Sunday, 18 May 2014

Shree: Another mining accident waiting to happen?

The almost daily reports about falling iron ore prices and the chatter about the effects on junior miners has shone the spotlight on Shree Minerals’ Nelson Bay River iron ore mine on Tasmania’s West Coast, as it battles to stay afloat.

Trying to understand what’s happening is best with knowledge of Shree’s recent history.

Pre listing activities.

Shree started trading in 2008.

Punters were invited to open their wallets when Shree sought listing on the ASX.

Before listing in February 2010 principals and close associates arranged 70 million shares to themselves in consideration for:

·       a few mining leases with some potential previously granted at minimal cost, plus

·        net subscriptions of $1.4 million cash.

The lads who had only outlaid cash of 2 cents per share for almost 70 million shares then invited punters to further fund the expected windfall.

Punters in their enthusiasm oversubscribed the Initial Public Offering (IPO) and took up 17 million shares at 20 cents a pop, a total of $3.5 million.

70% of the cash for a 20% interest.

Small speculative miners work that way. They depend on gamblers. Banks aren’t interested.

Post listing funding

As is common with most small exploration companies, subscribing for shares entitles  holders to free options, in this case, buy two shares and get one option free.

Converting options may be attractive if the market price exceeds the option exercise price and/or if there aren’t enough shares for sale on the market.

Converting options raised another $1.4 million in 2011.

Once mining started and more working capital was needed in December 2013, two private placements of new shares at 16 cents raised another $4 million. Private placements without shareholder approval are limited to protect existing shareholders’ interests being flooded and devalued as a consequence. The second placement required shareholder approval. Not that that was a problem as the promoters and their mates had control. In any event there was no alternative.

Raising money by small miners is always an expensive gambit. It has cost Shree $600,000 to raise about $10 million in various tranches from the IPO to the private placements.

The other source of working capital via an off-take and funding arrangement negotiated in May 2013 with Frost Global, a Singapore based commodity trader. The deal was that funding of up to US$4 million by way of an advance towards the supply of iron ore would be clawed back at the rate of US$500,000 from each of the first 8 shipments of ore.

By December 2013 $4 million had been received. But this will be reduced pretty quickly as the program, if achieved is for 10 shipments per year.

One advantage of running a bank account in the black all the time is that interest is earned. By December 2013 $560,000 had been received, needed to pay the paper shufflers to raise the funds in the first place.

But the icing on the cake has been the R&D concessions payable to small companies in cash rather than via a 150% tax deduction. A cash receipt up front rather than a tax deduction when and if profits emerge.

It does seem a little perverse that when direct outlays for science and research are under extreme budgetary pressure, R&D subsidies are being paid to dig up a bit of dirt and ship it overseas.

By December 2013 $1.2 million had been received as R&D funding, coincidentally roughly the same as remuneration paid to Directors.

Shree’s shares are closely held  by just a few. Currently the punters only own about 25%.

The plan

Shree has carried out exploration at a few sites in Tasmania. Only the Nelson Bay River (NBR) project has survived.

The NBR project has three types of resource: Direct shipping ore (DSO), beneficial low-grade resource (BFO) and magnetite. The first two are basically dig and ship operations with minimal processing required. They sit atop the third resource which is similar to the Savage River mineral deposit and will require more processing. To that end Shree has entered into a MOU with Grange Resources operator of the Savage River mine which processes ore at Port Latta.

The following chart sets out the plan, to sell 400,000 tonnes per year, that’s about 10  shiploads, of the DSO stuff until it’s exhausted after 2 years, then the BFO resource which will take after another 2 years, then magnetite concentrate  at the annual rate of 150,000 tonnes.

This gives the mine a life of 10 years.


However few believe the third stage will ever eventuate.

And there are currently good odds available about Shree surviving the first 2 stages.

Most outlays until June 2013 were for exploration. At some stage the capitalised exploration expenses are written off if fruitless (about  $1.2 million so far) or transferred to mine development ($6.2 million) and amortised once over the mine life.

Mining started in November 2013.

The set-up

Where possible the high risks of a mining operation such as Shree’s are shifted to contractors. The following table details those, mainly locals, who have elected to assume some of the risks.


Shree itself doesn’t own much plant and equipment. At the end of 2011/12 there was only 2 computers on the balance sheet. There appears to be a little more plant acquired since mining commenced but much of the necessary plant is probably owned by contractors.

The costs

As already indicated the first stage involves digging, minor on site processing, transport to Burnie and shipping.

The following table refers to estimated costs from one of Shree’s investor presentations.


With the absence of contracts, Shree is at the mercy of falling iron ore prices which are now heading under US$100 per tonne. Many junior iron ore producers will come under a lot of pressure. Rio can break even at US$40 per tonne (see HERE ).

Shree’s breakeven point is likely to be higher than simply the costs of production, probably at least US$100 per tonne.

