The small-cap miners operating deep in the West African jungle

Mining executives often like to describe their business as an exercise in earth moving. Maybe because they are not geologists they downplay the challenge of finding the stuff in the first place. Instead they concentrate on the physical challenge and cost of digging it up, sorting the metal from the ore and taking it to the nearest railway line or shipping terminal.

Sometimes this process runs smoothly. In countries with established mining industries, with modern transport networks and power grids, mining is a simple business. But today's miners are increasingly going where no miner has gone before, and they are finding that the necessary infrastructure does not exist.

One of the most exciting new mining regions is in West Africa, on the borders of Cameroon, Gabon and the Republic of Congo. Such is its wealth of iron ore that it has been called the new Pilbara the rich iron ore region of Western Australia but it is several hundred miles inland and unless a way can be found of getting the ore to the coast, commercial development will not be possible.

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Why go to the trouble? Especially when you have massively exciting untapped resources right here in Britain.

Well, because of the potential for huge gains, of course. I'll point to a few very attractive prospects today

Let the Chinese pay for it

A new note from Investec highlights the extent of the challenge in West Africa. "There are multiple hurdles facing development of projects. The key issues include the almost complete lack of infrastructure and the vast amount of capital required to install it; the relatively small sizes of the companies involved; the high sovereign risks (exacerbated by multiple borders); demanding operating conditions and assorted ownership... Each of the companies involved in the region lacks the critical mass in its own right to justify the capital risk in developing the respective asset."

What is needed then is either some form of co-operation or else somebody with very deep pockets indeed. For the latter, the deepest pockets seem to be Chinese, and hopes for the region have been centred upon Hanlong Mining.

Controlled by Sichuan-based billionaire Liu Han, Hanlong launched a bid back in 2011 for Sundance Resources (ASX: SDL), which hopes to develop the massive Mbalam iron ore deposit straddling the border of Cameroon and the Republic of Congo.

Hanlong received a provisional approval from the Chinese National Development Reform Commission, provided that it brought in a "large Chinese partner" capable of funding the $5bn cost of developing the mine and the necessary infrastructure.

This is a very major investment indeed. SDL is proposing a 510km heavy-gauge railway from Mbarga to the Cameroon coast, with a 70km extension south of Mbarga to Nabeba. This would run to a new port south of the existing facility at Kribi, capable of accommodating the 300,000 deadweight tonnage cape-sized ships.

China Harbour Engineering company, a subsidiary of a Chinese state-owned enterprise, signed a memorandum of understanding in 2010 to manage this project, while an outfit called China-Africa-Construction signed another MOU at the same time to scope the rail development and the required rolling stock.

You should keep an eye on this story

Again, this is no simple matter. The railway must cut through dense rainforest and make a 600 metre descent to the coastal plain. Seven bridges must be built along the way. Already the matter is stalled. Since launching its bid for SDL in July 2011, Hanlong was first forced to up the price and has then negotiated it down again in line with the falling price of iron ore.

The deal still has not been finalised and to add a bit of spice to the affair Liu Han has reportedly been arrested by Chinese police. "Until we get an explanation I'm a bit concerned," said SDL chairman George Jones, mildly.

Now there has been a fresh development.

SDL is reported to be discussing a sale of the Mbalam project to Glencore (LSE: GLEN). "Consolidation of the assets could provide the critical mass to stimulate a development decision by Glencore", says Investec. Key to this, however, would be confidence that the transport links could be built, a particularly thorny challenge in view of the number of interested parties.

Dealing with one African government is hard enough. To get three to agree on the building of a new rail and port system, and access to it, is a diplomatic challenge of mega proportions.

For penny share investors this is an important story. Afferro Mining (AIM: AFF),West African Minerals(AIM: WAFM) both have iron ore projects in the region. But my guess is that it will be a long time before wagons of iron ore are trundling through the West African jungle.

CORRECTION: In this article Tom stated that the Avima project is owned by Glencore International AC. This was a mistake. To clarify, the Avima iron ore project is in fact owned by Core Mining Limited, in which Glencore is a minority shareholder.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

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