Eastern Iron Limited (EFE.ASX) is an IPO that is due to be listed on the ASX on the 21st May 2008. The company plans to use the proceeds from the capital raising to fund exploration for channel iron ore deposits in the Cobar district of New South Wales. The company is raising $5 million before costs by issuing 25 million shares. In addition there are already 21 million vendor shares allocated to the seed investors and project sponsors, resulting in a post-IPO issued capital of 46 million shares. Assuming they enter the market at 20c (par value), that gives the stock a market value of $9.2 million, and we should not forget the 9.2 million options going to Platsearch, directors, consultants and the broker.
The company's website is www.easterniron.com.au. The offer closes 30th April 2008 so you will need to download your prospectus and despatch the application form.
Management
I know the senior management of this company very well having worked for Lachlan Resources in the early stages of my career. They have a background in base metals and precious metals rather than bulk materials, but its not entirely unrelated, and justifiable in a tight resources market.
Projects
EFE has acquired from Platsearch, a related company, an 80% interest in 15 tenements that cover extensive networks of iron-rich palaeochannels with a combined length of more than 1,100 kilometres. Potential for Channel Iron Deposits (CID) that are shallow and easily extractable.
1. The beneficiation process can produce a iron oxide concentrate that is sufficiently high grade to export without finer crushing and agglomeration or sintering.
2. That any iron ore concentrate could be shipped to an East Coast port such as Port Kembla or Newcastle.
3. There is currently no East Coast port handling iron ore concentrates. Apart from the fact that large scale mining to achieve cheaper rail freights would be required, it would also require dedicated storage and shiploading facilities at the port. Basic research by myself suggests that there might be berths available (BHP Berths 2-4), but that the berth & channel draft on these are just 15m compared to 18-21 metres in WA, which are incidently closer to China. The implication is that this project cannot compete with WA on rail freight, ship capacity. I would also suggest that its unlikely that an iron ore facility would have access to such infrastructure ahead of the 'well-established' coal industry. The same can be said of rail in the Hunter Valley, and I can't see a great desire to having iron ore trains passing through Sydney in large volumes, and Port Kembla is too far away anyway. Thats my background in bulk materials speaking... even if its 5 years out of date. Hunter Valley rail and port infrastructure has been fully-utilised for years. I see no reason why that would change. Yes, the East Coast has good infrastructure, its just not adequate to cater for the EFE's needs. Are there any signs of that changing? Well given the tight labour market, not without significant immigration and government funding, which is not contrary to Labor policy, but a long term prospect nevertheless.
The prospectus saids "Sampling and assaying material taken from drill holes across a paleochannel show remarkable consistency in the range of 12%-17% total iron". The implication is that these concentrations are likely to be a basin-wide phenomena, in which case the project might struggle to produce a higher grade iron ore concentrate without finer crushing. Given the location this project doesn't just have to level peg with the Pilbara, it has to exceed them. There is a plethora of iron ore around the world. This project would be uneconomic at much lower iron ore prices, which is why no one has ever thought to assess it before. The counter-argument is of course that China presents a huge emerging market, whose growth will keep prices high. Its possible but generally markets strike a balance. There is lower (capital) cost iron ore production capacity in WA which will come on much sooner than EFE's project. The "proximity of road and rail networks in both the Cobar and Euabalong areas" is really a less significant issue since WA mines and projects have the same benefit.
Project Valuation
I am less than impressed with the fact that no independent valuation of these iron ore project areas have been made. The fact that Glenn Goodacre and Bob Richardson are associated with the Lachlan Resources-Platsearch companies really begs the question. EFE purchased these leases (ELs 6710, 6711, 6671, 6672, 6706, 6952 to 6954 and 6956 to 6962) from PlatSearch on 30 January 2008, and the consideration for the purchase was As consideration for the 80% interest in the tenements was 11,000,000 shares at $0.03 per share and 5 million options at $0.001 per option with an exercise price of $0.35, an expiry date of 19 December 2012. There is also a requirement to complete expenditure of $2 million on the tenements within 4 years from 1 Nov-07 to retain the 80% interest. Nevermind the options, the same shares are now being offered to EFE shareholders at 20c. I think the prospect of mining shareholders is a little more tangible than the prospect of mining iron ore. Some effort should have been performed to look at the infrastructure bottlenecks in New South Wales prior to lodging this prospectus.Projects
EFE has acquired from Platsearch, a related company, an 80% interest in 15 tenements that cover extensive networks of iron-rich palaeochannels with a combined length of more than 1,100 kilometres. Potential for Channel Iron Deposits (CID) that are shallow and easily extractable.
