Iron ore deals could boost a mining minnow

Marketing, not discovery, can be the biggest test for a small company trying to enter a bulk commodities business, which is why iron ore hopeful CZR Resources (ASX: CZR) could have just got a leg up.

Rather than tackling the costly challenge of developing a mine, or being faced with selling ore at a discount to a dominant rival, CZR (formerly Coziron Resources) has suddenly found a new potential customer for its Robe Mesa iron ore.

Until earlier this week the logical buyer of CZR’s ore was mining giant, Rio Tinto (ASX: RIO), but on Monday a consortium led by Mineral Resources (ASX: MIN) gave the go ahead to develop the nearby $3 billion Onslow iron ore project in Western Australia.

For CZR, the big new project, which has been 20 years in the planning phase, means it now has three options: solo development; a mining and ore transport deal with another junior, Red Hill Iron (ASX: RHI); or a marketing deal with either Rio or Mineral Resources.

There is also a fourth option which would be easiest of all, an outright sale of an asset which has suddenly gone up in value.

Punching above its weight

Despite an ultra-low profile, and share price to match, CZR punches well above its weight in terms of management and the location of its plum asset, partial ownership of the Robe Mesa deposit in the north-west of WA.

CZR has a share price of just $0.014 and market cap of mere $49 million.

The company is effectively controlled by star prospector and mining billionaire, Mark Creasy, and features a heavyweight board led by career iron ore project manager Russell Clark, and seasoned iron ore geologist and project manager Stefan Murphy.

Like hundreds of similar mesas (flat-topped hills), which litter the Pilbara region, the Robe Mesa is topped by a thick crust of high-grade iron ore.

Robe River Mining, a pioneer of the WA iron ore industry, started mesa mining in the 1960s until it was acquired by Rio. Since then, Rio has continued the process with one of its current operations located on the southern portion of the Robe Mesa.

CZR’s Robe Mesa project is immediately adjacent to Rio’s active mine with a recent aerial photo showing Rio drill pads up to the boundary line which, in theory, makes CZR’s ground a logical and tasty acquisition. Rio could simply keep mining across the border because everything is in place to do that.

How CZR acquired its portion of the Robe Mesa was explained in a Small Caps story earlier this year, with the key being a 19th century law which required stock routes to be kept clear for pastoralists driving cattle to market.

The Robe Mesa was inside the De Grey (ASX: DEG) stock route, so when Robe River Mining pegged the mesa more than 50 years ago the stock route portion was automatically excluded, but later became available when the law changed.

Snatching at opportunity

Enter Creasy, a man with a deep and intimate knowledge of what land is available in Australia (and other parts of the world) for mineral exploration and what exceptions apply which could create an opportunity.

With his 55% stake in CZR, the company has effectively become Creasy’s vehicle in the complex web of interlocking interests in the Robe River Valley of the Pilbara.

As well as acquiring a potential new customer, CZR has been busy expanding its iron ore resource. Earlier this year it reported a mineral resource on the mesa of 24.7 million tonnes of ore grading 56% iron – a grade identical to that being mined across the border by Rio.

Since then, a busy drilling program has lifted the mineral resource to 37.5Mt at 56% iron as well as securing heritage approval to drill further along the mesa with a high degree of confidence that this will lead to another resource increase given the uniform nature of the ore across the mesa.

Among big neighbours

Interest in CZR’s small but perfectly located asset has also been boosted by the operations of Rio, which have effectively surrounded its tiny neighbour.

In its latest quarterly report CZR noted that the Robe River joint venture (Rio plus partners, Mitsui and Nippon Steel of Japan) had a number of mines operating in the Robe Valley region with a rail connection to export facilities at Cape Lambert.

“The Robe River JV invested $1.7 billion in the Robe Valley to replace production from existing mines at Mesa A, Warramboo and Mesa J,” CZR said.

“Production commenced at Mesas B, C and H in August last year and there is extensive drilling underway at Mesa F – effectively surrounding CZR’s Robe Mesa deposit.”

Quirks of a cartographer’s pen have thrown up other examples of a small mining company finding itself surrounded by bigger players in much the same way the owner of a house can find his property in the way of a major redevelopment, and to then become the lucky recipient of a high price to move.

What price would trigger a sale?

For investors the challenge is knowing the price at which Creasy might sell, because the alternative of becoming a small iron ore miner with all the management commitments, government regulations and marketing requirements is almost certainly unappealing to a man who describes himself as a professional prospector – not a professional miner.

So, the question in valuing CZR’s Robe Mesa asset becomes one of assigning a notional value to its known 37.5Mt of 56% iron ore.

Even if you apply a low-ball $10/t of iron ore you arrive at a value for the deposit of $375 million – 5.5-times CZR’s current market value.

But if you increase the price to $20/t, which a big miner could afford to pay for a fully-drilled ore deposit of the same specifications, it is currently mining and it has equipment ready to move over the border and start work, the value of CZR’s Robe Mesa rises to $750 million, and perhaps more as the resource expands with ongoing site work.

In other words, CZR could be heading for a big pay day – especially as it is now in a position to create bidding tensions given the launch of the Onslow iron ore project which means that there might be two potential buyers.