KRYVYI RIH, UKRAINE — Political turmoil in mining countries may come and go, but great deposits endure, waiting for better days to be developed. That’s an old mining maxim Black Iron (TSX: BKI; US-OTC: BKIRF) co-founder and CEO Matt Simpson has lived every day since Ukraine’s political crisis erupted in 2014 and put on ice the Toronto-based junior’s shovel-ready Shymanivske iron ore project, which is now coming back to life beside the city of Kryvyi Rih in central Ukraine, 330 km south-east of the capital Kyiv.
In events that shook Eastern Europe and reverberate around the world to this day, Ukraine’s bloody Revolution of Dignity began in February 2014, with protests in Kyiv’s Independence Square that culminated in the ouster of Ukrainian president Viktor Yanukovych.
In the ensuing weeks, Russia annexed Ukraine’s Crimean Peninsula on the Black Sea and Russian-backed separatist forces launched a still ongoing civil war to bring Ukraine’s two easternmost oblasts, or provinces — called the Donbass region, 400 km east of Kryvyi Rih — into the neighbouring Russian Federation.
Only a few weeks before, in late January 2014, Black Iron had completed a bankable feasibility study at Shymanivske showing attractive economics for a 10-million-tonne-per-year iron ore mine, producing a premium product with 68% iron content, and low impurities.
Simpson says Black Iron had circled up just shy of US$800 million of the US$1.1 billion needed to build the mine, with the rest to have come from an export-credit agency, and an equipment supplier.
“What started to get scary was when the government started to turn against its own people, and started shooting people,” Simpson recalls. “That was when it was, ‘Holy, what is going on here?’ and there was quite a bit of concern for the employees and making sure they’re okay.
“We would have been off building a mine, but then Russia invaded Ukraine, iron ore prices subsequently fell from US$95 all the way to US$37 per tonne, and we just put the brakes on the project,” Simpson says. “There was shock. Everything was looking great, but that carpet just got pulled out from under us, and there’s nothing you can do about it.”
Black Iron clamped down on costs for the next three years, and cut its local workforce to only seven full-time employees by the end of 2017.
“It was the right thing to do to protect the cash we had and wait for better days,” Simpson says. “And those better days are here.”
He cites several reasons behind his sunnier outlook.
“The first is, the front line hasn’t really moved since the original invasion. My personal view is that it was all done, because, when Viktor Yanukovych was president, Putin basically stepped in and said, you cannot have the country implode or fall apart — we need to regain some control. In particular Russia couldn’t afford to lose Crimea to a NATO country, so Putin stepped in and took Crimea — where his naval base is located.”
Simpson speculates the Russians came into the Donbass region and stopped advancing for two reasons: so Ukraine couldn’t join NATO, because if there’s an active war in the country, it can’t join, according to NATO rules; and to keep influence over the government in Kyiv.
The still disputed separation of large areas of the Donbass from Ukraine created havoc in the country’s integrated steelmaking industry, in that much of the iron ore mined in the Kryvyi Rih area was shipped to steel mills in the Donbass that made use of Donbass-mined thermal and coking coal.
That steelmaking and coal capacity in the Donbass has mostly sat idle since the invasion, provoking severe economic distress. In the ensuing years Ukraine’s power-generation system has adjusted to the loss of its thermal coal supply from the Donbass and to Russia’s wider halting of its natural gas exports to Ukraine. Meanwhile, the iron ore mine operators in the Kryvyi Rih region had to find new customers outside the country for their iron ore.
Black Iron’s previous partner at Shymanivske was Ukrainian industrial giant Metinvest — with its robust, pre-crisis annual revenues of US$16 billion — but Metinvest was brought to the brink of bankruptcy when it was cut off from its steel mills and coal mines in Donetsk in the Donbass region, forcing it sell its stake in Shymanivske back to Black Iron in January 2016 for US$5.6 million in cash, after having invested US$20 million. Black Iron now has a full interest in Shymanivske.
“It’s not just me who feels that things are somewhat stable in regards to what has become a frozen conflict,” Simpson says. “I don’t see Russia backing out. I don’t think they want to see Ukraine have real freedom, but I don’t see them pushing it any further, because there’s no benefit to doing that.”
Seemingly in agreement with Simpson’s optimistic take on Ukraine is steelmaking titan ArcelorMittal (NYSE: MT), which has a large iron ore mine north of the 2.6 sq. km Shymanivske property, and announced last July that it is investing US$1.1 billion into its Ukrainian operations. In December 2017, the European Bank for Reconstruction and Development chipped in US$350 million of the US$1.1 billion announced by ArcelorMittal.
“If you know ArcelorMittal, they have operations all over the world, including Canada,” Simpson says. “Why would they choose to put so much money into Ukraine? One, they have to be comfortable politically, and two, because they’re making a ton of money.”
