Minerals 260 loan shows robust economics of gold mining despite lower bullion price

It says something about the relative strength of the gold price that three banks have lined up to provide $410 million in debt facilities for the development of Minerals 260’s (MI6) Bullabulling gold project in WA ahead of the company making a final investment decision.

With the gold price and gold equities being buffeted on a daily basis, it is easy to forget that compared with the CY2023 average gold price of US$1,943.oz (A$2,943/oz), the current price of US$3,974/oz (A$5,806/oz) is a fantastic price.

It means fat margins for gold producers and, of particular interest to banking types, the ability for the rapid payback of capital by new projects, meaning what was a high-risk area of lending has become moderate-risk at worst.

That is reflected in the terms MI6 has been able to achieve with the three banks – ANZ, NAB and SocGen – no mandatory hedging, an interest rate carrying a premium of less than 3% to the Australian benchmark for debt financing, and a loan term of up to of 7 years for the project finance facility component.

By extension, maybe the propensity of the equities market to take down share prices hard on the recent gold price retreat to what is still a fantastic price is likely overdone – the so-called disconnect that the industry and analysts highlight.

MI6 plans to complete its definitive feasibility study and make its final investment decision in the first quarter of CY2027.

With the project now fully funded thanks to the bank facilities, the royalty funding from Franco Nevada and the company’s recent equity raising, it’s worth remembering that the project was only acquired by M16 some 19 months when it was a $30m company.

Since the pick-up from China’s Zijin the 2.3Moz project has grown to 6.2Moz and M16’s market cap has grown to more than $2bn at Thursday’s market price of 80.5c a share.

As to the apparent value disconnect between equities and the gold price, BMO Capital Markets has a price target on the stock of $1.75.

ARROW MINERALS:

It was mentioned here back on September 10 that bustling David Flanagan was back in the Pilbara iron ore scene through his leadership of Arrow Minerals (ASX:AMD).

Thanks to a deal this week with Joshua Pitt’s Red Hill Minerals (ASX:RHI) it can now be said Flanagan is back in his old stomping ground in an even bigger way.

The deal involves Arrow picking up RHI’s 62.5Mt Pannawonica project in the West Pilbara for $1.15m in shares and cash over time and a 1.5% gross revenue royalty on future production.

It is an advanced project with granted mining leases, native title agreements and environmental study work in hand.

It is also in the same neck of the woods as Arrow’s less advanced Yarraloola iron ore project, the acquisition of which earlier this year heralded Flanagan was back in the Pilbara.

Flanagan is the guy who between 2004-2016 grew Atlas Iron (now part of Gina Rinehart’s stable) from a $9 million company to as much as $4.5 billion by establishing a 15mtpa Pilbara iron ore production base.

As previously mentioned, when iron ore prices crashed to below $US40/t in 2015, Atlas had a debt problem. Flanagan sorted that out before leaving the company he had originally founded as a gold explorer.

After doing some other things, he became managing director of Arrow and took the company off to Guinea in West Africa, picking up an iron project to the north of the giant Simandou iron ore project owned by Rio Tinto and a bunch of Chinese interests, as well as a large-scale bauxite project.

The bauxite project continues on as a potential large-scale project for the company while Simandou North is held up pending the completion of a vetting process by Guinea on all of the country’s exploration permits.

As noted back on September 10, either of the projects could light a fire under Arrow with its then modest market cap of $22m at 1.3c.

Arrow was trading in Thursday’s market at 2.6c a share after announcing it had raised $5.5m at 2c a share to fund work in the West Pilbara and the bauxite project in Guinea. On its expanded issued capital, its market value is now more like $50m.

So it can be suggested that Flanagan’s bustling activity in the West Pilbara is starting to create a fan base. The resilience of iron ore prices at around US90/t despite the naysayers is no doubt helping.

RHI’s Pitt reckons it is Flanagan in particular who can make something of the Pannawonica project.

“As the founder of Atlas Iron, David Flangan has an outstanding track record in developing and operating low-cost iron ore projects,” Pitt said.

“His team has the skills and experience to unlock the full value of this asset.”

The Pannawonica project is of the Channel Iron Deposit-type mined in the area by the Rio Tinto-managed Robe River joint venture. The JV is a bit protective of its backyard too as evidenced by it paying $75m for CZR’s undeveloped Mesa A deposit (45.2Mt) in 2025.

Little wonder then that Flanagan reckons the Pannawonica project is a company-making transaction.

“Our priority focus will be to find the fastest path to production and cashflows,” he said.

“In iron ore, it’s all about logistics and I am not aware of another undeveloped iron ore deposit in Australia that is closer to a port, on granted mining licenses, with signed heritage agreements, and with flora and fauna studies well advanced.”

“The race is on to see how quickly we can become the Pilbara’s next mid cap iron ore exporter.”

AUSTRALIAN VANADIUM:

It’s not every week that an ASX company picks up a $15m government grant aimed at fostering the birth of a new utility-scale energy storage industry.

That’s what just happened for Australian Vanadium (ASX:AVL), courtesy of WA’s Cook government starting to fill out an election promise to make the state a leader in the roll-out of vanadium flow battery (VRB) projects.

VRB’s have major advantages over their lithium-based alternative due to their fire-safe chemistry, longer discharge duration and multi-decade life.

The Cook government sees a 50MW/10-hour VRB as a solution for power problem-riddled Kalgoorlie in the first instance, with VRBs for the hotter and equally power-challenged northern reaches of the state to follow.

AVL’s $15m grant is to support the design, construction and commissioning of a high-capacity and relocatable vanadium electrolyte manufacturing facility utilising AVL’s in-house V-NOMAD technology.

While the government has yet to award the tender for the Kalgoorlie VRB, it seems a safe assumption that the grant has filling up the Kalgoorlie VRB in mind, in the first instance.

AVL was trading in Thursday’s market at 18c for a market cap of $68.7m so there hasn’t been a celebration just yet of its emerging lead role in WA’s VRB ambitions. Presumably a re-rate will come on news of a (potential) successful tender for the Kalgoorlie VRB.

Having said that, AVL’s interests stretch to the US where its mix of upstream, mid-stream and downstream vanadium assets and technology has been gaining traction in investor and government circles.