Chromex Mining (AIM:CHX) is one of those rare animals on South Africa's  Bushveld - a pure chrome play. With a 74% interest in, and 100% control of, two key projects, the original development at Mecklenburg and Stellite, acquired last year, Chromex is well positioned in one of the most important chrome-producing regions in the world. Demand for chrome - for which there is as yet no commercially viable substitute - is largely driven by producers of ferrochrome for stainless steel production worldwide, who consume some 90% of mine output. Other industrial uses include superalloys, leather tanning, castings and metal finishing.

South Africa accounts for 40% of world production of chromite - the only ore from which chromium is extracted commercially - and hosts around 70% of the current chromite resource base. The Bushveld igneous complex - although better known perhaps for its deposits of platinum group metals - contains a number of chromite bearing reefs or layers: the Lower Group ranging from LG1 - LG6, which are overlain by the Middle Group MG1 - MG4. These occur in what's known as the critical zone, and lie below the better known Merensky and Upper Group 2 (UG2) PGM bearing reefs.

In its simplest terms the Bushveld can be visualised as an irregular bowl shaped structure, consisting of several shallow bowls of decreasing size stacked one inside the other so that their top edges are all level - these represent the mineralised reefs. The western and eastern rims of the bowls are exposed to the surface, and form the Eastern and Western Limbs of the complex. All the reefs of mineralisation slope gently downwards towards the centre of the bowl. This is, of course, highly simplistic, but helps to understand how the various reefs outcrop to the surface, and can be accessed first by open cast mining, and then, as the reefs dip away, by following them underground.

Chromex's two properties lie one on each limb: Mecklenburg in the east and Stellite in the west. Both are owned and operated by the South African company Chromex Mining Company (Pty) Ltd, which is 74% owned by Chromex and 26% owned by their BEE partner Umnotho WeSizwe.

Mecklenburg was the property Chromex originally acquired in 2005 from Spruce Management - which remains the largest shareholder - and brought to the market in September 2006 when it was listed on AIM.

At that time, Mecklenburg was already a well developed project, with a Bankable Feasibility Study under way, and a resource of over 9 million tonnes of chromite hosted in the LG6 and LG6A reefs, which outcrop to surface on the property and are the most important chromite target due to their higher grade and uniform thickness. By April 2007, the BFS was complete and the resources confirmed to SAMREC standards at 9.05 tonnes of chromite, of which 5.86 tonnes was in the measured/indicated category.

Mecklenburg will be an underground mine, using three declines from the surface to exploit the reefs, and a 60,000 tonne per month operation is envisaged over a 10 year minelife. The desirable lumpy ore - which remains as coherent blocks or fragments and is much in demand by the ferrochrome smelters - is likely to form approximately 40% of the mine's output. Mecklenburg is currently on hold, however, due to the market downturn and low demand for stainless steel, which has seen 70% of the world's ferrochrome producers shut down temporarily.

There are also permitting issues: although the Department of Minerals and Energy awarded the New Order Mining Right for Mecklenburg to Chromex last July, the large chrome/ferrochrome producer Samancor has appealed against this decision. Chromex is confident that the issue will be resolved in its favour, in spite of the clout that Samancor can wield as a large operator, and have all its plans drawn up for developing Mecklenburg once market conditions improve.

On the Western Limb, close to Rustenburg, is Stellite, the company's second acquisition, already a producing mine. Bought by Chromex and partner Umnotho WeSizwe in two tranches during 2007 and 2008, Stellite is very different to Mecklenburg. It's an open pit operation initially, focused on the region where 5 individual chromite layers outcrop to the surface - LG6, MG1, MG2, MG3 and MG4. However, the mine plan anticipates moving underground after about 7 years as the opencast potential becomes depleted. Production commenced last July, when the company started stockpiling ore at the rate of 30,000 tonnes of chrome per month, using contract miners, and with the initial intention of selling run-of-mine ore to third party customers. However, opportunity knocked at a very appropriate time, and Chromex was able to acquire a contractor-owned mobile crushing and screening plant, which allowed it to treat the ROM product and sell partially beneficiated chrome ore. As a result of selling screened and crushed chrome ore instead of unbeneficiated ROM, Chromex increased its anticipated revenue by 75% while increasing its operating cost by only 8%, and Stellite made an operating profit in its very first month. At the same time, Chromex was able to announce that exploration drilling on the property had increased the SAMREC compliant resource to 31.9 million tonnes of chromite, 6.7 million tonnes of which is mineable by open cast methods, and the remainder accessible by underground mining.

With the chrome market currently depressed, Chromex has been utilising its time wisely. The flexibility of the contractor-based mining operation means the company can adjust quickly and easily to market climate and whilst Stellite continues to produce, it is only running at approximately 25% of its available capacity of about 40,000 tpm.  Chromex is thus ticking over, keeping contractor and customer relationships going, gaining a greater understanding of the orebody, and generally marking time until the market picks up again in the not too distant future...and, of course, generating positive cash flow as overheads are so low. Semi-beneficiated ore has been sold to Tata Group, the Indian steel producer, for processing to ferrochrome at its smelter at Richards Bay and to Metalmin, a leading international chrome trading company.

But in the background, a significant development is ongoing. A new processing facility is being built at Stellite, which is expected to be commissioned by the end of the first half of 2009 at a cost of approximately ZAR 22 million ($2.25 million). The plant, funded by a $3 million loan potentially convertible at 22p per share, has been designed to process circa 40,000 tonnes per month run of mine ore. This will enable Chromex to supply a wider range of added value products including chemical grade and metallurgical grade sands in addition to the chrome ore currently being produced. The attraction of the value added products is clearly demonstrated by the MOU Chromex have signed with Metalmin, for 10,000 tonnes per month of metallurgical grade sands on a take-or-pay basis once the process plant is up and running.

Another significant development is that Chromex has secured an amendment to its Mining Right which allows it to also extract PGMs and gold from their property at Stellite. This will allow it to treat the tailings from the chromite operation and extract the higher value metals - albeit in small amounts - which will make quite a difference to the ultimate bottom line.

The trick now for Chromex at Stellite is to avoid depleting its cheap-to-mine surface resources at the current low prices, whilst still maintaining a cash positive operation and keeping customers and potential customers on board ready for the upturn. The new process plant can increase its margins, but is additional cash flow now worth prejudicing the company's potential to earn significantly more from the same output when the global economic recovery pulls chrome prices back in line with their fundamentals?

And there seems little doubt that that will happen. For the first time, there is an increasing market in China for ROM ore, as the Chinese are tuning to their own ferrochrome production rather than buying the output of ferrochrome producers elsewhere. The same is happening in India.. There is no economic replacement for chrome, and the turning by many steel producers - due to high nickel prices in 2007/8 - from austenitic stainless steel, which requires nickel, to ferritic stainless steel which contains chrome, marks another swing in chrome's favour. China's demand for chrome and ferrochrome is already beginning to show the much-cliché'd green shoots.

At under £18 million market cap, at the end of March the company had one chromite mine generating positive cash flow, another with good potential in suspended development, around $2 million in cash, orders in the book and no debt other than the convertible loan for £1.5 million already mentioned. 76.5% of the shares in issue are owned by just 9 shareholders. Among them are Spruce Management - the vendor of Mecklenburg - with approx 38% and directors Brian Moritz and James Burgess who own almost 12% between them.Published courtesy of Proactive Investors - www.proactiveinvestors.com