December 16, 2011
Afferro Mining to accelerate Nkout development after Putu disposal windfall
Afferro Mining is poised for an exciting 2012 as it pushes ahead with the accelerated development of the Nkout iron project in Cameroon.
By the end of the first quarter it hopes to have completed a preliminary economic assessment of the project. And later in the year Afferro aims to complete a pre-feasibility study.
Nkout hosts an estimated 2 billion tonnes of iron ore, with a grade of 32 per cent and 18.5 million tonnes at 60.3 per cent with direct shipping ore (DSO) potential.
It is now the firm’s priority project following this week’s surprise US$115 million deal to sell its 38.5 per cent stake in the more advanced Putu project in Liberia to Russian group Severstal.
This cash injection will be a significant boost for the future development of the wholly-owned Nkout and other nearby licences.
With an accelerated approach, the firm will support an aggressive drill campaign, with 7 rigs working on site shortly.
This will allow Afferro to put forward new mineral resource estimates, targeting both the DSO potential and the magnetite BIF (banded iron formation). It also includes the advancement of both the preliminary economic assessment (PEA) and the pre-feasibility study (PFS).
As a result of the Putu deal all this work is now fully-funded. So Afferro doesn’t need to tap investors for any more cash in the foreseeable future.
“We expect to be spending at a rate of about US$2 million a month for the next couple of years,” chief executive Luis da Silva told Proactive Investors.
“This is an estimate of our all-in cost; we are currently reviewing our budget. This spend rate would include the 7 drill rigs, acceleration of the PEA and PFS. It would also include the development of our three other projects along the same proposed infrastructure, especially Ntem where airborne magnetics recently identified a target of greater magnetic intensity than Nkout.”
More importantly, perhaps, the cash injection vastly improves Afferro's bargaining position for any future farm-out deal.
Da Silva explained that negotiations over a potential farm-out have been taking place for more than nine months. He says these activities are relatively advanced.
“One of the key aspects of the Putu deal is the improved position from which Afferro is negotiating with prospective strategic investors,” he added.
Talks will continue with potential partners in the coming months, he said.
Additionally, da Silva said that Afferro could now look at putting an exploration plan in place for Ntem, which is located in south west Cameroon.
Afferro shares have gained around 30 per cent since the Putu deal was announced and at the current price of 54.25p the company has a market value of around £56 million (or US$87 million).
As such the market has yet to give Afferro full credit for the £74 million (US$115 million) base value of the Severstal deal, da Silva believes.
The company will receive an initial payment of US$65 million in cash on completion, which is expected to be no later than February 28. A further US$50 million deferred payment will also be due.
The firm said that it would receive an additional consideration if Putu was sold to a third party in the future. It is understood that such a payment would be worth at least £45 million (US$70 million).
The firm added that it will be released from any further capital contribution to Putu from January 1.
On Monday, Evolution Securities mining analyst Charles Kernot said the deal was fantastic news for Afferro.
According to the analyst, the AIM-quoted company has structured a sensible deal.
“Importantly, this enhances Afferro’s ability to progress Nkout to a cash-generative position without further dilution of existing shareholders,” the analyst said in a note to clients.
Kernot added: “The near-term cash payment more than offsets the currently weaker tone of the iron ore market, which has been reflected in the sales price. Importantly, however, the retention of control at Nkout is significantly value-accretive.”
Additionally, Afferro will be able to progress Nkout more quickly, with this accelerated development likely to focus on the project’s direct shipping ore potential, Kernot explained.
He reckons this could lead to the early generation of operating cash flow and significantly enhance value.
Kernot repeated his ‘buy’ recommendation but put his target price under review following the sale.
With this new cash injection and a busy schedule investors will have plenty to look forward to in the coming months.
article source www.proactiveinvestors.co.uk
Posted on The Cameroon News under Cameroon Business