For Oceanic, it’s steady as she goes

Oceanic Iron Ore (TSXV: FEO; US-OTC: FEOVF) may be a junior trying to develop a costly iron ore project in remote northern Quebec during hard financial times, but over the last year management has come closer to tying up a deal with a potential strategic partner in Asia, while at the same time completing key optimization studies. 

Since The Northern Miner last covered the company in mid-2012, management has met with 12 companies in China — eight of which are steel producers — in an attempt to interest them in the Hopes Advance project, 20 km from tidewater in the northern extension of the Labrador Trough in northernmost Quebec’s Nunavik region.

Most of the companies it has engaged are state-owned, but some are private, and president and chief operating officer Alan Gorman says some of them have signed non-disclosure agreements and are evaluating the project. 

“We’re hoping that we might put together an acceptable strategic partnership arrangement sometime in the next six months,” Gorman says. “We’ll see. We’ve been working on it for a number of months already. Perhaps it will take a little longer to happen. There are no guarantees one way or the other, but based on the response we’re seeing to date and the nature of the inquiries from potential strategic partners who are undertaking due diligence, I think we’re reasonably confident that the merits of the project will sell the partnership deal, and we’ll get there.”

The merits of the large-scale deposit include a 2-billion-tonne iron ore resource — or proven and probable reserves of 1.4 billion tonnes grading 32.2% iron — and a mine life of about 31 years, which Gorman believes could be extended a lot longer.

“We’re looking at a reserve life of 31 years initially and [there is] room to grow, so it won’t be unrealistic to reach 50 years and perhaps even 100 years, and those are the kinds of foreign investments that China is focused on,” he says. “Margins in the steel industry in China are pretty slim, and the way to improve those margins is to make direct investments into the supply side of the equation and invest in iron ore that is low cost.”

While Gorman concedes that Chinese companies have become increasingly “deliberate and measured and more calculating in terms of their due diligence, having met their initial appetite for some of the resources,” they are also focusing “on low-cost, long-life assets — and that’s where Hopes Advance shines.”

According to a prefeasibility study, life-of-mine operating costs will work out to $30 per tonne, and the clean, high-grade concentrate will average 66.5% iron. About 85% of the iron ore concentrate would be produced by low-cost spiral gravity separation, with the remaining 15% produced by low-intensity magnetic separation. 

The project has a base-case, after-tax net present value of $3.2 billion, an after-tax internal rate of return (IRR) of 16.8% unlevered (19.2% levered) and payback on an after-tax basis of five years.

And even if the government of Quebec implements its proposed higher taxes and royalties on mining companies, Gorman says, the impact on the project’s IRR would boil down to just 0.1%.

Construction capex is forecast to come in at US$2.9 billion, with expansion capital costs of US$1.6 billion.

At full production, the company believes Hopes Advance would be the largest iron ore mine in North America. Production is pencilled in to begin by 2017 at a rate of 10 million tonnes per year, expanding to 20 million tonnes per year in 2027.

To find strategic partners in China, Oceanic engaged Capital-Asia Investment Holdings as an advisor in May. “They have been integral to opening up the playing field for us in terms of having discussions in China,” Gorman says. “They have got a pretty extensive network in terms of industry contacts in both the private and state-owned enterprise sectors, and they have got contacts in government, and often those relationships are critical in gaining access to some of these major companies.”

Also in May Oceanic announced a non-brokered financing for $3 million in convertible debentures subscribed for by the Sino-Canada Natural Resources Fund. The fund is a private equity firm in Hong Kong focused on natural resource companies in Canada that’s managed on behalf of private and institutional investors from China. 

The debentures are convertible at 16¢ a share, and at the end of the term Oceanic has the right to decide whether it will pay it out in cash or shares. 

In the meantime, Oceanic has been completing a number of studies on Hopes Advance. In June it announced the results of a study on process and product optimization that found — with minor changes to the grinding process and the downstream material-handling system — that the project is capable of producing 2.4 million tonnes a year of its initial 10-million-tonne-per-year output of sinter-quality product at a 5.5% silica target. The study also found that the total percentage of sinter product could be optimized if customers have a higher silica tolerance in their blast-furnace operations.

Oceanic says it is up to eight weeks away from announcing results from a shipping optimization study it launched in February. The study will evaluate the best transshipment approach for product deliveries to the Asian market and refine views on transshipment location, logistics and the incremental costs associated with repositioning cargo from ice-class vessels to market vessels at the transshipment location. 

Once complete the study will be a major part of the company’s feasibility study, and give greater certainty to potential investors. “This [shipping optimization] study is the most relevant to some of the discussions we’re having with potential strategic partners,” Gorman says. “Shipping is a significant consideration in moving the iron ore from Canada to China . . . so that will require some work to demonstrate that it can be done viably and economically.”

In April, Oceanic completed a “product value in use” marketing study that concluded that in addition to the iron unit premium for its high-grade concentrate (66.5% iron measured against a benchmark
62% iron), a minimum 10% value-in-use premium can be anticipated due to the product’s high quality and low impurities.

As far as iron ore prices are concerned, Gorman says they “seem to be settling in nicely at about US$125 per tonne at the moment, and there’s reasonable optimism that those prices ought to hold or improve somewhat in the near or mid-term,” which he argues is encouraging “and makes our project look as good as, or better than, what we published in the prefeasibility study.”

And while there is much talk about China’s slowing growth and its impact on commodities, Gorman says he isn’t concerned. “China is still incurring expansion at about 7.5%, and I think their forecast in the next number of years is not a whole lot less than that,” he says. 

“An interesting statistic in terms of the economy in China is that 40% of the workforce is still employed in the agricultural sector — and that is a pretty significant proportion of the workforce — so for their economy to evolve they will move people out of agriculture over time and into cities where they are going to work in some other sector, and have a greater impact on gross domestic product growth and productivity.”

He adds that frequent trips t
o China have reinforced his view that “a tremendous amount of work continues to be visible and progressing,” judging by the number of overhead cranes he has seen in cities across the country.

As for whether the new government in Beijing — under the leadership of Premier Li Keqiang, a trained economist — plans to take its foot off the gas pedal, Gorman doesn’t believe it will. “I don’t think they are going to scale down growth significantly,” he says. “I don’t know if they could, even if they wanted to.” 

Meanwhile, there is talk in China about the need to diversify away from the country’s big-three iron ore producers, he says, at a time that many of the large iron ore producers outside of China appear to be scaling back on new projects. A recent article in The Australian newspaper quoting a J.P. Morgan report warns that an iron shortage looms, and Rio Tinto “appears increasingly likely to delay a $5.4-billion iron ore mine expansion in Western Australia.”

Over the last year Oceanic has traded in a range of 8¢ to 22¢ per share, and at press time was trading at 9¢.

Daniel Greenspan of Macquarie Equities Research has a 12-month target price on the stock of 35¢ per share. “With the potential to be a large-scale, low-cost producer in the future, we continue to believe that Oceanic is a good candidate to attract a strategic partner to help develop Hopes Advance,” the mining analyst wrote in a research note to clients on May 17.