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Shree Minerals Readies To Mine Iron Ore In Tasmania

Shree Minerals (ASX:SHH) is due to start mining ore next month after a third party group said it would not proceed with a challenge to approval of Shree Minerals' iron ore mine at Nelson Bay River iron ore mine on Tasmania's west coast.

All requisite approvals have been received by Shree Minerals.

Proactive Investors understands that production could commence within a week or two at project, mine development is advanced - production will start early October.

One of the contracting groups for the mine said, "the project was on track to be digging ore by October 4."

It is understood that mine development and construction work could be 90 per cent done.

Iron ore price

With the iron ore price for 62% Fe iron sitting at a robust US$132.40 a tonne, when translated into local currency, a price of A$141.30 provides a very strong outlook for revenue generation for Shree as it becomes the next iron ore producer in Australia.

Background

Nelson Bay River Iron Ore DSO Project

Nelson Bay River is located in the west coast of Tasmania, in an area rich with infrastructure including proximity to roads and port.

Highlighting the prospectivity of the area, it hosts world class mines including Grange Resources' Savage River, Vedanta's Mt Lyell, Unity Mining's Henty and MMG's Roseberry and Avebury.

Nelson Bay River currently has a goethite-hematite Inferred Resource of 1.4 million tonnes, magnetite Resources of 7.8 million tonnes at 38.3 DTR.

Production is expected to be about 400,000 tonnes per annum.

The hematite ore is similar to ore found in Western Australia's Pilbara region; low alumina and a premium product and easy-to-extract.

The production schedule for the first stage of the project is to develop two relatively shallow open-cut mines to produce direct shipping grade hematite ore, which will require just crushing and sizing.

The second stage involves the continuation of mining of the second open-cut situated above the main magnetite orebody.

The hematite oxide cap consists of the central DSO ore section mined in stage one which is surrounded by lower grade ore considered to have potential to produce a commercial beneficiated oxide product.

Shree will then move to the third stage of the project, which involves open-cut mining of the deep magnetite orebody beneath the oxide cap.

Earlier studies have demonstrated that the magnetite ore can provide either a dense media magnetite product suitable for coal washery applications or a blast furnace pellet magnetite concentrate.

The mine life for the project based on the current mine plan is expected to be 10 years and has potential to increase with further exploration work.

Shree added the DSO project is planned as a contract mining operation based on contractor supplied plant and equipment including processing and transportation.

DSO Project Economics

Production from Nelson Bay River should generate $110-$130 million for the mining of DSO+BFO material which will generate strong near term cash flows in 2013/14 and transform Shree Minerals from explorer to producer.

Projected earnings from Stage 1 NBR Project for Shree Minerals are compelling - with potential to earn between $16 million to $18 million over two and a half years.

Offtake agreement

In May, Shree entered into an offtake agreement for its Nelson Bay River Iron Ore DSO Project in Tasmania with Singapore based trader Frost Global.

Importantly, Frost will provide US$4 million in funding to progress development of the project by way of an advance towards the supply of iron ore.

This will be paid back over the first eight shipments of iron ore, or US$500,000 per shipment.

Given that Nelson Bay River has low capital expenditure requirements and operating expenditure of about $58 per tonne for DSO product, which is not bettered by many iron ore producers, the funding advance will help progress the project towards production while allowing Shree to maintain a sizeable margin during payback.

Frost Global is a Singapore based company trading in agricultural products, metals, minerals, petrochemicals and textiles.

Analysis

Although it appears like a long road for Shree to move to production, the reality is the time frame is still faster than development time of most iron ore mines.

With production, Shree can soon be valued against cash flows and earnings per share. At current share price of $0.18 and a market cap. of only $18 million, it might just be the last opportunity to partake at this discount to intrinsic value.

Based on DSO material, output from Nelson River of 400,000 tonnes per annum, (mid-point Spot Iron Ore price used to estimate the cash flow was $120.00 CFR China for 62% Fe Fines), would produce a net cash flow of $12 million per annum from DSO production for Shree Minerals.

This would then equate to an after tax profit of $7.8 million per annum and an Earnings per Share (NYSEARCA:EPS) of $0.073 and a price earnings (P/E) multiple of 2.4x at current share price.

Based on the forgoing, we could see a Shree Minerals valuation and share price greater than $0.30 within six to 12 months based on this undervaluation. (Liquidity in the stock is light and daily share turnover low).

Shree Minerals carries an extremely light market valuation for a near term DSO iron producer with established strong regional infrastructure.

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