Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Gunson Resources' Engineering Study Points To Reduction In Construction Time For Coburn

Gunson Resources (ASX: GUN) has delivered the results of an engineering study, recently completed by Sedgman Limited, for the Coburn Zircon Project which shows an eight week reduction in the construction schedule compared to the previous Definitive Feasibility Study (NYSE:DFS).

The construction period, which incorporates the period from time of award of early engineering and site activities through to practical completion, is now estimated at 77 weeks.

With the completion of the capital and operating cost updates, Gunson can now move to accelerate its efforts in concluding debt and equity funding for the project.

The Front End Engineering (OTC:FEED)/Value Engineering Study has also provided more definitive capital costs including a moderate 7.5% increase in the estimated project capital costs compared to the May 2011 estimate.

The study also resulted in a 19% increase in the annual average HiTi 90 production from 16,000 tonnes per annum to 19,000 tonnes per annum, based on an optimised process flow sheet.

Other key metrics in the study include a net present value of $210.6 million and an internal rate of return 22.4 %.

Capital costs

Sedgman, which compiled the capital cost estimates to a definitive accuracy level of +10%, has included contingencies at the P90 level, indicating a 90% chance of the actual cost coming in at or below estimate.

The average contingency is 9.6%, similar to the level incorporated in the capital costs in the DFS announced on 7 January 2010, despite the more mature nature of the design in the latest capital cost estimate.

In view of the recent delays and cancellations of new development projects in the Western Australian iron ore industry, it is likely that some construction costs may fall in the next 12 months.

In compiling the capital costs, Sedgman assumed that a single EPCM engineering company would be appointed to design and construct the project.

Capital expenditure estimates include all onsite construction items, apart from the build-own-operate power station and lateral natural gas pipeline, the expenses of which are included in the operating costs.

The only off-minesite item is a mineral product storage shed to be located at the Port of Geraldton.

The total capital cost estimate, including owner's pre-production costs, is $192 million and does not include working capital.

Operating costs

Gunson has this month completed a review of project operating costs, the most thorough since the DFS was completed in 2009, which has resulted in an increase.

Financial updates since the DFS results were announced in January 2010 were based on broad inflation adjustments only.

The biggest single component increase resulting from Gunson's review was in mining costs. However, in view of the growing number of contractors now seeking work in Western Australia after the large reductions in iron ore activity in the past two months, this situation is expected to change.

As a result, there is a reasonable basis to expect lower operating costs after the company tenders the mining and other ancillary contracts in 2013.

Next steps

Gunson is well advanced with several debt providers in relation to project financing, as well as with a larger number of key potential equity investors.

The company has a net requirement of $88 million for funding its share of the capital costs, in accordance with the POSCO joint venture arrangement announced in August.

Once the size and nature of the debt component is settled, the equity funding is scheduled to follow soon after.

In the coming weeks, the Korean resources fund is expected to provide indicative approval of its investment in the project, subject to execution of the Coburn Joint Venture Agreement by POSCO, which is now expected in October 2012.

Proactive Investors is a market leader in the investment news space, providing ASX "Small and Mid-cap" company news, research reports, StockTube videos and One2One Investor Forums.