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3 reasons to buy Rum Jungle Resources Ltd

Rum Jungle Resources Ltd (ASX: RUM) is developing the world-class Ammaroo Phosphate Project in the Northern Territory which it discovered in December 2010. Phosphate is a key ingredient required to produce fertiliser and demand for fertiliser is expected to increase substantially in the near future as literally hundreds-of-millions of people around the globe move into the ranks of the middle-class.

Rum Jungle has an experienced management team leading it. Managing Director David Muller is a geologist by training and has been involved with the mining industry since 1966. The board also consists of a senior executive from BHP Billiton Limited’s (ASX: BHP) Phosphate Hill operation.

The size and quality of Rum Jungle’s resource has also attracted a number of experienced investors to its share register. These investors include fund manager Acorn Capital and conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

Here are three reasons to consider buying Rum Jungle:

World Class Deposit.

Phosphate and potash are two of the three essential elements of fertiliser – the third element is nitrogen. Initially, in 2012 Rum announced a maiden JORC Resource of 253,000 tonnes of 15% phosphate. The explorer also has a potash brine resource defined at 8.4 million tonnes.

In March 2014, Rum Jungle upgraded its phosphate resource deposit to 1.08 billion tonnes at an average grade of 14% P2O5 using a 10% cut-off or 338 million tonnes at 18% using a 15% cut-off. This makes it not only the largest rock phosphate resource estimate in Australia but also a deposit of global significance (according to management).

Infrastructure and Production Plan.

With the resource located just 90 km from the Adelaide-to-Darwin railroad, moving the ore to the Port of Darwin for shipment to Asian customers is considered a relatively straightforward task and offers Rum Jungle a significant transport cost advantage compared with competitors.

There are also some very appealing attributes to the ore body. Firstly, it is of such a high quality that it is expected to be shipped with little need for refinement required. Secondly, it is very close to the surface and believed to be soft. This should allow for the ore to be mined at a relatively low cost, as the need for drill and blast to extract is expected to be avoided.

The rise of the Asian middle-class and Australia’s opportunity to be the “food bowl” for Asia.

Most investors are familiar with the comparative advantages Australia possesses in agricultural production, and our opportunity to benefit from both global population growth and particularly from higher Asian per capita income which will allow middle class populations to consume higher protein foods. While this situation may be obvious to investors, a way to gain exposure to this exciting theme can sometimes be less obvious. Rum Jungle would appear to offer an appealing way to gain exposure to Australia acting as Asia’s “food bowl”.

Australia currently imports all of its potash. In total the world is short on supply of both phosphate and potash. The only way for the world to meet the demands for more high protein foods is through increased use of fertilisers. This will not only increase the demand in Australia for fertiliser but increasingly in populated regions of Asia. Currently many Asian countries are totally dependent on imports for their fertiliser requirements – Australia’s proximity (specifically the Port of Darwin) offers a comparative advantage for Rum Jungle over other further away suppliers.

Valuing a mining company which has a resource but is yet to enter production is exceedingly difficult. For this reason investors need to be aware of the speculative nature of such an investment. That being said, the comparatively low start-up costs and size of the resource, coupled with a market capitalisation of just $40 million could make the risk-reward trade-off of Rum Jungle appealing.

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Motley Fool contributor Tim McArthur owns shares in Rum Jungle Resources Ltd.

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