Black Iron advances Ukraine iron-ore project

January was a productive month for Black Iron (TSX: BKI; US-OTC: BKIRF), which updated its bankable feasibility study and signed a rail agreement using Ukraine’s rail network to move 20 million tonnes of iron ore per year from its Shymanivske project to the port of Yuzhny, 580 km south.

The Protocol of Intent Agreement (PIA) with the government agency responsible for the country’s rail system is in effect until a commercial contract is signed, likely by mid-2015.

Black Iron only needs half of the 20-million-tonne rail capacity outlined in the agreement, but says the extra capacity gives it flexibility to expand the project. With the agreement, the open-pit project — 330 km southeast of Kiev in the heart of the Krivbass iron-ore mining district — can target iron-ore end-users in Europe and Russia by rail.

The latest agreement represents the final piece of infrastructure the company needs to develop Shymanivske after another agreement reached last September gave the company port access at Yuzhny, and therein access to the global seaborne iron-ore market and growth markets in Turkey, the Middle East, India and China.

Black Iron also made headway with a strategic investment and development agreement in mid-2013 with Metinvest, Ukraine’s largest mining and steel producer. Ukraine’s Antimonopoly Committee approved the agreement — giving Black Iron a strong local partner with which to develop the project.

Under the July 2013 agreement, Metinvest will initially invest US$20 million for a 49% stake in Shymanivske and the company’s adjacent Zelenivske project. Metinvest has the option to increase its ownership to 51% after Shymanivske achieves three straight months of production at full capacity. Black Iron remains the project’s operator and developer.

“Securing a PIA for the rail further addresses the infrastructure needs of the project and helps de-risk another important part of the logistics chain,” Daniel Greenspan of Macquarie Capital Markets writes in a Jan. 16 note. “In the near-term, we will be waiting for the closing of the Metinvest deal, which will be a milestone for Black Iron.”

An updated bankable feasibility study released on Jan. 23 demonstrates that Shymanivske should produce 9.9 million tonnes per year of high-grade, 68% iron-ore concentrate over a 14-year mine life. Capital costs would be in the order of US$1.1 billion, which exclude sustaining capital costs of US$483 million spread over the mine’s life.  

The study was updated to incorporate results from pilot plant test work carried out in 2013, which resulted in an optimized process design and layout, along with revised infrastructure use rates. The biggest improvements in the latest study were changing from dry cobbing to more efficient wet cobbing at a finer particle size, resulting in an increase in the rejection of waste rock prior to grinding from 10–40%. The latest study also shows an increase in iron-ore concentrate production to 9.9 million tonnes per year, up from the 9.2 million tonnes outlined in the previous study completed in December 2012, with virtually no change in capital costs.

Shymaniskve is estimated to have a 39.1% post-tax internal rate of return, a US$2.6-billion post-tax net present value and a two-and-a-half-year payback period at an 8% discount rate. Average annual revenue over the mine’s life would be US$1.2 billion.

“The updated study further reinforces that the project’s economics are quite attractive,” Matt Simpson, Black Iron’s president and CEO, explains in a telephone interview. “This is a great project that needs to be built and will be even more attractive now for getting financing. We have all the major infrastructure agreements in place, including rail, port and power.” The power and port agreements were completed near the end of last year.

Simpson added that the Ukraine is an attractive place to do business, as the government has been cutting its corporate tax rate by 2% a year for the last two or three years, whittling it down to the current 18%, effective Jan. 1, 2014. It will be cut again to 16% from Jan. 1, 2016. “They’re trying to attract more foreign investment into the country,” he says. The mining royalty rate payable to the state is 9¢ per tonne of ore mined, or less than 1%.

In a follow-up email, Simpson said the following about the current political situation in the Ukraine: “Black Iron’s project is located roughly 350 km south of Kiev, which is where the brunt of the protests are occurring. Our operations have not been impacted and nor has our in-country Metinvest’s operations. In speaking with my employees and friends, they are watching the news very carefully in hope of a quick and peaceful resolution that betters their lives, but day-to-day life continues with Mom and Dad going to work and kids to school. In the second week of February we are hosting a potential strategic investor on-site, and last week we closed a $3-milion bought financing, so businesses are still thriving.”

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

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