He says ArcelorMittal makes this money largely because of the devaluation of Ukraine’s hryvnia (UAH) currency. As part of a bailout by the International Monetary Fund, Ukraine was forced to unpeg its currency to the U.S. dollar in 2015, and let the hryvnia float free.
“Where previously it was pegged at 8 UAH to US$1, as soon as they unpegged it, it rocketed up to around 25 UAH to US$1,” Simpson says. “And since 2015, when it was unpegged, it has basically moved between 25 and 30 to 1. If you look at a number of different bank forecasts, everyone’s predicting around 30 to 31 to 1 in the coming years.”
Despite its troubles in the Donbass, Metinvest continues to mine iron ore in the Kryvyi Rih area, and immediately southeast of Shymanivske has its YuGOK mine and processing facility, which is co-owned with Evraz.
In another sign of a turnaround in the Ukrainian mining industry, Metinvest recently refinanced US$2.5 billion of debt with Deutsche Bank, ING, Natixis and UniCredit. About US$1.5 billion is made up of five-year notes at 7.75%, and the chunk of the balance is eight-year money at 8.5%.
“It is possible that Metinvest could come back to the table with us because they are on a much better footing right now, similar to ArcelorMittal. Even though they are a shadow of what they once were, they’re still quite profitable these days,” Simpson says. “Instead of using their iron ore domestically to produce steel, they’re now exporting it — the majority of it to China.”
Though Black Iron finished a bankable feasibility study for a 10-million-tonne-per-year operation in early 2014, the company returned with a preliminary economic assessment (PEA) in November 2017 that keeps the premium 68% iron final product, but lowers the scope of the project, and allows builds 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 be in operation by year five. The debt would be paid down in the first couple years of production and then the third year would generate enough free cash flow to start building phase two.
This plan eliminates the need to dilute shareholders to pay for the expansion costs.
“We’re trying to strike a balance between being big enough for people to care on the public markets, but not being so big that the amount of capex we need to raise to get this thing in operation seems insurmountable,” Simpson says. “But we do have the flexibility to go lower.”
For a possible third phase, instead of expanding to 10 million or 12 million tonnes, Simpson says Black Iron would “probably look at putting a pellet plant in, because that would further broaden the customer base and the amount you can charge for the product.”
The crash of the hryvnia makes the PEA’s economics even more compelling than those seen in the pre-crisis feasibility study, even with conservative iron ore price estimates.
Including a 17% contingency, the 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 open pits, which are open for resource expansion, particularly to the north.
Using an exchange rate of 28 UAH to US$1, estimated operating expenses have fallen to US$31 per tonne (average free on board), so that with a long-term assumption of US$62 per tonne for 62% iron, Black Iron estimates its premium 68% product could garner US$97 per tonne, resulting in an after-tax net present value of US$1.7 billion at a 10% discount rate, and a 36% after-tax internal rate of return.
Payback would be in 2.9 years.
“Long-term, we’re using a forecast of US$60 to US$62 per tonne [for 62% iron benchmark], but you can use your own crystal ball,” Simpson says. “The beautiful thing about this project is, whatever your view on what the price of iron ore will be — whether it’s US$50 or whether it’s US$80 or US$90 — you still have phenomenal economic returns.
“If you just have one year when iron ore goes back to US$95 per tonne, the economics go crazy. And that’s not unrealistic. We did that just last year. The point is, you’ll always be able to service your debt in the bad years, and in one or two good years you’re making crazy money on this project.”
The in-pit resource in the PEA stands at 340 measured tonnes grading 31.3% total iron and 19.2% magnetic iron, plus 140 million indicated tonnes at 31.1% total iron and 18.8% magnetic iron, with 27 million inferred tonnes at similar grades.
Under the current 20-year mine plan, the final pit would be 1.2 km long, 750 metres wide and 300 metres deep — all within the current mining allotment.
The deposit was discovered in the 1920s and has undergone waves of exploration, particularly in the early to mid-1980s.
Black Iron’s drilling program in the 2010s of 17,500 metres in 70 holes confirmed high-quality, Soviet-era work totaling 40,000 metres in 215 holes, and brought the resource numbers into compliance with National Instrument 43-101.
The measured and indicated material in the PEA of November 2017 had already been in the proven and probable category in the 2014 feasibility study, and would move back to the reserve category at the stroke of pen — without more drilling — whenever Black Iron finishes a new feasibility study.
“It’s very quick for us to get a feasibility study done based on the work to date, but you’re not going to see materially different numbers than what we have now,” Simpson says.
He notes that the Shymanivske mine would have a very conventional flowsheet with a gyratory crusher, a secondary crusher and high-pressure grinding rollers.
