Cash preservation is the name of the game at Alderon

With iron ore prices off 49% year-on-year at US$71 per tonne, Alderon Iron Ore (TSX: ADV; NYSE-MKT: AXX) says it has no choice but to start a “comprehensive” cash preservation program.

The decision comes just four months after Alderon secured an offtake agreement with Glencore (LSE: GLEN) for iron ore from its US$1.3-billion, fully permitted Kami project in the Labrador Trough.

The cost-saving measures will keep a healthy working capital position into 2017, Alderon said, emphasizing that the program does not mean the company is on care and maintenace.

Management said it is working closely with Hebei Iron & Steel to increase the Chinese company’s participation in Kami, and boost Alderon’s access to available capital. Hebei Iron & Steel hold a 25% stake in the project.

In the meantime, Alderon’s cost-saving measures include a number of voluntary vendor payment deferrals and relief from debt servicing requirements, as well as cuts to the company’s workforce.

Among the deferrals are interest payments on a $22-million convertible loan from Liberty Metals & Mining Holdings. Liberty has agreed to defer the next two interest payments on Dec. 31 this year and June 30 next year, until Dec. 31, 2018. In exchange, Liberty will receive common share-purchase warrants.

David Talbot and Aaron Salz of Dundee Capital Markets cut their target price on Alderon to 30¢ on the news, down from their previous target of $3.90 per share, as they push back Kami’s production date by four years to 2020. But they said Alderon’s decision made sense.

“We aren’t walking away from the Kami iron ore project … and are in fact pleased that development hadn’t progressed any further, or liabilities could have created enormous problems,” they wrote in a research note. “For the time being — commodity prices being what they are — Alderon has the option to defer development and its cash burn, saving Kami for another day.”

The analysts added that with their long-term iron ore price at US$88 per tonne, “in line with consensus,” they believe that Kami “could ultimately get built later in the decade should prices rebound — but raising $1-billion debt and $600-million equity may be a challenge, and provide only a modest $33-million net present value.”

Capital costs to build Kami were estimated at US$1.3 billion in a December 2012 feasibility study. The project is forecast to produce 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 in Labrador, with rail access to a deep-sea port.

Alderon’s shares hit a new 52-week low of 25¢ on Dec. 10. Its 52-week high of $2.13 per share was reached earlier this year in mid-February.