just 40km from Forécariah which again makes the project attractive for a potential partner or purchaser.
Another rail line is proposed for the Bellzone Mining Kalia joint venture with China. The Chinese are fully funding the construction of the rail system and port facilities as part of their acquisition. As stated by Bellzone, this construction will be “multi-user infrastructure required to support the export of iron ore from the Kalia Mine Project and other projects that will be developed in the area.”
The majority of the 75 km railway runs directly through WAI’s Forécariah permit. Again, a deal with the Chinese to piggy back their rail and port facilities are ideas which Duport is considering. This is where his language and Asian business presence comes into play.
As another sign of serious Chinese involvement in Guinea, the Chinese have been approached by the Guinean government to help build a 135 MW hydro power plant within the Forécariah region.
China
According to Morgan Stanley, Chinese infrastructure spending will reach $1 trillion this year and keep growing to $1.8 trillion by 2017. Currently about 60% of Chinese demand is met by imports where BHP Billiton, Rio Tinto and Xstrata are the world’s top producers.
Beijing has indicated they want to secure their iron ore sources themselves by investing in mining projects like those found in West Africa where they have established some deals already. The Chinese government has stated they have a goal of being self sufficient in iron ore by 2015. If that’s true, they’ll have to go on a serious buying spree to secure resources and I think WAI has a number of key advantages which the Chinese will like: A high potential property, good location to infrastructure and transportation, and a management team with roots in China.
As I mentioned in my initial report, China is the driving force behind world’s iron ore demand which is estimated to be growing by 10% per year. China, the world’s largest iron ore consumer, imported 618 million tons of iron ore last year, and most of that was supplied by global miners BHP Billiton, Rio Tinto and Vale, all of whom operate in Guinea.
Beijing has indicated they want to secure their iron ore sources themselves by investing in mining projects like those found in West Africa, where they have established some deals already. Their deals in West Africa could produce nearly 250 million tons of ore annually in the medium- to long-term.
The Chinese government has stated they have a goal of being self sufficient in iron ore by 2015 which seems like an improbable timeline, however it does speak volumes about their intention to acquire projects.
This is where the expertise of WAI’s CEO, Guy Duport, comes into play. As I stated in my earlier report, “Guy is a rather unique individual having a Masters degree in European commercial law, is a member of the Society for Mining Metallurgy and Exploration in Colorado, has consulting offices in Hong Kong and Beijing where he is fluent in Chinese, and has close political ties with the leaders in Guinea. You would be hard pressed to find a more perfect man to run an up and coming iron ore company in Guinea where the ultimate buyers are likely.
ChineseAccording to the Rio Tinto media advisor, Rebecca Murphy, the company plans to invest over $15 billion in the next five years.”
Canaccord Genuity of Vancouver is helping WAI identify strategic partners in China by talking with a number of iron ore producers, consumers and investment funds in China. Guy Duport stated that “The keen interest expressed by a number of potential strategic partners with which we have consulted, gives us confidence that our future financing plans are achievable without imposing an undue burden or dilution upon our balance sheet and shareholders.”
Conclusion
The speculative value of WAI shares today is 8 cents. This is a far cry from the fair value estimate of 46 cents from Fundamental Research. Also there has been absolutely no speculative premium given to the new Wondima/Amaraya discovery. And I believe this new iron rich cap discovery will be the catalyst which ignites WAI shares once the lab results prove out the rather optimistic findings made thus far.
SRK is theorizing that the iron ore deposit here could be a massive 2.9 to 5.1 billion tonnes. As investors we are speculating that if SRK Consulting is even half right about their theoretical model then we could be sitting on a huge capital gain over the next couple of years.
It all comes down to drilling success. So far it’s looking good. By Q4 2012 we should have a compliant 43-101 resource estimate which will give us the verification we need that this project can be developed into a mine.
As far as the all important infrastructure accessibility, the proposed rail line and port development will make WAI an obvious choice for a merger or acquisition.
Some analysts are forecasting that the Chinese will invest $25 billion over the next five years to secure their iron ore needs with most of that being spent in West Africa. Reuters has reported blue chip mining companies will spend $14 billion to develop iron ore projects in West Africa.
West African Iron Ore is certainly in the right place at the right time. Within seven months we will have some proof as to the viability of them building a mine. The clock is ticking so investors should due their due diligence now while the stock is trading quietly