Bellzone Mining - Ongoing Operational Difficulties

Bellzone Mining (LSE:BZM) has experienced numerous setbacks since the first review. At the time, the company's shares were trading at 14p, bouncing around a major low. I noted that despite there being a positive short-term technical picture, "it is certainly a long-term investment if on fundamentals." I concluded that a No Rating tag was the most accurate at the time. As it has turned out, Bellzone has had serious operational setbacks and so even though it did surpass 18p in the short-term, it has since collapsed to a share price of 4.4p. The share price is highly erratic due to a lack of liquidity and the share price has seemingly formed a platform within the 3.6p - 4.3p range. Furthermore, news released from the company continues to be mixed in sentiment, although the potential of its iron ore deposits remains. The iron ore miner currently has ~730m shares in issue thus Bellzone has a market cap of £32.1m.

This article is a follow-on from the below post. For full context and information, read this article first:

There is not a lot to say regarding the technical position of Bellzone. It has stagnated around it's current share price level and has failed to make any real breakouts and that is down to the traded volumes which remain comparatively low on 2012, when the share price was much higher. That is in all probability down to a lack of investors confidence in the company. However, the longer the company consolidates at this share price, there is an increasing chance of a breakout although the direction is not clear on technicals alone. Since the last review, there have been a few holdings RNS'. Most notably China Sonangol have upped their stake to over 25%. Under LSE rules, they are relatively restricted to how much further they can up their stake without taking over Bellzone. Considering that Sonangol have been purchasing Bellzone shares since the 80p level, you do have to wonder whether they would consider lining up a bid. However, Sonangol is rather an investment company so that would not be in their interests. What has been seen through West African neighbour Afferro, is that appetite for high quality iron ore projects remain. It is certainly the case though that many have hit stumbling blocks.

Few directors have taken some advantage of the price drop to top up their interests since October, with only Chief Financial officer Terry Larkan purchasing approximately 250,000 shares. Ideally with the share price still being around 4p it would be reassuring to see directors add at this level, but with the closed period calendar and continuous news-flow out of the projects, that might be difficult.

courtesy of Bellzone Mining's website
As noted in the last review, Bellzone operates within Guinea in West Africa. The main projects surround the currently producing Forecariah mine and the Kalia mine which is still being developed. Looking back at the historic resource figures for Kalia I alone, there is a JORC compliant estimate of circa  5.6bt. That figure overshadows Afferro Mining's, Sundance Resources and London Mining's regional total compliant resource numbers. Adding on top the smaller Forecariah resource does make the company look undervalued purely on resources alone. Head grade for both the projects is just below 30% Fe which is slightly below Afferro/Sundance/London. The stumbling block for Bellzone remains the huge CAPEX required for Kalia, where most of the resource lies. On-site CAPEX was previously expected to total $4.4bn with port/rail facilities requiring an extra $2.7bn. That is far beyond Bellzone's financing capacities, but the company has devised a staged development plan (KP1, KP2 and KP3) to tackle this.

Indeed, Bellzone actually released it's Bankable Feasibility Study for the Kalia 1 mine today. That is the first mine for the Kalia development which is nicknamed KP1. For those wondering, the BFS is an evaluation of a project that is aimed such that it could be used to convince a bank of investment if necessary. It assesses the economic viability of a project. The following points were key:

- KP1 has an IRR of 37.5% and NPV10 of $1,387m
- Production expected to be 7 MTpa of 58% Fe for 10 years (which is the Life of Mine)
- Total CAPEX of $865m. This is far reduced from previously expected levels and removes the need for costly rail infrastructure during stage 1. There is an 85% chance that the CAPEX figure will not be exceeded. In the conference call, Bellzone's CEO Glenn Baldwin did note that there is potential for part of the road construction CAPEX to be alleviated should other parties help. That is because the road is clearly going to be in the best interests of the regional and other aligned parties
- Operating cost expected at $34.39/tonne (one third trucking, 2 thirds processing and mining)
- Break-even point is equivalent to $51.71/tonne (including OPEX and CAPEX). The 50% disparity gives Bellzone operational flexibility
- Mining technique: conventional open-pit, drill-and-blast and/or free dig with a load and haul to two direct tip primary crushers
- Mine Transport: 285km of road access required that will run through the existing 'Infrastructure Corridor'. Port, barge and shipping operations follow this. There have been worries over this trucking operation, but the BFS have reduced these. Bellzone is intending to construct the road such that it can allow for 150 tonne trucks.

Should the KP1 project be successful, it is hoped to fund KP2 (the second Kalia mine) that will require additional facilities due to a lower expected grade. The BFS is clearly very encouraging, and first production is expected at Kalia in 2015 with first exports in 2016. The news prompted a couple of broker notes - the one of interest was released by Investec who upped their target price and recommendation to buy, in light of the announcement. They said: “The BFS on Kalia’s oxide resources (termed KP1) outlines a 10yr, 7mtpa (dry) iron ore operation producing a 58% Fe material from the oxide resource base, at cash costs just short of $35/t (FOB), which potentially makes it a serious junior iron ore player.” The question remains how this will be funded, but the company has indicated that the search for a financing solution has started as revenues will not cater for the required capital.

