Chinese investment comes at a price for Champion Iron

A Hong Kong investment company has invested $3 million for an 11% stake in Champion Iron Mines (TSX: CHM) and its portfolio of iron ore properties in the Labrador Trough.

In a private placement earlier this month, Baotou Chen Hua Investments acquired 15 million units of the iron ore exploration and development company as a subscription price of $0.20 per share. Each unit consists of one common share and one common share purchase warrant with an exercise price of $0.25 for two years.

Champion will use the proceeds to continue the feasibility study and technical work on its Consolidated Fire Lake North project in Quebec’s Fermont iron ore district.

Management at Champion describe the principal of Baotou Chen Hua as a “mining entrepreneur” with “substantial interests in Chinese iron ore and rare earth deposits.”

Under the terms of the transaction, Baotou says it will use “commercial best efforts to introduce a strategic investor for Champion to invest in its properties” and if it is successful, Champion has agreed to pay Baotou an 8% cash commission within 18 months of closing a deal.

Champion stated in a press release that it is confident that Baotou and its principals and affiliates “have the potential to provide Champion with access to multiple end-users of iron ore in China and to Chinese companies that have a strong interest in participating in financing Champion’s short-term endeavours as well as providing strategic relationships.”

Colin Healey of Haywood Securities pointed out in a client note that theprice of the private placement “comes at a discount to the recent average trading price” of $0.22 per share over the last sixty days, “especially when considering the value of the share purchase warrant attached to each unit and the 8% commission.”

But he said that the “dilution hit” is “offset by the addition of a strategic partner which might be used to begin fostering relationships with other strategic investment groups in Asia, which we consider a necessity if Champion is to eventually secure funding support for development” of the Fire Lake North project.

Baotou is also entitled to participate in any future financings and to nominate one person to Champion’s board as long as it maintains at least 10% of the junior’s outstanding shares

Champion’s flagship project, Consolidated Fire Lake North, is immediately  north of Arcelor Mittal‘s (NYSE: MT) operating Fire Lake mine and is 60 km south of Cliffs Natural Resources‘ (NYSE: CLF) Bloom Lake mine in northeastern Quebec. 

A preliminary feasibility study envisioned an average output rate of 9.3 million tonnes a year over a mine life of twenty years and the production of a 66% iron concentrate. The project’s proven and probable reserves stand at 464.6 million tonnes grading 32.4% iron.

Healey says he bases his model on the project starting production in 2016, “which should leave sufficient time for the construction of all supporting infrastructure assuming Champion remains on track to commence pre-construction activities in 2013, and receives all government approvals and authorizations to begin construction in the first half of 2014.”

“That said,” he continued, “without a strategic partner, this timeline remains highly speculative and conceptual.”

In addition to the Consolidated Fire Lake North project, Champion has a 100% stake in the Fermont Iron Holdings in Quebec and a 44% stake in the Attikamagen iron project, in Quebec and Labrador.