1. The beneficiation process can produce a iron oxide concentrate that is sufficiently high grade to export without finer crushing and agglomeration or sintering.
2. That any iron ore concentrate could be shipped to an East Coast port such as Port Kembla or Newcastle.
3. There is currently no East Coast port handling iron ore concentrates. Apart from the fact that large scale mining to achieve cheaper rail freights would be required, it would also require dedicated storage and shiploading facilities at the port. Basic research by myself suggests that there might be berths available (BHP Berths 2-4), but that the berth & channel draft on these are just 15m compared to 18-21 metres in WA, which are incidently closer to China. The implication is that this project cannot compete with WA on rail freight, ship capacity. I would also suggest that its unlikely that an iron ore facility would have access to such infrastructure ahead of the 'well-established' coal industry. The same can be said of rail in the Hunter Valley, and I can't see a great desire to having iron ore trains passing through Sydney in large volumes, and Port Kembla is too far away anyway. Thats my background in bulk materials speaking... even if its 5 years out of date. Hunter Valley rail and port infrastructure has been fully-utilised for years. I see no reason why that would change. Yes, the East Coast has good infrastructure, its just not adequate to cater for the EFE's needs. Are there any signs of that changing? Well given the tight labour market, not without significant immigration and government funding, which is not contrary to Labor policy, but a long term prospect nevertheless.
The prospectus saids "Sampling and assaying material taken from drill holes across a paleochannel show remarkable consistency in the range of 12%-17% total iron". The implication is that these concentrations are likely to be a basin-wide phenomena, in which case the project might struggle to produce a higher grade iron ore concentrate without finer crushing. Given the location this project doesn't just have to level peg with the Pilbara, it has to exceed them. There is a plethora of iron ore around the world. This project would be uneconomic at much lower iron ore prices, which is why no one has ever thought to assess it before. The counter-argument is of course that China presents a huge emerging market, whose growth will keep prices high. Its possible but generally markets strike a balance. There is lower (capital) cost iron ore production capacity in WA which will come on much sooner than EFE's project. The "proximity of road and rail networks in both the Cobar and Euabalong areas" is really a less significant issue since WA mines and projects have the same benefit.
Project Valuation
Stock Outlook
Again I make the point that there are listed companies on the market, cashed up, with an odd 1Moz of gold at commercial grades within 1-2 years of mining trading at similar values to the implied value of EFE prior to listing. I therefore predict that this company will die a slow death unless it changes direction. You might think that is all fine and well, but shareholders are committing to $2mil of expenditure (half the proceeds raised) and dilution from 45% vendor equity that in less than a year seems to have been marked up in value considerably without any third party 'independent' assess of its worth.
An independent geologist has said that "The purpose and scope of this report is to assess the technical information contained in the prospectus, to verify independently, the sources of information and to make relevant comments on the integrity of that information and the work proposals contained herein". I agree that in the scope of the narrow scope of the report he has done that. But issues that should have been addressed by this report have not been. Or maybe they were unfavourable so they were excluded.
Sorry people this is another stock I dont like. I hope its not a pattern.
An independent geologist has said that "The purpose and scope of this report is to assess the technical information contained in the prospectus, to verify independently, the sources of information and to make relevant comments on the integrity of that information and the work proposals contained herein". I agree that in the scope of the narrow scope of the report he has done that. But issues that should have been addressed by this report have not been. Or maybe they were unfavourable so they were excluded.
Sorry people this is another stock I dont like. I hope its not a pattern.
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