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Chromex Mining’s Encouraging Start of the Year after a Challenging 2009

It’s been two months since Chromex Mining restarted full mining operations at Stellite, one of its chrome projects based in South Africa. This year certainly began encouragingly, leaving behind the memory of a difficult 2009. With market conditions beginning to improve, Chromex’s management team is hoping to deliver better value for shareholders in 2010.

It’s been an eventful twelve months with the company focusing on the construction of the Stellite dense media separation (DMS) plant which is expected to double the current plant capacity.

The commissioning of the first phase of the Stellite chrome beneficiation plant was completed in August 2009. By the beginning of November 2009 this facility was able to operate at full design capacity, producing 42% and 44% metallurgical grade chrome concentrates.

The plant was financed in part by a loan of ZAR 30 million (£2.5 million), of which ZAR 20 million (£1.67 million) has been drawn down and ZAR 10 million (£0.83 million) remains undrawn.

However, the challenging conditions of the chrome market in 2009 led Chromex to halt mining operations at Stellite, the plant was commissioned on chrome stockpiles. But the flexibility of its contractor-based mining operation meant the company could adjust quickly and restart mining in January as pricing and chrome market conditions improved.

Since recommencement, Stellite’s initial monthly production has amounted to 20,000 ROM tonnes per month, which will increase to 40,000 tonnes once a DMS is installed at the plant. The DMS, which is expected to be completed during the third quarter of 2010, will also allow the company to be in a position to market a sized lumpy chrome product in addition to chemical and metallurgical grade concentrates.

More good news has come from Stellite as Chromex has recently received encouraging results from platinum group elements (PGE) testwork. A recent run of mine samples indicated an average 3PGE (platinum, palladium and rhodium) and gold content of 1.74 grams per tonne (gpt). Whilst it would not be economical to mine Stellite to solely produce PGEs, in conjunction with chromite, Chromex assumes that PGE-gold extraction could increase revenues substantially in the future, particularly revenues from the reefs with lower chromite content.

A study is now underway to determine the economics of adding a PGE floatation plant to treat the tailings produced from the project’s gravity concentration plant.

Meanwhile, its second project, Mecklenburg, is still in limbo, pending settlement of the legal issues with large chrome/ferrochrome producer Samancor Chrome Limited, who applied to the South African High Court in 2008, to set aside the decision to award Chromex the Mining Rights. Chromex is confident that the issue will be resolved in its favour, but the process of providing evidence to the court is taking a long time. Upon resolution of the dispute, Chromex will complete the design of the underground mine and start producing high grade ore from the LG6 and LG6A reefs, which outcrop at surface.

Mecklenburg is located at the Mecklenburg farm on the Eastern Limb of the Bushveld Complex in the Limpopo Province of South Africa. Stellite is located in the west. Both are owned and operated by the South African company Chromex Mining Company (Pty) Ltd, which is 74% owned by Chromex and 26% owned by their BEE partner Umnotho WeSizwe.

Chromex remains on the lookout for other projects. It entered the Zimbabwean chrome industry, through the acquisition of 49% of Falvect. This deal is consistent with the company’s strategy of building a portfolio of chrome and related mineral assets across southern Africa.  Zimbabwe is host to significant high quality chrome resources.

On the financial front, Chromex reported a small loss before tax of £151,000 (2008: loss £1.4 million), but after adjusting for future tax benefits, it swung to a profit after tax of £0.19 million.  These results reflect the fact that much of the year was taken up with construction of the Stellite processing plant, while producing sufficient chrome to provide positive cash flow, and retaining valuable chrome resources in the ground pending an upturn in prices. 

The economic downturn and other challenges faced by the company in 2009 have been well managed. The fact that both the operation of the processing plant and Stellite’s mining activities are sub-contracted have proven invaluable in enabling it to react quickly to market changes and protect margins as much as possible. However Chromex does remains exposed to the strong Rand and input costs in South Africa.

Ocean Equities issued a research note last month, saying that Chinese industrial production will be the key catalyst for the company’s share price in the mid-term. Demand for chrome ore is increasing - largely driven by producers of ferrochrome for stainless steel production. Other industrial uses include superalloys, leather tanning, castings and metal finishing.

Ocean expects the secular trend toward incremental demand for chrome relative to ferrochrome to emerge, as Asian stainless steel demand continues to grow faster than traditional developed markets, with China posting a 19% increase in stainless steel output compared to a 20% global decline excluding China. The broker projected chrome demand to increase at a higher pace when compared to stainless steel output as chrome/ferrochrome gains market share.

Overall the financial position of Chromex remains comparatively strong to many other mining juniors. With the exception of the plant construction loan described above, the group has no debt.  It has approximately £0.8 million in cash and expects to trade on a cash positive basis going forward.  By sub-contracting its mining and processing operations, Chromex has minimised its fixed costs, which should help it take advantage of the upturn in the markets.

Disclosure: The author holds no positions in the company