Queensland Bauxite (ASX:QBL) has delivered an initial Indicated bauxite JORC 2012 mineral resource that solely underpins critical first years of potential production from the South Johnstone Bauxite project in Queensland.

The revised Scoping Study does not rely upon the lower category Inferred Resource at all, which the Company revised upward to Indicated category of resource confidence.

The higher confidence level of initial Indicated resources was defined from limited drilling to date below 1.3 metres or along strike; in fact the resource was defined from less than 1% of the Exploration Target area ranging between 193 million tonnes and 405 million tonnes.

Given the inferred mineral resource at Johnstone, it would appear that the scoping study could also have relied on inferred resources.

Based on this and higher grade zones emerging there appears to be plenty of scope to increase the bauxite resource inventory at depth and along strike at South Johnstone which should easily underpin 10 years production - and likely many more years on top of that.

In fact, the Project appears significantly under-explored and under drilled. But that should change now that QBL has a handle on the geological controls this time around at South Johnstone and has cash of $4.2 million in the bank to increase the Indicated resource inventory.

Other notable points from a very long release of information included:

- An Average available alumina grade of 29.7% and reactive silica of 3.2% for Indicated Resource, which is in line with alumina to silica ratios today of around 10:1. The grade is similar to bauxite mined in the Darling Ranges of Western Australia that has average alumina grades of 27-30%. Approximately 20% of the world’s bauxite is supplied from this region.

Interestingly, at limited deeper drilling to 3 metres, and again there were few holes drilled at that depth; drilling returned 33.6% available alumina and 1.8% reactive silica which possibly provides a clue as to what may be beneath.

Capital expenditure remains the same at just $5 million (give or take). Even allowing for an additional 20% contingency on top, this is very low for a potential near term producer. Only Australian Bauxite (ASX:ABX) has a similar Capex and it is a $40 million capped company which is food for thought.

Obviously, the NPV in the scoping study, which is an early stage scope of project economics is now solely based on the initial Indicated Resource derived from limited resource drilling and not the Inferred Resource so it will be temporarily lower (one would assume) until drilling upgrades further resources to Indicated category.

The IRR of 223% provides a measure of the returns available from mining the bauxite at the project, even based on the initial Indicated resource.

The project operating costs are (unchanged) and still low; these could be expected to be refined down with more work on mine planning.

Bauxite revenues are based on a fairly opaque current bauxite price and based on limited cargoes and does not allow for the projected bauxite shortages in 2015/16 and a likely higher bauxite price. So these are likely conservative. The lower Australian dollar versus U.S. dollar is also timely.

Based on QBL's low spend and preservation of capital, there is sufficient capital to keep moving the South Johnstone project moving along at a fast clip.

It would seem, although not surprising, that QBL has been approached by additional commodity traders and now alumina refineries. If project finance is the route taken by QBL, this would not seem to be an issue to secure based on low Capex, low Opex, high Margins, fast Payback and time to get a product to market.

The all important environmental approval process appears to be commencing soon, as well as an application for a mining lease.

QBL is aiming to commence mining in second half of 2015 and while this might appear aggressive - for a bauxite market with forecast limited new supplies of seaborne bauxite forecast on-stream in the next 12 months, the Project might just be an imperative for the bauxite market.

In the last year, Malaysia has provided bauxite to Chinese refineries. Shipments have increased from 100,000 tonnes to over a million tonnes this year (with high reactive silica grades too boot) but this won't put a dent in demand and there are also (reportedly) limited reserves of bauxite in Malaysia.

Analysis

QBL has achieved what few exploration companies manage: An initial Indicated resource (in a commodity with looming shortages) to support early years of production without relying on lower category Inferred Resources; a project Capex at just $5 million; a project located 15-24 kilometres to the nearest Port - with export capacity, while retaining $4.2 million in cash - all with a market cap. of just $15 million.

Of course, that all begs a new question: it assumes bauxite produced from South Johnstone might go to China? However, there might be demand from other Asian markets or even in Australia.

QBL and one or two other ASX listed bauxite companies are treading a path which seeks to break the integrated bauxite/alumina/aluminium integrated loop and forge a bauxite production niche in a market likely starved of the mineral in 2015/16.

That is a path that has significant valuation upside as ABX has shown. A major differentiator is the scale of resource potential at South Johnstone and close to Port.