Sweet Kazakhstan deal makes Oriel look ripe for takeover

Sweet Kazakhstan deal makes Oriel look ripe for takeover

Despite a significant drop in the price of its stock, Oriel Resources plc has positioned itself to supply stainless steel market to Asia and Europe for the next 25 years as it puts nickel and chromite mines into production in Kazakhstan. Kazakhstan is the world's second largest producer of chromite and steel producers are lining up to book production of chrome and nickel from Oriel’s Kazakhstan mines once the first of them begins production in 2007, according to a statement issued to Reuters by the company, June 28. Initial studies on both deposits indicate quick payback and strong cashflow for the company. The mines are close to infrastructure, cheap power, a skilled mining workforce and are in a mining friendly area of northern Kazakhstan that is strategically located between China and Europe. "It really isn't that difficult to stay out of trouble on Former Soviet Union projects provided you followed simple rules – never be a minority partner to a Russian company and stay away from properties that have nearby towns depending on the cash flow," Oriel’s Executive Chairman Dr. Sergey V. Kurzin told sources in February this year. “Our projects are clean from scratch – absolutely no strings attached.” Kazakhstan appears to be a cut above the madness going on in neighboring states right now, and investors forget, or are unaware of the fact that the country has the same bond rating as Mexico. Oriel was formed in July 2003 to acquire and develop early and advanced-stage mineral deposits in Russia and former Soviet satellites. Kurzin was instrumental in delivering the Julietta and Kupol projects to Bema Gold, and the Varvarinskoye project to European Minerals. Part of the decline in Oriel's share price may simply have been the result of a re-arrangement of shares among some institutions. There was a significant amount of one penny founder shares, which were owned by an initial founder who is not part of the current management. These became free-trading, requiring placement with new investors. But that process has now been completed. Also, almost 20 million shares were sold out of an investment fund to which a new manager had been appointed. Oriel was listed on AIM in March 2004 in a £40m ($72.8m) placement that was oversubscribed eight times. The company has a respected pedigree thanks to his ability to secure a number of key FSU deposits for development by Western companies. Nickel and chromite are used as alloys in stainless steel, which must contain a minimum of 10.5 percent chromium. Nickel is used as an alloy to enhance ductility and prevent corrosion, while chrome provides additional resistance and decorative appeal. The global steel market is expected to grow at 5 percent Compound Annual Growth Rate, with China leading the way at over 25 percent CAGR. Major steel companies have been approached by Oriel to assist in financing the mines, and Kurzin has told Reuters that German steelmaker ThyssenKrupp has signed a letter of intent with Oriel to take supplies of ferro-nickel when its Shevchenko mine in northern Kazakhstan starts producing in 2008. Nickel prices are near 15-year highs on strong demand and are expected to advance further as stainless steel makers vie for roughly 23.6 million cwt. churned out worldwide each year. "ThyssenKrupp are keen to take up to 100 percent. We have a letter of intent with them," Kurzin said in a recent interview in London, adding that German and South African banks were looking to fund construction of the nickel mine that produces 31’000 metric tons a year. Several Chinese firms have expressed their interest in financing the project with a view to taking production. "We are talking to a number of Chinese and Russian companies,” Kurzin said. “They are also prepared to build processing plants if we supply long-term demand. It's in advanced talks. The interest is there and it's very high." Oriel is also talking to brokers Canaccord about a share placement to raise 20 to 40 percent of the initial construction cost, which is currently projected at $346 million. Construction on Oriel’s 100-percent-owned Voskhod chromite deposit could begin in 2006, with first production by mid 2007. Voskhod has a projected capital cost of less than $40 million and using a base case of $80 per metric ton of chromite ore, full production gross revenue is a projected $42 million per annum. Chromite prices ranged from $142 to $200 per ton in Q1 2005. The pre-feasibility study on Oriel's 90 percent owned Shevchenko nickel deposit shows it will be one of the lowest cost operations in the world, with variable and fixed costs of $1.53 per pound, and will produce 610’208 cwt. of nickel per annum. The PAS study outlined an audited Measured, Indicated and Inferred JORC resource of 860 million cwt. grading 1.01 percent Ni, which represents 58 percent of the Soviet outlined resource of 1.555 million cwt. An additional 157 million cwt of unaudited resource at 0.84 percent nickel was used in the preparation of the financial model. The indicated mine life is over 15 years, with a strong potential to go to 25+ years as the Soviet resource is confirmed. As milestones are achieved and risks disappear, and as interest returns to the sector, valuations will rise geometrically on many of these companies, rewarding patient investors with enormous gains. Oriel appears to be one of them.