To add to that, a very bullish Kalia Optimisation Study (KOS) was released recently. The main points emphasise the robust nature of the project:
- Maiden Probable Reserve of 59.8million tonnes ("mt") @ 54.1% Fe within the high grade Indicated Oxide and Supergene BIF Mineral Resource
- Ore Reserves derived from Indicated Resources of 72.8mt @ 53.7% Fe, included in the Indicated and Inferred Mineral Resource Inventory of 124.2mt of +48% Fe ore at an average grade of 53.5% Fe

The outlook for iron ore itself is not too bad either, with recent price strength within the Australian Dollar indirectly helping the metal, and that is despite worries from the Far East over slowing growth rates. The reality is that the Chinese government have now openly stated that they will support growth rates, and considering that many parts of China have yet to undergo urbanisation, that means higher demand for steel hence higher derived demand for iron ore. That is why the Chinese continue to back, or look to back, certain projects in Africa that are involved with iron. It is reasonable to expect some price weakness in iron, but the long-term outlook remains far from clear. That will continue to inhibit investors sentiment for small cap miners.

So what has been hurting Bellzone over the last series of months? The reasons are mostly operational, and they are mostly concerning Bellzone's 50:50 Joint Venture at Forecariah. The news started off well. The first shipment from Forecariah was completed in late December. Further good news was released in the way of the maiden JORC resource estimate that returned the following figures:
- 3.2mt of Direct Shipping Ore (DSO)
- A further 71.1mt of Inferred and Indicated surface oxide (average grade of 34.7%)
- Inferred JORC compliant resource of 161.5mt of haematite schist

However, the news that sent the share price down heavily was released in late March. The reason was that it was planning to dramatically reduce expected production at Forecariah. The original plans saw a production rate of 3-4mt/annum, but this was scaled right back to just 0.8mt/annum to 1.0mt/annum. The given reason was the limited quantity of resource. Projected costs also rose due to the use of geared ships. The only glimmers ot positivity regarded progress at Kalia, and reduced cash drains at Forecariah, but this did little to prevent the share price almost slipping 50% in one day.

News hasn't improved much since either, with production guidance reduced yet again in September. The RNS read:  "It is now clear that previously expected shipping targets are no longer achievable. This is due to the issues outlined in that statement as well as the performance of the trans-shipping contractor and weather conditions. The operations have shipped some 270,000 tonnes to date and have approximately 250,000 tonnes of partially and fully processed stockpiles. The JV will continue to mine and stockpile material while the shipping issues continue to be resolved. "

Cash is also an issue for Bellzone as in their latest set of FY results, the company noted it only had a cash balance of $20m, that was only sufficient to see them into H2 2014, not through it. The next question is whether an equity raising is on the cards, and ultimately, that concern will keep a lid on the share price until clarity emerges. Regardless, the company is debt free and had a net asset value of 15.6p/share.

All in all, Bellzone has shot itself in the foot over the last year or so. It is a classic case of a company over-promising and under-delivering. Companies should begin to realise that the best way to maintain shareholder confidence is to do the opposite (without reason). However, whilst Bellzone has not performed well operationally, it does have some of the best resources/reserves in terms of iron ore, in the entire region and if that highly valuable resource can be exploited then Bellzone's current market cap will dwarf its current one. Despite this, cash remains a key hurdle and I reckon funding will be needed fairly soon, and that coupled with ongoing uncertainty means that there is no rush to buy Bellzone shares. The real value here lies in Kalia and with regards to Forecariah the company must demonstrate that it can hit targets consistently.

Operating in Africa is certainly no easy feat, where infrastructure is limited, but unless Bellzone can start to instill confidence in investors, then no real meaningful progress will likely be made in terms of the share price. The company has the potential in the assets, they need to prove they have the ability to monetise those assets, successfully and over a sustained period of time. When regulations allow, a clear path to start that sentiment reversal would be to see directors increase their holdings. They need to show confidence in the company and lead the market. Following that, securing short-term financing for working capital and Forecariah should be a priority. At the current share price dilution is not good news for investors, but in the long-run it is the best source of short-term finance. As you may expect, I am still not convinced about Bellzone. Doubts remain, and until they are dispelled, investors will likely remain on the cautious side, and that is a shame considering the high-quality assets. No Rating


  1. Fair Accurate Honest
    Thanks :)

  2. There are some really buzzing results from Naibu this morning. they are Worth looking at if you havent already!
    Bellzone has let investors down so many times and so have lost respect. Thats not going to be easy to get back and will take a very long time


  3. Absolutely. Spot on that management need to speak through buying.

    Give the market its confidence back.

  4. You are 100% correct, the problem why it is stagnating, if they cannot ship/transport/mine/process 800,000 tons then how are they going to ship 7Mtpa? and i think the $30+ costs are highly questionable, driving 7Mtpa on dirt road??
    i don't think Konta can handle 2Mtpa, the problem lies in the directors, they are an exploration company, they have not yet transitioned into a production mining company, once they also learn to tell the truth, it might move..

  5. The BFS included "a new dedicated bulk-handling port at Konta, designed and costed by Fluor"