“You just throw it in and are crushing it finer and finer and finer, and running it through more and more powerful magnetic separators,” he says. “And that’s how you concentrate it from roughly 30% up to 68%. It’s really just crushing, magnet; crushing, magnet; crushing, magnet. Then you dewater it and load it on the trains. It’s the kindergarten of mining.”
Black Iron chose to produce a PEA in late 2017 rather than undertake a full revised feasibility study to save money and time, and have a document in hand with the new economics to market offtake to potential customers throughout this year.
To help on this front, veteran mining executive Bill Hart in Australia was added to Black Iron’s management team in November to market a prepaid offtake agreement to potential customers in Europe, the Middle East and Asia.
Black Iron needs to raise US$436 million for phase one. With a 40-60 split of equity-debt financing, that equates to about US$175 million in equity, financed in large part by a prepaid offtake agreement that would see Black Iron offer a discount to the benchmark price over a period of time — for instance, a 5% discount over 10 years.
The debt side could then be financed by export credit agencies and international finance agencies that are mandated to lend money to ventures in troubled but rebounding countries, such as Ukraine.
If there’s cosmic compensation for the political complexities at Shymanivske, it’s the superb mining infrastructure that surrounds the property, with five large, long-life iron ore mines operating nearby and another two in the wider Kryvyi Rih Iron Basin, also called the KrivBass district, which has seen more than 50 years of iron ore mining, and has many more decades of mine life to come.
Black Iron also has a letter of intent with a private shipping operator in Port Yuzhny — 430 km southwest on Ukraine’s Black Sea coast — to load up to 9.5 million tonnes per year of material onto cape-sized vessels that can access the seaborne iron ore market.
If the Soviet Union was good at anything, it was building massive infrastructure to service critical heavy industry, and the mining city of Kryvyi Rih still benefits from an abundance of mining-related infrastructure from the 1960s and 1970s.
A visit to the Shymanivske property consists largely of a tramping around wildflower-filled fields, with Black Iron personnel pointing out major rail, power, road and tailings assets in all directions, and saying things such as, “Can you believe how close this government rail line is to our property?”
Simpson says that “to make money in iron ore, yes, resources are important, but infrastructure is by far the most important thing. And when I say infrastructure, it’s rail, port, power and people. You either have them or you don’t.
“If you don’t have rail, you’re talking about US$3 million per kilometre. Power is a million, a million and half per kilometre. And pretty well every other development project out there is missing one or both of those items, let alone port access.”
Simpson praises the high technical competence and available skilled labour — 8 km from site in Kryvyi Rih — with many unemployed miners having recently settled in the city after leaving the Donbass region due to the conflict.
“We’re in a city with 750,000 people, where a skilled worker makes US$10,000 to US$14,000 a year,” Simpson says. “You compare that to Rio Tinto’s operations in Canada, you’re paying around $120,000. In Australia you’re paying closer to $180,000. So it makes a huge difference on the economics of your project.”
He points out that personnel in Black Iron’s wholly owned Ukrainian subsidiary Shymanivske Steel LLC are part of a community that have been miners for generations. The local vendors are also supported by this labour force.
“The second big thing that makes us unique is the product grade — 68% is in the top 4% of products produced globally, and we can make an ultra-pure, 69.5% product,” Simpson says. “There’s a huge push globally to reduce emissions in making steel, and China is really leading that front now, because the air quality is so poor.”
To that end, he says, the Chinese government announced last year they are shutting down a third of their domestic iron ore mines, and they’re now shutting down all their smaller steel mills.
“You’re seeing the emergence of larger and larger steel mills, and these larger steel mills are more efficient,” Simpson says. “And the reason why these larger steel mills require higher iron content is that instead of using coal to heat up silica, you using that coal to heat up iron and melt the iron down. Usually you’re moving from, call it 60% to 65% iron, so if you start with 68% you’re not burning as much waste, and you’re also not transporting as much waste.”
Simpson adds that another factor a lot of people aren’t aware of in the markets today is the importance of low silica and low phosphorus in iron ore.
“That’s why mines in Canada are still very relevant and mines here in Ukraine are still very relevant,” Simpson says. “The impurities continue to go up in the Australian mines, and that’s becoming more and more of an issue to make high-quality, structural steel.”
There’s a list of impurities you need to watch out for with iron ore, but the big four would be silica, phosphorus, alumina and sulphur.
Simpson says an iron ore miner generally wants silica levels below 4.5%, phosphorus below 0.1%, alumina below 2.5% and sulphur below 0.05%.
“Those are the threshold targets of where you want to be,” Simpson says. “But the lower, the better.”
Shymanivske ore can yield a standard blast furnace concentrate product with silica at 4.5%, phosphorus at 0.02%, alumina at 0.43% and sulphur at 0.05%.
