Black Iron is in the black in the Ukraine

Low operating costs and close proximity to steel mills in Turkey, 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 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 a cost of US$43.97 per tonne (FOB), 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 Yuchny at an estimated cost of US$7.39 a tonne.

Matt Simpson, president and chief executive of Black Iron, part of the Forbes and Manhattan group of companies, says the operating costs are low for a number of reasons, including the deposit’s low strip ratio of 1.63:1, its close proximity to power, rail, and port facilities, as well as the Ukraine’s inexpensive skilled labour and low corporate tax rate.

Corporate taxes in the Ukraine are 16% and royalties are equivalent to about 1-2%, or about half those in a developed country, he 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 very 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 of 750 million people. 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 the mine at US$689 million. The low capital costs he says 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 a very expensive railway, which also usually brings with it permitting challenges, we just build a spur.”

Shymanivske will generate more than US$1.1 billion in average annual revenue over the course of 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 was based on the benchmark US$95 per tonne, while current prices stand at about US$122 per tonne. And he believes 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 ranged 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 are a mining allotment, approval of the pit shell and baseline environmental studies, and the 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 is 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 very bureaucratic; you have multiple departments and multiple signatures that are required, so that is onerous. But it is a very clear and defined process.”

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

“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 the first quarter of next year, followed by a much larger raise in the middle of 2013 through an off-take 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 will sign an off-take agreement to buy a large portion of Shymanivske’s production. Using the off-take contract, Simpson says, Black Iron will then be able to raise debt financing, topping it up with smaller tranches of equity financing.

Simpson adds that nineteen different companies have already signed non-disclosure agreements with Black Iron, most of them steel mills, along with traders or large investment houses, in the Middle East, Turkey, Europe and Asia. “We’re just progressing discussions with a few of them and now they have a very, very 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 and Manhattan company, as an example. In August, Alderon, which is developing the Kami project in Newfoundland and Labrador, announced a huge investment and off-take deal with Hebei Iron & Steel Group, a steel mill in China.

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

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

At presstime in Toronto, Black Iron was trading at $0.25 within a 52-week trading range of $0.13 and $0.74. The company has about 140 million shares outstanding.