Black Iron (TSX: BKI; US-OTC: BKIRF) and Glencore (LON: GLEN) are in talks to finance construction of the junior’s Shymanivske iron ore project in Ukraine, and have signed a non-binding memorandum of understanding (MOU) to begin formal negotiations on the financing-offtake package.
“They have had their eye on this project for a while, and a number of things are quickly coming together such that Glencore believes it is the right time to move on it,” says Black Iron president and CEO Matt Simpson. “This is huge news.”
The companies envision an investment from Glencore that will help fund construction in exchange for offtake of production of 4 million tonnes a year under Black Iron’s phase-one production plan. The terms and amount need more negotiations.
A preliminary economic assessment (PEA) released in November 2017 envisioned building in two phases, starting at 4 million tonnes of dry concentrate per year, and ramping up to 8 million tonnes per year. Construction of phase two would start in the third year of production — funded by internal cash flow — and it would operate by year five. The debt would be paid down in the first years of production, and the third year would generate enough free cash flow to start building phase two.
Including a 17% contingency, the PEA estimated capital investment would be US$436 million for phase one and another US$312 million for phase two, for a minimum 20-year mine life from the open pit, which is open for resource expansion, particularly to the north.
Glencore’s involvement strengthens Black Iron’s ability to raise more funds and draws on the commodity giant’s extensive international network, experience and market knowledge.
The natural resources powerhouse has agreed to work with Black Iron to leverage its relationships to source the balance of funds needed for construction and be an anchor investor.
Under the MOU, Black Iron can also allocate offtake to other equity investors if the investment terms are equal or superior to those proposed by Glencore. Separately, Black Iron continues its debt financing discussions with international financial institutions and banks in Europe.
“It’s important for people to know that even though the MOU is non-binding at this point, Glencore has spent quite a lot of money and time on due diligence, site visits, meeting government officials, and are very serious to move forward,” Simpson says. “They want to help Black Iron raise the balance of money that’s required to construct the project so they can market the high quality product that will be produced.
“They have very strong brand recognition globally, so they’ll help open doors with other equity investors and banks that might be hard for us to do on our own,” he adds. “Glencore can even call the banks and say: ‘We want you to meet them, we’re investing in their project, we really like it, and you should invest too,’ and because they are such an important client for a lot of the banks, the banks listen to them.”
Similarly, an equity financing and offtake agreement with Glencore also helps raise equity financing, as it gives potential investors confidence that Glencore is behind the project.
The intention is to transition to a binding MOU during 2019, while Black Iron works in parallel on speaking with engineering procurement construction companies, streaming and royalty companies, and other groups that might be interested in investing in Shymanivske.
The company has already started discussions with certain debt providers.
One of the many things Glencore likes about the project in Ukraine’s Kryvyi Rih area, Simpson says, is that it’s a very simple mine to build, given the excellent infrastructure that exists there already. There is no requirement to build rail, a port or bring in power. The area is also replete with abundant skilled labour.
If all goes according to plan, Shymanivske should be ready for construction by early 2020, followed by a two-year build period. It will need to finish an environmental impact assessment to obtain its construction permit.
The project was shovel-ready in early 2014, but had to be put on ice when Russia annexed Ukraine’s Crimean Peninsula on the Black Sea, and Russian-backed separatist forces launched a civil war to bring the country’s two easternmost provinces — in the Donbass region, 400 km east of Black Iron’s project — into the neighbouring Russian Federation.
Today, “you would never know there’s a war going on from where we are. Life is very normal and safe,” Simpson says, adding that “the front line of the civil war hasn’t moved in five years, and there’s no reason to think it will now.”
He also points to an announcement by ArcelorMittal (NYSE: MT) in November 2018 that it is investing US$1.1 billion into its PJSC mine, less than 1 km from Black Iron’s project.
“If Arcelor Mittal — being a global giant with operations in several countries, including Canada — is choosing to put that much money into the Ukraine, it must be because, number one, they’re comfortable politically with the war, and number two … they’re making a tonne of money because of how economic it is to mine iron ore in the country.”
Simpson notes that it costs 25–30% less to produce a tonne of iron ore in Ukraine (US$31 per tonne) than it does in Canada (US$45 per tonne) for a similar-quality product.
Black Iron plans to produce a 68% iron content pellet feed concentrate with low levels of trace elements that can be used to produce high-quality iron ore blast furnace pellets, or premium direct-reduction-grade pellets. It can also be used as a sweetener in the feed for sinter production, which is processed to steel in blast furnaces.
“The reason why the product is so interesting is because of the high iron content, but also because it has very low phosphorus and alumina,” Simpson says, which are contaminants that can affect the quality of steel produced and make it brittle.
“High-quality steel needs to be flexible and ductile — like a skyscraper that can move a little bit because of the wind, or if you’re in an earthquake-prone zone, you need the building to move slightly and not crack. Similarly, if you hit a pothole you don’t want the rim of your tire to crack, and the way to make the steel more flexible is to make sure your phosphorus and alumina are low.”
Black Iron’s product is in high demand, Simpson says, and the recent tailings dam disaster at Vale (NYSE: VALE) — along with the company’s decision to shut down many of its operations, which will remove an estimated 10% of the world’s iron pellet feed from the world market — only increases the need for low-impurity iron.
“A lot of people are aware that Vale has shut down 11 of its operations, taking about 70 million tonnes of capacity offline,” he says. “Some of that can be replaced by Vale themselves, or more easily by Rio Tinto, or potentially BHP — if they can increase production. But part of that 70 million tonnes is 10% of the pellet production, and that can’t be replaced by Rio Tinto or BHP very easily because they’d need to build a pellet plant, and potentially an iron ore concentrator. To do that, you have to design your plant, permit your plant, construct your pant — and that’s easily three years plus.”
The Shymanivske project has a National Instrument 43-101 compliant resource of 646 million measured and indicated tonnes consisting of 355 million measured tonnes grading 31.6% total iron and 18.8% magnetic iron, and 290 million indicated tonnes grading 31.1% total iron and 17.9% magnetic iron, using a 10% magnetic iron cut-off grade.
The Shymanivske project also has 188 million inferred tonnes grading 30.1% total iron and 18.4% magnetic iron.
The deposit, discovered in the 1920s, has an estimated 20-year mine life. Under the current mine plan, the final pit would be 1.2 km long, 750 metres wide and 300 metres deep.
The mine will have a conventional flowsheet with a gyratory crusher, a secondary crusher and high-pressure grinding rollers.
At press time, Black Iron was trading at 10¢ per share within a 52-week range of 0.05¢ and 12¢ per share.
The company has 160 million shares outstanding for a $16-million market capitalization.