Marathon Resources Limited 24 Nov 09

South Australian Government raises the stakes – buy a huge amount.

Just as we thought would happen, EL 3258 was renewed, but only for one year. A huge negative surprise for investors, ahead of a South Australian election next year, is that Mt Gee has been classified under a new zoning classification as being in Access Zone 2A. No high impact activities are allowed in Access Zone 2A – this means no mining. The company is preparing a submission to the South Australian Government that must be lodged before 19 December 2009.

Not surprisingly, the news was taken badly by the market that has punished the company’s share price, and at this point in time justly so.

Fat Prophets initially recommended buying Marathon Resources at 72 cents in March 2006 (Fat Mining 16). Our last review of the stock was in September (Fat Mining 194).

Since our last coverage, MTN was trading around the $0.67 level, and has recently traded to reach a high of $0.80 in October before being sold off to touch a low of $0.49 last week.

In our opinion, support lies at $0.50, given the close proximity of this level to current prices, we believe further downside risks are increasing. Should prices break this level, we could be in for an accelerated drop in price to the $0.33 support level.


From a broader perspective, the weekly chart shows the depth of the decline over the past two years. Given the significant amount of chart resistance above current levels, we cannot rule out further consolidation and downside risk.

The South Australian Government has just released a paper entitled “Seeking a Balance”. The Department of Environment and Heritage, in conjunction with Primary Industries and Resources SA, undertook a project to identify and rate sites of interest in the Northern Flinders Ranges. This was done without consulting Native Title landowners and other parties including miners with significant interests in the area.

For the purposes of exploration and mining, the Northern Flinders Ranges have been divided into four zones with different levels of access.

        Zone 1. No access accepted.

           Zone 2A. No high impact activities are accepted.

        Zone 2B. Low impact activities are accepted.

        Zone 3. Standard access for exploration and mining activities.

The proposed zoning map is shown below. Zone 2A is shown in blue.


Looking at the proposed Management Zones it looks as though circles have been deliberately drawn around uranium deposits, including Mt Gee.

Until now it looked as though the South Australian Government was supportive of a uranium industry, but not any more and many companies have been affected.

All the companies will make their submissions by the due date and will have to argue hard for a change in the zone classifications. Investors might well wonder if the “Seeking a Balance” report has anything to do with the South Australian election that will be held in March 2010?

Exploration continued during the September quarter with high resolution geophysics providing much more detail than previously available. High resolution magnetic and radiometric surveys and infill gravity measurements have defined new anomalies.

From this work a new geological model has been developed and new zones of mineralisation have been identified and warrant drill testing.

Additional resources will come from the Armchair deposit where mineralisation remains open along strike and down-dip. The small high-grade Hodgkinson deposit is open to depth.

The truth of the matter is that there is potential to at least double the current resource which is 51Mt at a grade of 615ppm U3O8.

This makes the total resource equal to 31,300t of U3O8 or 69m pounds. Mt Gee has potential to rival ERA’s Jabiluka deposit in the Northern Territory that is twice its current size.

Recent acquisitions in Australia have been made in excess of $A7.50 per resource pound. If this metric is applied to Marathon, the value of the company exceeds $A500m.

The mining concept for Mt Gee will include a mixture of open pits and underground mines targeting high-grade zones. Back of the envelope revenue calculations, assuming a head grade of 0.06% U3O8, and recovery of 88%, gave the following results. At a uranium price of US$50/lb the revenue is US$58.20/t. At US$85/lb revenue rises to nearly US$100/t, and at a price of US$120/lb, revenue is US$140/t.

It is way too early to predict what the unit cost will be in terms of USD per pound. A mix selected open pit and high-grade underground ore will deliver a grade significantly above the average grade of 615ppm. On paper, Mt Gee is an excellent project in the making and the project would probably target revenue in excess of US$120 per tonne.

All the balls are up in the air and nobody knows how they will fall. If Mt Gee is re-zoned to Zone 3, then Marathon is massively undervalued. If mining is not allowed then Mt Gee has no value.

So what should members do? Mt Gee is an excellent discovery and potentially a very valuable asset. However, at this point in time the risk of owning the stock is very high.

To reiterate, we like Marathon, and will revisit the company if Mt Gee is re-zoned to allow exploration and mining. We do not think it makes any sense for the Government of South Australia to stop exploration and development of the Mt Gee uranium deposit. However, we think that at this point in time the risk is too high.

Fat Prophets recommends that Members SELL their holding in Marathon Resources and SWITCH into Bannerman Resources (ASX: BMN) to maintain an exposure to uranium.


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