Riding the weak dollar

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 27 Jan 2016   Posted by admin


By Samantha James

DIATREME Resources is relying on a forecast increase in mineral sands demand and the weak Australian dollar to aid its flagship Cyclone project, in WA’s Eucla Basin, on the road to production.

According to UK-based industry forecaster Artikol, mineral sands demand is expected to expand by up to 4.1 per cent per annum through 2020, with the weak Australian dollar set to aid Australian producers.

At the 2015 Informa Mineral Sands Conference, Artikol predicted estimated mineral sands demand growth based on growing demand from Asia, Latin America and Southeast Asia.

Iluka Resources – the world’s largest mineral sands producer and Diatreme’s main competitor in the Eucla Basin – also indicated that positive demand fundamentals included urbanisation trends, increasing consumption levels and new product applications, with Chinese and North American requirements set to lift demand growth.

Diatreme discovered the zircon-rich heavy minerals sands (HMS) deposit at Cyclone in 2007.

Following completion of a positive pre-feasibility study  which outlined a 10 year, 147,000 tonne per annum heavy mineral concentrate (HMC) operation generating zircon and two titanium products, Diatreme moved to a Definitive Feasibility Study (DFS) while completing planning, environmental and mine approval processes.

During the September 2015 quarter the DFS focused on the viability of producing HMC, rather than processing zircon and titanium, following a new project strategy and revised budget.

The changes were made as part of ongoing discussions with potential Chinese investors.

In December Diatreme announced an increased ore reserve of 140 million tonnes grading 2.5 per cent HM, including 0.71 per cent zircon.

This incorporated not only the major Cyclone mineralised zone but also the nearby Cyclone Extended tenement –  which was secured by the company earlier in the year – and lifted the projected mine life from 10 years to 14 years based on a 10 million tonne per annum mining rate.

Backed by industry forecasts, Diatreme stated it was “confident in the medium to longer-term outlook” which would see the Cyclone project come into production in early 2018, at a time of rising demand for its key product.

Drilling at the Cyclone deposit began in 2007.

Drilling at the Cyclone deposit began in 2007.

The road so far

Diatreme holds 94 per cent of Cyclone, with Hong Kong partner Perpetual Mining Holding earning its initial 6per cent in September 2015 following a $2 million investment in the project.

The company also owns the Tick Hill gold project in Queensland, centred on the redevelopment of a historical mine near Mount Isa.

In 2015 Diatreme announced a joint venture agreement with Superior Resources, under which Superior could earn a 50 per cent interest in Tick Hill.

In addition to the Eucla Basin HMS exploration project – which extends from WA into South Australia – and the Bedford Cape HMS project in Queensland, Diatreme also holds the Clermont copper project in central Queensland, which covers the historic Peak Downs copper mine.

During 2015 Diatreme advanced Cyclone’s regulatory approvals, with the Public Environmental Review undergoing assessment by the WA Environmental Protection Authority into February 2016.

The EPA assessment was the final requirement in de-risking the project, following the granting of a mining lease, an agreement with the traditional owners, and the identification of water supplies, along with an expanded mineral resource estimate following the acquisition of the adjacent Cyclone Extended tenement from Image Resources.

“Cyclone represents an attractive investment given its relatively low projected capital costs and high zircon component,” Diatreme chief executive Neil McIntyre said.

“With the latest forecasts anticipating growing medium to longer-term mineral sands demand from Asia and North America, the project has the potential to deliver sustained growth in shareholder value.”

Due to the downturn in the mining industry and changes to the fuel prices and exchange rate, the company was reviewing pricing with potential suppliers for logistics and services related to development of the project.

The DFS plan was reviewed on the basis of a new project strategy and a revised budget, as part of ongoing discussions with potential Chinese investors.

“There is surplus capacity in Chinese mineral separation plants and a shortage of heavy mineral resources in China to supply these plants with HMC,” Mr McIntyre said.

Diatreme was targeting completion of the DFS and the granting of most regulatory approvals in fiscal 2016, after which it would secure project financing.

Construction and development was planned for 2017 – and would generate around 200 jobs – with mining and production to begin by the end of the 2017 calendar year.

Positive impacts

The Eucla Basin, which covers parts of South West WA and South Australia, is touted as an emerging world-class zircon province and host to several developing and producing projects owned by Iluka Resources and Adelaide Resources.

Mr McIntyre said that in comparison to existing projects, Cyclone was in a favourable position because of its high-grade zircon and low projected development costs of $233 million.

“Based on projected capital cost estimates, Diatreme compares favourably to most rival projects as a relatively low cost project, while its in-situ ore value is also a mid-tier project compared to rivals,” he said.

Although the company was forced to revise its mine plan at Cyclone due to the low economic environment, Mr McIntyre said the outcome for Diatreme remained “very positive”.

“Diatreme is expecting to benefit from reduced input costs such as fuel, more competitive domestic labour rates and more competitive capital equipment sourcing,” he said.

“Overall, the lower Australian dollar is a net benefit to the project as it increases the value of projected US dollar export revenues for the mineral sands product considerably and will add to the attractiveness and project returns of the project for investors.”

Mr McIntyre said the current downturn in supply was “sowing the seeds for an upturn in prices”.

“By narrowing our focus to key projects, maximising their value and conserving capital, we are confident of a bright future for Diatreme as we work towards becoming an emerging producer and mid-tier miner.”

Short term options

The Tick Hill project, held by Diatreme in joint venture with Superior Resources,  is a historical high-grade mine that produced 513,333oz of gold in the 1990s at an average recovered ore grade of 22.6 grams per tonne of gold.

In early 2016 Diatreme announced a maiden resource estimate for the remaining tailings material of 630,000t grading 1.08g/t of gold, containing about 22,000oz gold.

Diatreme Resources' chief executive Neil McIntyre.

Diatreme Resources chief executive Neil McIntyre.

Mr McIntyre said that further work was planned to determine optimal grind size to balance gold extraction and energy input, develop a process flowsheet and complete capital and operating cost estimates at the historically rich mine site.

Diatreme would consider several development methods concurrently including the establishment of a tailings processing operation, the de-watering of the existing mine workings to recover material from within the existing mine drives and stopes, and the commencement of new mining activity in high grade offshoots that were identified in historical mine exploration records but not worked.

“Tick Hill’s location, its past history as a high-grade gold mine and the potential for increased revenue due to the depreciating Australian dollar have all increased the promise of this project to provide attractive near-term returns for shareholders’ benefit,” Mr McIntyre said.

Moving forward

In 2016, Diatreme planned to progress Cyclone towards development and construction, with the completion of the DFS and acquisition of regulatory approvals. Tick Hill would also remain a priority as “an attractive potential source of near-term cash flow”.

“We are rapidly working towards completing [Cyclone’s] DFS by de-risking the project to attract further investment,” Mr McIntyre said.

“We already have secured substantial backing from investors in China and Hong Kong and anticipate further support as we progress the project towards mining.”

Mr McIntyre said the company was in a positive place in the current market.

“Diatreme is unusual compared to our peers in that we have two advanced projects transitioning to mining and production, and both projects are attractive for a potential development or sale,” he said.

“A re-rating of Diatreme’s market value is expected as the company further progresses these key projects in 2016.”