Magnum Mining (ASX: MGU) (OTCQB: MGUFF) shares are down 33% on the scoping study. MGU shares seem to have fallen on the realisation that earlier excitement was somewhat overdone. This isn’t an unusual occurrence in the metals markets, people can and do get over-excited about prospects and it takes the publication of the actual numbers to bring back a useful sense of reality. Note that this doesn’t mean that the project isn’t useful, isn’t economic or anything. Just that the share price was getting a little ahead of reality before the revelation of the numbers.
A scoping study is yet another of those stages a major project has to go through. This isn’t a deep examination of the minerals deposit, not a definition of reserves and so on. Instead it’s an overall look at the rough economics of the idea. What’s the possible market value of production - assuming the rough numbers we’ve got for mineralisation - and the cost of that production and so on. Is there actually a potential market for the production is another major input here. A scoping study is, more than anything else, a rough guide to the potential economics.
That scoping study is here: “Magnum is targeting a 1.6 Million tonne per annum (Mtpa) Direct Reduction Iron (DRI) magnetite concentrate production rate over an initial Life of Mine of 25 years.
“A capital cost (CAPEX) of US$182 to $378M and an operating cost (OPEX) of US$44 to $90/tonne are estimated. Revenues assume pricing based on a 68% Fe product with an applied DRI premium.”
There’s nothing actively wrong with those numbers, nor the NPV that gets spit out at the end of the process. But they’re not as exciting as perhaps the share price thought they would be. Thus the decline.
We’ve talked about Magnum Mining before: “Gaining a sales partner like Mitsubishi is a validation of the strategy. However, perhaps a little too much can be read into this announcement - this is not a binding deal. It's a Memorandum of Understanding - MOU - and the real terms are that we agree we might well do something together now let's sit down and hammer out exactly what we will do and on what terms. Yes, it's an achievement for a small company like Magnum to bring a giant like Mitsubishi to the table. But it's by no means a done deal.”
And then a month later about Magnum: ““ As to the larger background of the project there are merits here, yes. Green iron is going to be a thing, climate change means we'd prefer not to have to use blast furnaces and their associated coke. Magnetite and HIsmelt are indeed one of the ways we can gain green iron. The idea is just fine - it's the details of the implementation which are going to matter though. For the ore is easily available elsewhere, the technology doesn't belong to Magnum either. So, others can do much the same thing if they wish - therefore the determinant of success is not the idea but how well Magnum implements it. The entire project relies upon management efficiency that is.””
This is unlike most mining projects. We’re not taking a bet on the value of the resource itself. Rather, upon the efficiency of the business plan and its exploitation. And if that changes, as with this scoping study, then we’re going to see significant share price movements.
