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Tuesday, 27 August 2013
Cancana Resources: direct leverage on manganese
Cancana Resources Corp. (CVE:CNY) holds the distinction of being one of only four companies listed on the Toronto Stock Exchange that work in manganese, and is definitely “the preeminent one from a grade point of view, a development point of view, and from a resource point of view,” says CEO and director Andrew Male.
It is a bold claim for the Calgary-based junior, but one backed up by a flagship asset boasting what is by industry standards a grade of rare quality on a highly prospective property.
Manganese itself is crucial to the production of both steel and fertilizer. Every tonne of steel produced requires between 8 and 12 kilograms of manganese. Between 2 and 6 per cent of the volume of every bag of dry fertilizer will be manganese; for liquid fertilizer that figure can go as high as 30 per cent.
“You cannot make steel without manganese and you cannot make fertilizer without manganese,” says Male. “There is no substitute.”
The company is the “re-jigged” Sola Resources, at one time a diamond explorer in the same region of Brazil, which has since re-focused on manganese and set about aggregating its mineral claims in 2010.
The primarily contiguous land packages assembled since total 45,000 hectares of manganese-based mineral claims.
But even more impressive than the sheer size of the claims is the quality of the deposits.
“As we were pulling these claims together, one of the things we began to notice,” says Male, “was that the grade of the manganese was spectacular.”
While Cancana has never said it has the highest grade manganese ore in the world, Male points out that while the metal has a theoretical maximum grade of 63 per cent “the grades we are consistently getting are 52 to 54 per cent”. This contrasts with the 35 per cent manganese found in Africa, the 30 per cent grade encountered in Australia, Europe’s 28 to 30 per cent ore, and China’s 20 per cent “and declining” yield.
Grade is key – steel production requires manganese of at least 42 per cent, meaning most ore has to be upgraded, adding another cost and another element to the process. For fertilizer, the minimum cut off bar is even higher at 48 per cent.
Unsurprisingly, the price of the commodity is determined by grade (i.e. the going rate is $5.25 per dry metric tonne unit (dmt) multiplied by grade), thus Cancana is looking at an average sale price of roughly $250 per tonne, and, Male says, the company can confirm a “consistently high grade” of manganese throughout the region.
Little wonder then that Cancana is moving rapidly to production, with its main focus settling on the Valdirao project. One massive advantage that accrues to the project is its proximity to infrastructure -- Valdirao is within 20 kilometres of the Brazilian National Highway, which itself is accessible by municipally-maintained roads, for transportation of ore out of region. It is fortunate placement in an area where, as Male says, “everything moves on the back of a truck.” The project is also adjacent to a town primed to provide a ready workforce as well as services such as healthcare.
The specifics of the project itself are even more impressive.
In the name of moving into production, the company chose a particular location to embark on an NI 43-101 report, focusing as a first step on an area of 2.97 hectares on the 5,400 hectare claim. It was on this “real small spot”, says Male, by way of hand-dug pits and trenches that the company “got to a resource in fairly short order.” In less than 3 hectares with pits that went down a maximum of 1 metre, Cancana turned up a resource of 8,800 tonnes.
The results warranted further exploration, “so we took that one step farther and went out to 4.4 hectares and trenched it down to 3 metres deep and came up with a resource of 35,000 tonnes.”
Having turned up such bounty from an area roughly the size of Toronto’s Skydome, Male says that was sufficient for the company to proclaim that this is the spot where it will commence production.
Production is due to begin in the next couple of weeks, according to Male. To that end, preliminary work has been carried out or is in its final stages.
“From a mining perspective, this is very simple. It’s basically an excavation -- like digging a basement.”
The nature of the mineralization means that Cancana will be looking at only the top 3 to 4 metres of soil for the “rocks in dirt” that characterize manganese.
The grade alone means that Cancana is in the enviable position of producing direct shipping ore (DSO), that is, ore that requires no further beneficiation to reach acceptable grade cutoffs, a recipe guaranteed to keep both opex and capex down. “We excavate, take dirty rock, crush to a size the wash plant can accommodate, wash the rock off and that’s DSO,” says Male.
From there, the material need only be placed in a furnace to be blended into steel.
The target for the next 12 months, Male says, is to produce 20,000 tonnes of ore, “which is a very safe number, and will give us a value of $5 million and a net profit of $1.6 million.”
The second stage of Cancana’s plan concerns the company adjacent to their existing claim, Rio Madeira, which approached Cancana at the end of last year with an offer to sell.
The NI 43-101 compliant report conducted as part of the background to the purchase turned up a result which Male calls “quite a strong resource” and one which “affords us a 10 year mine life in very basic production.”
Rio Madeira has a record of seven years of production on the site behind it and is currently in production, albeit at a low level, far below the 3,000 tonnes of ore per month the plant is capable of producing.
The purchase is all the more promising, Male says, when considering that Rio Madeira has done only “hunt and peck” geological work to date. “We’re kind of excited with the opportunity with Rio Madeira.”
Plans for the Rio Madeira site include the improvement of the 3,000 tonne per month processing facility via a mooted $1.75 million capital expenditure.
Rio Madeira’s purchase price is $20 million for 100 per cent, with Cancana being afforded the opportunity to stage the acquisition in two increments that break down to 75 per cent for $15 million, with the remaining 25 per cent to be purchased over the next two years.
The addition of the Rio Madeira project would add a further 26,000 tonnes to the 20,000 tonnes of ore forecast from Valdirao for the next 12 months. Projections for the second year take that combined figure to 90,000 tonnes of ore, and to a total of 103,000 tonnes in the third year. At today's manganese prices, net profit for the first year would thus come to $6 million, while the second year would see earnings of $14.5 million and the third would crest $18 million in net profit.