TNG Limited (ASX: TNG) has agreed in-principle terms for a farm-in and joint venture agreement on its 100% owned Melville Island licence in the Northern Territory with Rio Tinto (ASX: RIO) subsidiary Rio Tinto Exploration.
Melville Island, which covers about 1,400 square kilometres, has been a strategic licence for TNG being located in a prospective area for bauxite and other minerals.
Rio Tinto Exploration can earn up to an 80% interest in the licence by spending $5 million within four years.
Once TNG's interest is diluted to 20%, the company has the option of selling the remaining interest or converting it to a 2% net smelter royalty.
Importantly, if TNG elects to take the 2% net smelter royalty it retains continued exposure to the potential exploration upside of the project.
TNG managing director Paul Burton told Proactive Investors today the agreement will allow the company to retain an interest in a very strategic exploration licence in a prospective area, as well as also focus on its flagship Mount Peake project and development of its copper exploration portfolio.
TNG will receive an initial cash payment of $50,000, and Rio Tinto Exploration will progress negotiations and the grant of the licence application for bauxite exploration.
The next step for Rio Tinto Exploration is to seek agreement with the traditional owners for access to the Melville Island licence.
"They do have a very good reputation in that regard in that area. They've done a similar agreement with another company that has a licence to the south of us on that island," Burton said.
"They've got the right profile and the right connection I think."
Mount Peake Upside
The upside potential for TNG at its Mount Peake project is significant.
TNG is at a very interesting stage with the project, which hosts a JORC Indicated and Inferred Resource of 160 million tonnes at 0.3% vanadium, 5% titanium and 23% iron.
The company has almost completed a Pre-Feasibility Study, which is the key to a hydrometallurgical process capable of separating the three minerals - iron, vanadium and titanium, all at high grades and high purities.
Burton said the process allows the separation of the three mineral streams which gives TNG very strong robust economics for Mount Peake and allows the company to identify a whole range of different markets.
Importantly, TNG is already generating interest from potential Chinese and European buyers of the Mount Peake product.
Testwork for the pilot plant is scheduled to begin next week. Once that has been completed TNG will make a decision on whether or not to progress to the Feasibility stage.
The pilot testwork is likely to confirm the robustness of the Mount Peake project. Given the strong economics and the potential upside of the project, TNG's valuation looks exceedingly light.
Shares are currently languishing around A$0.08 per share, yet a U.K. broker has placed a Buy recommendation and a $0.45 price target on TNG.
The potential of this company is likely to be realised by the market once the pilot testwork is completed.