Territory Iron 21 Dec 05

A low-priced, emerging iron ore player

Territory Iron is an emerging iron ore player that has interests in four iron ore deposits in the Northern Territory, which are at various stages of development. The company is a relatively new entrant to the iron ore sector in Australia, having listed in the early part of 2005. The company's flagship Frances Creek Project is progressing rapidly in terms of its assessment, with a Feasibility Study due for completion by February 2006.


"The company represents one of the lowest-cost exposures to the iron ore sector, with its Frances Creek project ideally situated close to infrastructure and subject to a feasibility study that is scheduled for completion in early 2006."

All of the company's projects are located within 190km of Darwin and within proximity to road, rail and developing port facilities, all of which are essential for an emerging bulk commodity company. We will concentrate at this time on the company's most advanced project, which is Frances Creek.

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Territory's flagship project is the Frances Creek Project, which hosts a 35km strike length that is prospective for iron ore deposits. Iron ore was produced and exported up until 1974 from the old Frances Creek mining centre, which is located within the Frances Creek Project area, when flooding and consequent damage to infrastructure forced its closure. In its prospectus, Territory identified iron ore within nine separate deposits at Frances Creek, with a total Inferred Resource of 3.4 million tonnes, grading between 58.8% and 63.4% Fe. The project is ideally situated, just 20km from the railway line and containing 55 known iron ore deposits.

A number of changes in the past 30 years have made the revival of this iron ore field potentially rewarding. These include: new mining and processing equipment; the development of rail links within close proximity of Frances Creek; new port facilities in Darwin; modern exploration techniques, including airborne geophysics; and much improved market conditions

In early December a substantial upgrade in the total Frances Creek iron ore resource was announced on the back of the completion of field work for the year. An aggressive five-month drilling program was undertaken, comprising diamond, RC and RAB drilling for a total of almost 22,000 metres.

This resulted in a lift in the Frances Creek resource from 2.42 million tonnes (in the Inferred category) to 5.77 million tonnes (in the Indicated & Inferred categories). These figures exclude the Helene 6/7 deposit, which hosted 1.0 million tonnes grading 63.4% Fe in the prospectus, as results are still awaited.

Importantly, the drilling data was provided to independent consultants, Snowdens, who have in turn independently verified the robustness and accuracy of the company's resource estimation. Snowdens also considers that Territory should be able to increase the confidence and size of the resource through additional drilling. The high ratio of Indicated to Inferred material and the shallow nature of the deposits provide confidence that the conversion from Resources to Reserves will be high.

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From a regional perspective the work program was also highly encouraging. A total of 58 aeromagnetic anomalies, including 20 high priority targets have been identified by a survey flown during September 2005. Three holes were then drilled before the end of the drilling season, with one hole in each of the highest priority targets. Encouragingly, all holes intersected haematite and goethite mineralization, with the best result encountering 7m @ 62.8% Fe from surface. The results highlight the long-term iron ore potential of the Frances Creek Project.

Adding further confidence to the commercial potential of the Frances Creek Project, a marketing agreement was concluded in December with OM Materials (OMS) to market iron ore produced by Territory. OMS is an international trading company that will be responsible for the promotion, marketing, sale and distribution of all the company's iron ore products. OMS has an extensive marketing network in China, with offices in Singapore, Hong Kong and China. It is well placed to market Territory's iron ore into some 25 steel mills in China, Japan and South Korea. Marketing visits to China are planned shortly after the Chinese New Year in 2006 with the aim of securing Memorandums of Understanding for iron ore supply.

Territory is rapidly progressing assessment of the Frances Creek Project. It has a Feasibility Study underway on the project to assess its commerciality, with the study anticipated for completion by late-February 2006. In anticipation of a positive result that would confirm the project's commerciality, Territory has already initiated discussions with the Darwin Port Corporation with respect to securing a site for ore stockpiling. The port itself is being upgraded with the construction of a bulk loading facility, with completion anticipated for the last quarter of 2006. In addition, Territory has submitted a Notice of Intent to mine and is in discussions with mining contractors with respect to indicative mining costs and pit optimization work. Metallurgical testwork is continuing and the results are favourable.

We rate the chances of the Frances Creek Project being declared commercial as high. The shallow nature of the deposit and favourable metallurgy, combined with its location and access to rail and port infrastructure are key attractions. The capital development costs should be well below most other competing iron ore developments, and being haematite ore as opposed to magnetite ore, Frances Creek will need no further expensive upgrading.

We rate Territory Iron as our preferred junior exposure to the iron ore sector. We believe its Frances Creek project compares favourably with the current competing crop of rival iron ore projects, yet Territory's market capitalization is well below most of its peers. We believe this represents a buying opportunity for investors, as we expect the company to be re-rated once the feasibility study is released in February 2006. Accordingly we recommend Territory as a buy to all Members around 37 cents.

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