Much to cheer in Australian Strategic Materials’ Dubbo deal with South Korea on rare earths project

Plus, Fenix locks in high iron ore prices, $8m Traka goes elephant hunting and Evolution raises a big lick well below the price of a week ago.
23rd July 2021

South Korea Inc has thrown its support behind the Dubbo rare earths and strategic metals project of Alkane spin-out, Australian Strategic Metals (ASX:ASM).

A consortium of South Korean investors are to pump $340m into the holding company for the project in return for a 20% equity interest, as well a 10-year metal offtake agreement with the metals plant being built by ASM in South Korea.

It’s the biggest news to hit Dubbo in NSW’s central-west since the Western Plains zoo was opened, as well for the Dubbo project itself, which has been 25 years in the making under Alkane, and now ASM.

An increasingly belligerent China has made the world increasingly concerned about its stranglehold on supplies of rare earths and strategic metals. And Dubbo is part of the answer.

All that has been foreshawed here previously, most recently on March 26 when ASM was a $5 stock. It has since motored off to $8.89 a share for a market cap of $1.2 billion.

It has been remarkable stuff given there was little value ascribed to Dubbo and the related metallisation plans when the project was hidden away in Alkane.

The development cost of the Dubbo project alone was last priced at $1.26 billion back in 2018. An optimised study into the project is due at the end of the quarter, with capital and operating costs enhancements expected.

Now that the South Koreans are on board, and Export Finance Australia has said it’s up to provide a $200m targeted debt solution, the Dubbo project is well and truly in the starting stalls.

There are some ifs and buts with it all, but it does seem to be a happening thing.

Importantly, the pricing of the deal with South Korea means that the potential for ASM’s market rating to have taken a hit had the entry price been below Dubbo’s NPV has been well and truly put to bed.

ASM/Alkane have always said that equity in Dubbo would not been done at less than NPV, last put at $1.23 billion (8%, pre-tax). So 20% of that (about $250m) would have done just fine.

But the actual entry cost of $340m for the 20% interest is impressive stuff, going as it does to seriousness of the global effort to broaden supplies away from China.

It is rare for an undeveloped project, particularly technically challenging ones, to command premiums to NPV. But it does happen with nationally and globally significant projects, as is the case with Dubbo.

Fenix Resources (ASX: FEX):

There’s been a nice bit of de-risking work by boutique iron ore producer Fenix (FEX), last mentioned here back in December when it was trading at 21c.

Fenix has since taken off to 42c in response to first production from its Iron Ridge project, which is throwing off lots of cash at current iron ore prices.

The company’s market cap continues to understate the earnings capacity of Iron Bridge because everyone expects the iron ore price will retreat from its current elevated levels.

As it is, iron ore has come off recent highs, and no one is sure where it will pull up in coming months.

Fenix has responded to that risk by effectively locking in 45% of its planned production for 12-months, through monthly cash settled swap arrangements, at a fixed $A230.30/t.

Fenix said the fixed price is sufficient to cover the majority, if not the entirety, of its budgeted cost base, with price upside remaining for the remaining 55% of output.

If only Rio, BHP and Fortescue could do the same with a portion of their 800mtpa of production so we could all sleep easier.

Traka Resources (ASX:TKL):

There’s not too many sub-$10m WA explorers out there. Certainly not many that are funded for an exploration program with the potential to deliver a leveraged response to success with the drill bit.

Hardy explorer Traka Resources is one of those. It last traded at 1.4c for a market cap of a little more than $8m.

It recently pulled in funding from a placement at the same price, and is in the process of completing a shareholder purchase plan that could bring in another $2.1m at the same price.

That gives it the funding for an exploration program due to kick off next month at its Mt Cattlin gold-copper project on the Ravensthorpe greenstone belt in south-east WA.

As mentioned here previously, Traka recent put out a small but high-grade gold resource estimate on a couple of prospects, more to preserve them in the portfolio by moving them through to licence applications more than anything else.

But a combination of the high-grade shoots, recent reconnaissance drilling, and remote sensing techniques, has got Traka thinking about the potential for a big intrusive-related porphyry copper-gold system at the project.

That’s what the exploration program will be targeting. The first of the porphyry targets to be tested is called Revelation, a name which reflects the new thinking on the large scale copper-gold potential.

The project is adjacent to Galaxy’s lithium mine and in the same general area as First Quantum’s Ravensthorpe nickel mine and Medallion’s recent high-grade gold/copper success at the historic Kundip mining centre.

Evolution/Northern Star:

Following on from St Barbara’s (SBM) tentative rationalisation moves at Leonora with its acquisition of a 19.7% stake in explorer/developer Kin (KIN), Evolution (EVN) and Northern Star (NST) have struck a rationalisation deal of their own.

Very logical it is too, with Evolution to pay $400m for Northern Star’s Kundana assets in Kalgoorlie, with Evolution to wrap the assets in to its Mungari operation.

The deal makes two average gold assets a better single asset under Evolution, while Northern Star pockets fair value for assets that can’t compete with its Tier 1 projects like Jundee and Pogo (eventually).

The only disappointment with the deal is that Evolution is funding it with a $3.85 a share placement. Evolution was a $4.95 stock a week ago when it spooked the market with a capex surge at its Red Lake and Cowal operation over the next three years.

As compelling as the Kundana deal might be, it would have been best to have delayed it (Evolution was the only logical buyer) until Evolution’s equity value recovered at least some of the lost ground.

     

 

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