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Base Resources: Kwale Moves Towards Production, To Unlock Over US$1b Life Of Mine Cash Surplus

Base Resources (ASX: BSE) is on the fast track to becoming a globally significant mineral sands producer, with a front-ended production profile over a 13-year mine life, at a time of strengthening prices.

The Kwale Mineral Sands Project in Kenya is tipped to deliver a life of mine cash surplus of over US$1 billion. It has an enviable cash flow profile with over US$550 million expected in the first five years of operation, which will provide a sizeable capital base that the company can use to capitalise on a pipeline of opportunities.

With A$140 million in cash and US$170 million in undrawn debt facilities, the company is more than adequately funded through to first cash flows which are expected towards the end of 2013 with the start of production.

Base is able to drawdown the first instalment of the debt facility within six months of requiring the funds, which, importantly substantially reduces risks associated with funding continuity.

With the funds not required until around November 2012, Base is expecting an initial utilisation to occur in July.

The satisfy the key conditions precedent to the initial drawdown Base has so far completed the execution of security documentation and is processing through execution Government of Kenya consent.

The company is also finalising offtake agreements covering 70% of projected revenue, as well as working to complete the gazetting of the taxation concessions that the Government of Kenya has committed to through the investment agreement.

Government support and strong pricing

Importantly, Base has the backing of a motivated Kenyan Government that continues to play its role.

Base will become a globally significant producer of rutile, ilmenite and zircon from Kwale, and is well positioned to capitalise on forecast strong demand for heavy minerals derived from mineral sands.

Rutile, ilmenite and zircon are "late cycle" minerals that are driven by urbanisation and wealth in developing and emerging economies. Kwale is set to capitalise on the emerging shortfall of new mineral sands projects and will be able to take advantage of bullish demand trends.

Kwale is set to begin production in the second half of 2013, with an enhanced Feasibility Study showing robust economics for the project including a post-tax net present value of US$500 million and an internal rate of return of 52.8%.

The project is a large scale, technically straightforward project supported by well-developed physical and social infrastructure, which ticks all the right boxes for a solid project.

It hosts a total JORC Resource of 146 million tonnes at 4.9% heavy minerals, 2.59% ilmenite, 0.65% rutile and 0.29% zircon.

Analysis

The current valuation of Base Resources appears very light indeed given the cash backing of $0.28 per share, with shares currently trading at around $0.41.

Base will become a globally significant producer of rutile, ilmenite and zircon from its Kwale Project in Kenya, and is well positioned to capitalise on forecast strong demand for heavy minerals derived from mineral sands.

Kwale will become a large scale, robust, and highly competitive producer of high quality minerals that is well supported by existing infrastructure and a motivated Kenyan government.

The project is fully funded, and is well advanced in arranging off-take agreements.

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