But in any event cash flow pressures can bring any business undone despite being in a roughly break even cost of production situation.

Cash flow problems

There’s always idle gossip in any community about who’s paying their bills and who’s not.

Shree gets a mention in the second category.

The March 2014 quarterly report lodged with ASX at the end of April 2014 confirms problems for Shree.

·       Iron ore grades are lower than expected

·       Transportation to the Burnie port is slower than forecast

·       Iron ore price fell sharply during the quarter

·       The $AUD appreciated during the quarter

·       Ocean freight rates are higher

During the March quarter the first 2 boat loads were sold, 86,000 tonnes in total.

It appeared as if cash for one load has been received, the first load sent with much fanfare in January 2014. However that amount was only $3.7 million. Whether Frost Global deducted anything before remitting to Shree is hard to ascertain.

Since then iron ore prices have fallen further.

Shree also disclosed a repayment of advances of $1.6 million to Frost Global in the March quarter.  Some of this is possibly reimbursement of shipping costs probably about $800 k per load that Frost probably paid when Shree couldn’t?  The second load was sold in the March quarter but money not yet received ( as at quarter’s end).It is doubtful a ship’s captain would set sail for Burnie to take on a load of ore from a small cash strapped West Coast miner without the money first being in his bank.

With such demands on cash flow it is easy to accept that other creditor payments are slow. Shree has disclosed in its quarterly reports that production costs are $5 million per quarter.

The situation as per the half yearly accounts as at December 2012 showed things were starting to look a little grim with payables of $2.3 million plus the $4 million owing to Frost Global.

The March quarter payment of $1.6 million to Frost Global meant local suppliers and contractors were probably shuffled further back in the creditor’s queue. At the end of the March quarter only $2.3 million was owing to Frost Global. Totals due to other creditors won’t be known until annual accounts are lodged in September. Before then a June quarter cash flow report should be lodged by the end of July.

With Shree’s income dependent on ore grades at delivery point and spot iron ore prices, there is always a long lead time and uncertainty between mining and final payment which is why working capital is needed. Without it.....? Whether the terms of Shree’s arrangement with Frost Global have changed has not been revealed?

The quarterly reports have also revealed waste stripping is greater than forecast.

Shree has been silent on the matter of deferment of royalties offered by Ms Giddings and Mr Green before their tenure was terminated. Such prima facie evidence of Shree’s cash flow problems might well have been reported to ASX?

Luckily mining punters are stoic souls. They’re accustomed to surprises.

The private placement of $4 million in December 2013 was a life saving transfusion. Over half was spent during the March quarter. But despite paying 16 cents per share and raising more than the funds from the IPO of $3.5 million in February 2010, the share price has dropped sharply to the current offer price of 10.5 cents per share.

There are more foxes in Tassie than Shree buyers.

What will happen if more cash is needed?


The NBR project involves road transport of over 100 kms as per the map below, on roads administered by the Circular Head Council, the government via DIER, Forestry Tasmania and possibly Parks and Wildlife.


The problem of road maintenance is fast becoming a game of bureaucratic handball exacerbated by the absence of the only source of additional funds, the meagre royalty payments. It will be interesting to see if a major spruiker of the Shree venture, local member Mr Brooks will be able to use his diminishing influence in government to obtain funds to fix  roads, some now part of the new Tarkine tourism drive, ill designed to handle trucks carrying 400,000 tonnes of ore each year.

Where to?

For junior miners to make it always requires a large dose of luck with all stars in alignment, and ready sources of capital.

Shree looks to be struggling on both counts.

Only the super bulls thought the China boom would last 15 years+. The nagging historical reality is that when commodity prices fall they may do so precipitously.

The only real surprise is that the fall in prices, the so called terms of trade effect has not flowed through to a fall in the $AUD exchange rate thereby cushioning price falls.

By all means let the punters have a go. But it’s difficult to imagine why the community should subsidise such adventures.

Postscript Monday 19th May

An article in today’s Macrobusiness titled “The five waves that could wipe out the Australian economy this year” included the following.

Wave four is the iron ore price and mining equities, which are under intensifying pressure:


The iron ore market is very weak. Chinese steel production is strong but end-user demand is not as Chinese property declines and inventories of steel and iron ore are plentiful in China. That has led to a collapsing steel price which will force Chinese steel mills to destock raw materials at some point this year. The most likely candidate for that is Q3 on typical seasonal weakness which looks like it may converge with China’s gathering property bust.

If so, iron ore will fall to $80 or below  in August or September (before rebounding somewhat). That will mean all of the Budget’s estimated terms of trade falls for next year will arrive instead in just one quarter. Fortescue Metals, as well as a swag of junior iron ore miners, will face another existential crisis.

1 comment:

  1. Great commentary John, I enjoyed reading the in-depth analysis.