Cape Lambert exit hints at market froth

[miningmx.com] — WITHOUT wanting to put a dampner on Exxaro
Resources’s yet-to-be-concluded R2.8bn bid for African Iron, you have to wonder if
the west African iron ore sector is perhaps a bit toppy.

Clearly Cape Lambert Resources has spotted an opportunity to realise some value in
the iron ore exploration sector. It this week agreed to sell its 20% stake in African
Iron to Exxaro Resources, while a month earlier had lined up suitors for shares in its
Marampa iron ore prospect in Sierra Leone.

“Cape Lambert appears to be realising value from its iron ore assets,” said Fairfax, a
UK stockbroker, in a note published this week. “We would recommend investors to be
selective in the iron ore juniors we would buy.” Fairfax added that the best
investments in the west African iron ore sector were those where product can be
shipped to markets in reasonable time.

After a price correction in the middle of last year, iron ore is gaining traction again.
There are valid questions about the project risk of many iron ore projects in west
Africa, although some do seem to be keepers, such as Rio Tinto’s Simandou project
in Sierra Leone.

One simply can’t underestimate the important of access to infrastructure. On
Wednesday, shares in Ncondezi Resources – a UK-listed thermal coal exploration firm
– gained 20% after it signed an agreement with Rio Tinto to study port and railway
options for planned projects in Mozambique’s Tete province. “And so it should,”
said Graham Mascall, CEO of Ncondezi Resources in response to the share price
activity.

For west African iron ore, however, it has been observed that a total of 5,000km of
rail and 11 new or expanded port projects need to be completed (excluding the
possibility of infrastructure sharing) to satisfy projected iron ore output from the
region.

Some 400 million tonnes worth of iron ore projects – equal to 40% of seaborne trade
– are in the works for the next 10 years. This will require roughly $74bn in capital
investment, yet will they all appear; and if the projects are successfully
commissioned, will it be at a time when China’s demand for iron ore softens?

“In the case of Exxaro Resources, the first-mover advantage held by African Iron in
the Republic of Congo (RoC) is a major plus,” said a Johannesburg analyst who
preferred not to be quoted. If Exxaro is successful in its offer, however, the pressure
will be on to bring the production to market as soon as possible.

Another important aside is that Exxaro will also have to find a project management
solution. There doesn’t appear to be any agreement to retain African Iron
management. It therefore befalls the chaps in Pretoria running the project, which
could be risky. Exxaro has bulk mining management experience, but RoC is a different
territory entirely, beset with its own technical and political challenges.

Contacted on Wednesday, Exxaro Resources said it wasn’t commenting further on its
bid until it closes its offer, which is set for February 14.

The west African iron ore region is a 4.5-million-square-kilometre region, estimated to
be nine times the size of Pilbara, the western Australian iron ore district. Along with
Brazil, it forms the hub of world supply. For all of west Africa’s latent promise, and
excluding some of the west African iron ore projects now in production such as
Tonkili and London Mining’s Marampa – a regard for over-enthusiastic sentiment
would only be healthy.