Alien Metals, UFO, Up 17% On Anglo American Mandate – More Later?

Alien Metals (LON: UFO) shares are up 17% this morning on the announcement of a possible financing and offtake agreement with Anglo American (LON: AAL). This is, more than anything else, an agreement to get on with negotiating the fine details. But it is a most encouraging sign – and thus the UFO share price rise there. There's a possible dilution event associated with it though, so it's not all smiles and roses. It's the balance between the varied parts of the deal that matters.

Worth having a look at the basic background here – Alien Metals is looking to develop an iron ore prospect. A quick view of the Earth's history is that the oceans rained iron oxide for tens of millions of years. The iron was dissolved in the water then global chemistry changed (to an oxygen atmosphere, itself the result of the respiration of plants). That all then came out as iron oxide and fell to the ocean bottom, creating layers and drifts hundreds, sometimes thousands, of metres deep. This “iron layer” is available anywhere in the world that was ocean bottom at that time. But where that near pure iron oxide has weathered to the surface is where we get our iron ore from – largely Western Australia today.

The result of this background is that iron ore mining is not a difficult enterprise. Find the outcrop, test it, ensure it's good stuff. Then, with only a little hyperbole, stick it in a rail truck and send it off. Given the low value – $100 a tonne, just to use a number – and the distance from users, the keys to profitable mining are logistics and working at scale. No point in doing this for a few thousand tonnes.

Also Read: Metals Mania – Why Are Metals Prices Surging?

But all of that means that if you're a small miner of that very iron ore then you've got a problem. You've got to have large amounts of capital to get to scale and then even more to be able to do the logistics. Which is where today's beginnings of an agreement between Alien and Anglo American come in. They will – subject to the details – provide advance payment in return for an offtake agreement. That – to an extent – gets around the capital problem. That also – and far more importantly perhaps – gets around the logistics problem. For Anglo American has the train sets, port facilities and so on to be able to export the iron ore.

The capital issue is not fully solved, for Alien must raise, as a part of the deal, another $5 million as their contribution to the capital costs. On an under £30 million market capitalisation that's significant dilution but it is doable. So we have both an upside and a down side here at Alien. That iron ore mine now becomes operable. They've the logistics and much of the working capital sorted, that's the upside, the downside that they've still got to come back to raise more capital.

All in all the share price jump today at UFO seems justifiable. It's implementation that will be the next hurdle and revaluation point on this mine.