“This is an ultra, high-grade product,” Simpson says. “Beyond that, we can also make a direct-reduction (DR) concentrate, which very few companies in the world can make. That’s a 69.5% product, but more than the high iron content, to qualify you also have to have the silica plus alumina below 2.3%. In our case if you add them up it’s 1.6% (1.3% silica and 0.28% alumina in the DR concentrate), so it’s well below that 2.3% threshold.”
The DR product is the only one that steel mills in the Middle East can take, because they use a different process called Midrex that takes advantage of the region’s cheap natural gas.
“Proximity to markets is also important,” Simpson adds. “The closer you are to your customers, the less money spent shipping product around. In our case, we’re extremely close to Turkey. We’re right around the corner from all the steel mills in the Middle East, and we can also hit the markets of China and India at about 20–25% shorter shipping than North and South American suppliers.
“Obviously we’re not as close as Australia is to China, but again, we’re the sweetener against some of the quality issues the Australian ores are facing.”
Apart from securing the prepaid offtake agreement, another focus for Black Iron this year is tidying up a few land ownership and access issues in and around the Shymanivske property. Black Iron is working towards relocating a small village and is negotiating a land swap involving the Ministry of Defense and the Kryvyi Rih city council for land it can use for its waste piles and processing plant. The costs are already built into its cost estimates.
Other activities for Black Iron this year are continuing with similar high-level permitting, which involves public hearings, and more engineering design work, which is 80% complete.
When asked about Ukraine’s reputation for corruption and heavy bureaucracy, Simpson replies that “Ukraine is a very bureaucratic country, but for us it’s really important as Canadians — and we have Pierre Pettigrew on our board, who introduced the anti-corruption act to Canada — to make sure everything’s done in a very professional manner.”
He notes that in Black Iron’s case, it had “quite a bit of difficulty” in the initial years with local inspectors, and the company found itself repeatedly in court.
“I’m pleased to say that with the new government taking a different attitude, we’ve been able to resolve those outstanding environmental issues — or perceived issues is what they should really be classified as — on the project, and move forward.
“I can’t say we’re not going to have further inspectors coming to us looking for graft or a bribe, but what I can say is we’re hypersensitive to it, because if you go down that road, it’s a very slippery slope,” Simpson says. “So it’s better to do things the right way.”
Corporately, Black Iron was founded 2010 as part of Stan Bharti’s Forbes & Manhattan group of companies and went public on the Toronto Stock Exchange in 2011, raising $38 million at $1.40 per share.
The share price dropped to the 3¢ range in mid-2015 and last traded at a dime, for a $15-million market capitalization.
Black Iron’s directors are chairman Bruce Humphrey, Pierre Pettigrew, John Detmold (chairman and founder of Mexico’s Invecture Group, which is a 15% and long-time Black Iron shareholder), David Porter and CEO Matt Simpson.
Simpson was previously the mine manager at Rio Tinto’s Iron Ore Co. of Canada — North America’s largest iron ore mine — before catching the entrepreneurial bug and cofounding Black Iron.
Other management includes president Michael Spektor (who is based in Kyiv and is former CEO of Ukrainian energy company VS Energy), chief operating officer Les Kwasik, chief financial officer Paul Bozoki in Ukraine, senior vice-president of corporate development Bill Hart, and vice-president of government and community relations Nikolay Bayrak (a former Ukrainian politician at the national level).
Bharti is a substantial Black Iron shareholder, with 10.25% of outstanding shares at the end of the first quarter, with many of those shares scooped up when the share price had tumbled to all-time lows in the 4–5¢ range.
Virtually all the above-mentioned directors and officers each held many hundreds of thousands of Black Iron shares at the end of March.
Black Iron remains debt-free and parked $4 million of its cash in May 2016 into shares and warrants of Euro Sun Mining (TSX: ESM; US-OTC: CPNFF) at a $1.27 per unit buy-in cost, hoping for a quick capital gain that so far hasn’t materialized. Euro Sun is focused on developing gold assets in Romania and is another Forbes & Manhattan-linked company, and Matt Simpson —who is also CEO of Forbes & Manhattan — joined Euro Sun’s board with the Black Iron investment.
At year-end 2017, Black Iron had US$3.8 million in working capital, including US$840,000 in cash and US$3.2 million in the Euro Sun investment.
“The money we have now, given our current burn rate, should be sufficient for us to hit the land allotment, surface rights for the orebody, surface rights for the tailings and the waste rock, and get the feasibility study done,” Simpson says.
“It’s important for people to know that Ukraine is getting better — everything is trending in the right direction for Ukraine,” Simpson says. “Make no mistake, it’s still a country in transition, it’s really just to say that compared to other countries that people are somewhat comfortable with, it actually is better.
“The big message I have for people is: I appreciate we’re in Ukraine, so the project can’t just be good, it has to be exceptional. And look at these numbers and returns — that’s not stretching it, these are realistic numbers. You can see it’s pretty exceptional.”