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Gunson Resources Gains With Lower Operating Costs For Coburn Zircon Project

Gunson Resources (ASX: GUN) has estimated it can achieve a 6.3% reduction in the life of mine estimated annual average operating cost, from A$85.1 million to $79.8 million, for its Coburn Zircon Project.

The finding comes after a review of operating costs for the Western Australian operation, which shows that over the 23 year mine life Gunson will save $122 million in costs.

Coburn is set to be the second largest zircon producer of the only three mines in the world that have a completed Definitive Feasibility Study and are fully permitted for construction, behind Grande Cote in Senegal.

Further improving the economics of Coburn, rescheduling of the open pit mining sequence so that Pit B is started before Pit A results in a decrease of $1.2 million in annual average mining costs in the first five years of the project, related to the lower overburden to ore ratio in Pit B.

This adjustment has a positive impact on the net present value and internal rate of return of the project.

An important reason for the cost reduction is that the review has shown the cost of mining overburden is about 50% higher than that of ore, due to the longer push distance required with the dozer trap mining method.

Gunson now plans to focus on pit optimisation to reduce the volume of overburden and the overall mining cost.

The pit optimisation study is scheduled for completion in February 2013.

Strong market outlook

The Coburn Project is tipped to deliver annual revenue of around $124 million, with a strong market outlook for zircon and titanium dioxide products.

Rio Tinto (ASX: RIO) forecasts the titanium dioxide market to grow 46% to 9.5 million tonnes per annum in 2020, with titanium dioxide consumption linked to GDP growth in emerging economies.

Importantly, Gunson and the Coburn Project have the backing of major Korean steel producer, POSCO, which is earning a 40% interest by spending A$28 million.

Gunson has also secured an offtake agreement with DuPont, the world's largest pigment producer, for its proposed share of chloride ilmenite production from the Coburn Project over a five year period.

The company is also nearing the execution of offtake agreements for zircon and HiTi 90.

First production is slated for the September quarter of 2014, subject to financing by early 2013.

Annually, Coburn is expected to produce 41,000 tonnes of zircon, 89,000 tonnes of ilmenite and 19,000 tonnes of HiTi 90. Zircon accounts for 65% of annual revenue.

POSCO JV progress

Negotiations on the final terms of the Joint Venture Agreement (NASDAQ:JVA) have continued, with Gunson, POSCO and Korean Resource Investment Fund - a minority partner in POSCO SPV - reaching substantial agreement on the JVA wording.

Final resolution of the JVA is expected during December 2012.

Importantly, the financing condition precedent in the draft JVA has been extended for completion at the end of March 2013, replacing the previous end 2012 deadline.

Due diligence for a debt facility covering part of Gunson's funding requirement is in progress. Equity funding will follow once a debt agreement has been reached.

Gunson's share of the capital expenditure is reduced to $88 million, excluding working capital, with POSCO's earn in payment.

Analysis

The reduction in operating and mining costs for the Coburn Zircon Project is an important advancement in the development of the project, favourably impacting the financial returns.

Importantly, there is scope to potentially further reduce costs through pit optimisation, which Gunson is now reviewing.

Gunson has secured a strategic joint venture partnership with POSCO, which reduces the company's share of capital expenditure, has secured offtake agreements with DuPont, and is close to executing offtake agreements for zircon and HiTi.

The company's market valuation of $19.5 million, against a share price of $0.08, appears light given the substantial progress to date.

All eyes will now turn toward the POSCO agreement expected in December, with momentum building.

Potential catalysts for positive re-rating will be offtake agreements for zircon and HiTi, the completion of the POSCO agreement and debt financing.

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