Thursday, May 19, 2011

Investors Guru Small Cap Stock Observer

(TSXV: WAI) West African Iron Ore - Why Iron Ore Is Out-Performing Other Commodities

Bulk commodities including iron ore have avoided the recent rout in silver, oil and other exchange traded commodities. With less speculation contract prices are more closely harnessed to underlying demand / supply fundamentals.

The Standard & Poor's GSCI Index of 24 commodities dropped 15% between April 29 and May 6. That is the sharpest decline since December 2008. Silver was the biggest loser with a 27% plunge.

98% of mined iron ore is used to make steel for structural engineering, maritime, automobile and general industrial applications.

It has been argued that iron ore is "more integral to the global economy than any other commodity, except perhaps oil".

The major constraints to economics for iron ore deposits are the position of the iron ore relative to market, the cost of rail infrastructure to get it to market and the energy cost required to do so.

World consumption of iron ore grows about 10% a year, with the main consumer and importer being China.

In fact, prices for the iron-ore sold by Vale (NYSE: VALE) averaged $126.19 per metric ton last quarter, up 100% from a year earlier. Vale produced 71.5 million metric tons of iron ore in the three months prior to March 31, up 3.6 percent.

"Given the demand prospects and the tightness in supply," said Vale in a statement, "we expect iron-ore prices hovering around a high plateau."

So while precious metals are vulnerable to sharp price fluctuations, iron ore is the little engine that could. It keeps chugging oblivious to investor sell-offs, the Indian jewellery season and currency manipulation.

According to a recent Reuter's article iron ore's "new frontier" is West Africa.

"Guinea, Sierra Leone, Liberia, Cameroon, Gabon, Ivory Coast all have potential," says John Jorgenson, iron ore specialist at the United States Geological Survey, "The reserves are a pretty good size, a quarter of a billion to half a billion tonnes, and some of the grade is 65 percent iron, which fits in the range of Australian and Brazilian deposits."

But large high-grade iron ore deposits are not that rare. What is rare is to find one that is close to a deep sea port - avoiding the crippling cost of building and maintaining a railroad system.

West African Iron Ore (TSXV: WAI) is an early stage iron ore project in Guinea that appears to hit all the right buttons.

WAI holds two iron ore permits in Guinea, the Forécariah permit and the Kérouané permit. The company's Forécariah iron ore mineral project is located approximately 90 km from Conakry, the capital city of Guinea.

An exploration target size of between 2.9 and 5.1 billion tonnes has been estimated for the two largest targets, Kalyadi and Sambalama.

An average grade of 36% Iron (Fe) was calculated on 186 surface samples within mineralized units in the Forécariah Project, while an average grade of 39% Fe was obtained on 78 surface samples from the Kalyadi and Sambalama targets.

WAI has also been granted exploration rights for a three-year period over iron deposits in an area covering 500 km2 - in the prefecture of Kérouané.

WAI plans on spending approximately $3.4 million initiating a Phase I exploration program on the territory covered by the Forécariah permits.

The stumbling block to many of these West African Iron Ore plays is the massive capex to build a mine. Perhaps the biggest line item is the cost of transportation infrastructure.

As an example, in 2008 Fortesque Metals Group (ASX: FMG) spent $2.5 billion to construct a 280-kilometer rail line between its Cloud Break Mine and the Point Hedland in Australia.

WAI's lead asset is so close to the Deep Sea Port of Benty that they could build a conveyor belt to deliver the iron ore directly to the ocean freighters.

By this fall, about 50 drill holes will be completed. Management hopes to outline 3 to 5 billion tonnes by year-end.

The CEO of WAI is Guy Duport - a veteran African resource developer who lives in Beijing and speaks Mandarin. His long-term business contacts in the target export market of China give the company a significant competitive advantage.

Gold and silver and copper will continue to hog up most of the limelight, but iron ore is the dark horse that may win this race. Trading at $0.29 with a market cap of only $50 million, WAI is one potential way to play it. More at .

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