Alderon Iron Ore (TSX: ADV; NYSE-MKT: AXX) has confirmed a power supply for its Kami iron-ore project in the Labrador Trough, passing another milestone this year.
The company signed a power-purchase agreement (PPA) with Newfoundland & Labrador Hydro, a subsidiary of Nalcor Energy, concluding a process that has been ongoing since 2011.
The PPA will come into effect once the provincial government builds the transmission line from Churchill Falls to Labrador West. The transmission line will ensure Alderon has enough power to operate its 75%-held Kami project.
The company has agreed to provide $65 million in security deposits to support building the power line. Nalcor will return the deposits after Alderon connects Kami to the electrical system, commissions the project and loads saleable product from Kami for two straight months.
Alderon paid its first $21-million security deposit upon signing the PPA. It did so by securing a $22-million loan at an 8% interest rate from its key shareholder Liberty Metals and Mines. Liberty owns 14.4% of Alderon and has an option to convert the loan into Alderon shares after one year at $2.376 per share. Alderon will use the remaining $1 million in proceeds for capital purposes.
The iron-ore developer will provide the outstanding $44 million in security deposits after Nalcor lines up other commitments to build the transmission line. This could happen sometime after August, the company says.
“The completion of the PPA, which follows the confirmation last week that Kami has cleared the important final federal environmental review, represents yet another critical milestone,” wrote Salman Partners analyst Mike Plaster in a Feb. 25 note.
On Feb. 18, Alderon received a positive environmental assessment decision from the federal minister of environment, noting the Kami project is unlikely to cause “significant adverse environmental effects.” Before that, other developments included the provincial government green-lighting the new transmission line and releasing Kami from the provincial environmental assessment process.
The achievements, along with securing the PPA, further advance the project and allow the company to focus on securing project debt financing before it breaks ground on the mine.
Last September, the company selected BNP Paribas to help arrange up to US$1 billion in debt to build Kami, which could cost US$1.3 billion.
“We are increasingly confident that project financing will be completed in first half of 2014,” said Desjardins analyst Jackie Przybylowski.
Alderon notes its 25% partner at Kami, Hebei Iron & Steel Group, has committed to fund up to US$220 million of capital costs not covered by the debt financing. Hebei, China’s largest steelmaker, has already spent $182 million for a 25% interest in Kami and 19.9% of Alderon’s shares. It has an off-take agreement to buy 60% of Kami’s first annual production of 8 million tonnes of iron-ore concentrate.
Przybylowski believes the company will finalize another offtake agreement by mid-year, after which it will start construction. Alderon may also complete an equity raise to ensure it has enough money to build Kami.
Alderon closed Feb. 26 at $1.88, and has a $244.6-million market capitalization.
Przybylowski has a “top-pick speculative” rating and a one-year $2.75 target on the stock.
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