Alderon Iron Ore signs offtake deal with Glencore

Alderon Iron Ore (TSX: ADV; NYSE-MKT: AXX) has secured a second offtake agreement for iron ore from its 75%-owned Kami project in the Labrador Trough, bringing it one step closer to a financing agreement for the US$1.3-billion project.

Alderon’s latest offtake deal with a subsidiary of resources giant Glencore (LSE: GLEN) will obligate the commodities trader and miner to buy 40% of the iron-ore concentrate produced at Kami, which would translate to 3.2 million tonnes per year. The agreement would remain in place until Glencore receives 48 million tonnes of concentrate, which is expected in the project’s fifteenth year of commercial production.

The junior  has lined up buyers for 100% of future production.

Alderon already had an offtake agreement with Hebei Iron and Steel Group Co., its 25% partner at Kami and China’s largest steelmaker. Hebei has the right to buy 60% of Kami’s annual production, and owns nearly 20% of Alderon’s shares.

Glencore will pay a market price for Kami offtake based on Platts’ quoted monthly average price for iron-ore sinter feed fines for 62% iron content, minus a 2% discount. (A premium will be paid for concentrate with greater than 62% iron.)

The offtake with Hebei is under the same pricing terms, except that the steelmaker gets a steeper discount of 5% off the market price.

“With 100% of the initial production from the Kami project now committed, we believe this enhances Alderon’s ability to obtain the requisite financing required to commence construction of the Kami project,” Alderon president and CEO Tayfun Eldem said in a release.

“The offtake arrangement with Glencore gives Kami concentrates global exposure, and the multi-year agreement serves as another significant de-risking milestone for the Kami project.”

Alderon has finished other milestones toward development this year, including signing a benefits agreement with the province of Newfoundland and Labrador, and receiving the mining and surface leases it needs to begin construction. The company has added heavy hitters from BHP Billiton Iron Ore and Shell Canada to its board.

Capital costs to build Kami were estimated at US$1.3 billion in a December 2012 feasibility study. The project is forecast to produce an average 8 million tonnes of iron-ore concentrate annually — grading 65.2% iron — over a 30-year mine life.

The feasibility study pegged the project’s after-tax net present value at US$1.9 billion and its internal rate of return at 23.1%, using an 8% discount rate.

The study assumed Kami concentrate would sell at US$107 per tonne for the first five years of production, and US$102 per tonne thereafter. Operating costs are forecast at US$42.17 per tonne.

The Kami property is located next to the towns of Wabush and Labrador City, with rail access to a deep-sea port.

Alderon shares climbed by 8¢, or 6.2%, to $1.37 on the offtake news. The company has 130.1 million shares outstanding, and has traded in a 52-week range of 97¢ to $2.13.