Solving Saudi's riddle of the sands

By DAILY MAIL REPORTER
Updated:

 

Timing is everything, even in the tantalum market. So when Patrick Cheetham won a licence to search for the metal in the Saudi Arabian desert in 2002, it was unfortunate that the price was collapsing.

Tantalum is used in capacitors, which store and release an electric charge. There are probably 20 of them in your mobile phone, and more in your computer and any other electric circuits you have. They also go into medical equipment, aerospace alloys, and, since it works well at high heat, into bits of your car engine.

During the tech bubble, tantalum was driven skyward by raging bulls. Then the price slumped, leaving Cheetham, a geologist from Cheshire, wondering whether the Saudi deposits would be worth anything.

The immediate price of tantalum, which hit $250 per pound during the bubble, is now back to $35. The more important long-term contract price is back at $50 to $60 - around the average of recent years. That makes a healthy outlook for the deposit at Ghurayyah, some 30 miles from the Red Sea port of Dhuba in the west of the Saudi kingdom.

There, in the baking sands, Cheetham's Tertiary Minerals company has marked out the world's largest tantalum deposit, encased in a solid granite 'plug' more than half-a-mile wide. It also contains niobium (used to strengthen steel), and some zirconium and uranium. A mine could cost up to $100m (£53m), a processing plant more than double that.

This is heady stuff for Aim-quoted Tertiary, whose market value at 10¼p is just £5.6m. Fortunately, the Saudi climate is hospitable - at least for investors. Cheetham, who qualified at the Royal School of Mines before working in Australia for Dragon Mining and Archaean Gold, says a $100m project might typically be funded 50% by the Saudi industrial development fund, 25% by bank loans, and 25% by equity.

BAE's Al Yamamah agreement could cough up half of the equity cost, leaving Tertiary and its local partners to find just $12.5m (£6.6m). The partners, two powerful Saudi family businesses, Algosaibi & Brothers and Samaco/ALNahla, are already bankrolling the feasibility studies for the project.

In the past year they have bought 15% of Tertiary in two slices, paying 10p and 15p a share. Ghurayyah is still at least four years from production. The 'bankable feasibility study' may be ready in 2007/ 8. First production might be in 2010.

If all goes well, the mine could supply 10% of the world's tantalum by 2011/12, earning up to £40m annual revenues, and making perhaps £10m to £12m profits. That is six years off, and meantime Tertiary will need more funding. But even if it raised a rights issue that doubled its size to £11m, the group might still be valued at only a year's profits.

Cheetham is executive chairman. The board includes David Whitehead, former head of exploration at mining giant Billiton, and Donald McAlister, finance director of Ridge Mining.

Tertiary also has exploration interests in Scandinavia and a 25% stake in Sunrise Diamonds, another Aim minnow which is exploring in Karelia in Finland, near the border with Russia. But the Saudi project is the key to its fortunes.

The risks are high. A change of regime could get Western investors kicked out, but would also cause global upheaval. The tantalum price could fall, but new 'hybrid' cars are likely to boost demand. When the cash calls come, the Saudis could turn the screw. But they want to encourage mining, which could provide jobs and lessen oil dependence.

The project itself could prove tricky, but much of the ore is close to the surface. If the partners move it closer to production, local investors may be keen to get involved. Floating Tertiary in a local market such as Dubai, where there is plenty of oil money looking for a home, could be highly rewarding.

In Australia, Sons of Gwalia, a big tantalum producer, slumped into administration after misadventures in gold hedging. When the tantalum side, which is healthy, is sold, it will benchmark values in the industry. Over the next 18 months, Tertiary will be testing the reserves and working on the feasibility studies. The real excitement will come as Ghurayyah is turned into a mine.

This is one for risk takers - set a stop loss at 5p - but the upside looks promising.

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