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TABLE OF CONTENTS Dec 3 - 9, 2012 Volume 98 Number 42 - 0 comments

Black Iron takes on Ukrainian iron ore

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By: Trish Saywell
2012-12-03

Low operating costs and proximity to steel mills in Europe and the Middle East make Black Iron’s (BKI-T) Shymanivske iron ore project in the Ukraine a compelling proposition, despite fluctuations in the iron ore price, the Toronto-based company says.

The open-pit project, 330 km southeast of Kiev in the heart of the Krivbass iron ore mining district, is expected to produce 9.2 million tonnes per year of high-grade, 68% iron ore concentrate at US$43.97 per tonne free-on-board, according to a bankable feasibility study. The iron ore concentrate will be put on a rail line close to the property and transported 580 km south to the port of Yuzhny at an estimated cost of US$7.39 a tonne.

Matt Simpson, president and CEO of Black Iron, which is part of the Forbes & Manhattan group of companies, says the operating costs are low because of the deposit’s low strip ratio of 1.63 to 1, its proximity to power, rail and port facilities and the Ukraine’s inexpensive skilled labour and low corporate tax rate.

Corporate taxes in the Ukraine are 16% and royalties are equivalent to 1% to 2%, or about half of those in a developed country, Simpson says. “In Canada, it would be 29% corporate tax and about a 5% royalty to an aboriginal group,” he notes. “In Australia, you’d be paying 30% corporate tax plus a 30% mining tax, or super-profits tax, which is crazy.”

Labour costs in the Ukraine are also a fraction of what they are in more developed countries, he adds. “Where else do you find skilled labour — electricians and mechanics — making US$3 an hour? In Canada it’s about US$30 plus benefits. In Australia, you’d pay US$50.”

And while wages in Africa are lower than in the Ukraine, the issue there is finding skilled workers, he explains. “Ukraine has educated people with a literacy rate of about 98%. The whole economy is driven by mining and agriculture, and we’re only 30 km from a city. We can just bus people back and forth.”

The bankable feasibility study puts the project’s capital costs at US$1.1 billion and sustaining capital costs over the life-of-mine at US$689 million. He says the low capital costs are a function of surrounding infrastructure. “We have all the key infrastructure in place, with surplus capacity,” he explains. “The rail is right near our property, so we don’t need to build an expensive railway, which also usually brings with it permitting challenges. We just build a spur.”

Shymanivske would produce more than US$1.1 billion in average annual revenue over its mine life, and yield a post-tax internal rate of return of 40.3% and a post-tax net present value of US$3 billion. At a discount rate of 8%, capital costs can be paid back in under three years.

As for iron ore prices, Simpson is optimistic. The bankable feasibility study is based on a benchmark US$95 per tonne, while current prices stand at US$122 per tonne. And he believes that while prices for the metal have hit a high of US$185 per tonne and a low of US$90 per tonne in the last few years, he expects they are likely to range between US$115 and US$120 per tonne over the next three years.

Simpson is aiming to get all the permits required to start construction before October 2013. The next permits the project requires consist of a mining allotment, approval of the pit shell, baseline environmental studies and surface rights. He does not believe any of the permits will be problematic — not just because the Ukraine is a mining-friendly country with a straightforward, if somewhat bureaucratic permitting process, but because Shymanivske is in a mining district and surrounded by seven other iron ore mines.

“One thing that is nice about the Ukraine is that the permitting process is well established, unlike in Africa, where they’re still trying to figure out their mining codes,” Simpson says. “Of course, being a former Soviet country, it is still bureaucratic: you have multiple departments and multiple signatures that are required, so that is onerous. But it is a clear and defined process.”

Black Iron purchased a 100% stake in Shymanivske from a private company called East One in 2010. ArcelorMittal, which owns the Kryvyi Rih iron ore mine 1 km north, had tried to buy the deposit in 2008, but walked away from negotiations when the global financial crisis struck, Simpson says.

“When things turned around in 2009, the Ukrainians didn’t want to deal with Arcelor,” he says, adding that Black Iron’s purchase of the project was a bit serendipitous for other reasons, too. “One of the people who work for Forbes and Manhattan was born in Azerbaijan and knew a guy at the Ukrainian company that owned the property,” he continues. “They were childhood friends.”

Simpson says the plan is to complete construction in the fourth quarter of 2015 and start production in the first quarter of 2016.

Black Iron has about US$11 million in cash and no debt, and plans to raise money in stages. The company will do a small raise in next year’s first quarter, followed by a much larger raise in mid-2013 through an offtake agreement with a large steel mill. Under this scenario, the steel mill will inject at least 40% of the projected capital costs over a two-year construction period, and sign an offtake agreement to buy a large portion of Shymanivske’s production. Using the offtake contract, Simpson says, Black Iron would raise debt financing and top it up with smaller tranches of equity financing.

Simpson adds that 19 companies have signed non-disclosure agreements with Black Iron — most of them steel mills, along with traders or large investment houses — in the Middle East, Europe and Asia. “We’re just progressing discussions with a few of them, and now they have a clear estimate of how much capital this project will cost.”

Simpson says the financing model works well, and points to Alderon Iron Ore (ADV-T), another Forbes & Manhattan company, as an example. Alderon, which is developing the Kami project in Labrador, announced a huge investment and offtake deal in August with Hebei Iron & Steel Group, a steel mill in China.

The Shymanivske deposit contains proven and probable reserves of 448.2 million tonnes at 31.1% iron, and Simpson believes there is further exploration upside. He thinks the deposit may extend northward towards Arcelor’s Kryvyi Rih complex 1 km north, and plans additional exploration drilling, which could increase the deposit’s size.

Measured and indicated resources stand at 646 million tonnes grading 32% iron, with inferred resources at 188 million tonnes of 30% iron.

At press time in Toronto, Black Iron was trading at 25¢ within a 52-week trading range of 13¢ to 74¢. The company has 140 million shares outstanding.



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Photos

Equipment at Black Iron's Shymanivske iron ore project in the Ukraine, 330 km southeast of Kiev. Source: Black Iron
Equipment at Black Iron's Shymanivske iron ore project ...
A wide view of Black Iron's Shymanivske iron ore project in the Ukraine. Source: Black Iron
A wide view of Black Iron's Shymanivske iron ore projec...

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Shymanivske Project



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