Northland production on track for Q4

Before joining Northland Resources (NAU-T), an emerging iron ore concentrate producer in Europe, Karl-Axel Waplan served as president and chief executive of Lundin Mining (LUN-T) where he began as executive vice president of operations and was part of the team that orchestrated the financing of Lundin’s first mine in Sweden.

When asked the difference between the two career-defining experiences, Waplan says he has enjoyed both but that working at a junior brings its own unique pleasures. “I was part of building Lundin Mining … and that was building by acquisition, but here we are building and starting from zero so it’s more exciting from that respect,” he says. “It’s not very often you get the opportunity to start from scratch with a project of this size with a small junior company … and the real attraction here is to open up a new major mine in Sweden of this size because that hasn’t happened for a hundred years.”

Waplan is referring to Northland’s Kaunisvaara iron ore project, which in the four years since he joined the company (he was promoted to chief executive in 2010) has moved virtually from scratch in 2009 to near-term production scheduled for later this year. Kaunisvaara is fully permitted for first production in the fourth quarter of 2012 and Northland expects shipments of its high-grade 69% iron ore concentrate to start in the first quarter of 2013.

“We are still on time, which I think is pretty exceptional in the mining industry,” says Waplan, a mechanical engineer by training, noting that Northland started its preliminary economic assessment in January 2009 and by September 2010 had completed its definitive feasibility study, which was updated in May 2011.

The junior completed its last round of financing in February with a combined equity and bond offering of US$675 million and is fully funded to bring Kaunisvaara into production. Waplan says he expects to refinance the five-year $350 million bond in 2015 with proceeds from mine production.

Northland has already signed off-take agreements for 100% of its production with Standard Bank (60%), the South African resources bank, which is also coming up with a cost-overrun facility of up to a maximum of US$40 million; India’s Tata Steel (20%); and Stemcor (20%), the world’s largest independent steel trader. The high-grade and high-quality iron ore concentrate will command an estimated premium price in the world market, Waplan says. Impurity levels are extremely low with silica content of just 1.1% and alumina of 0.18%. Most iron ore projects he says have silica content between 2%-5%, while alumina content below 2% is considered low.

“The big advantage with high grade and lower impurities is higher furnace efficiency and reduced coking coal consumption so there’s some real savings to be had using our concentrate compared to others and I think that’s key,” says Waplan, a mechanical engineer by training who spent the first twenty years of his career as a resource trader Kaunisvaara is made up of two iron deposits that will be mined as open pits (Sahavaara and Tapuli) and are about 100 km north of the Arctic Circle.

The project area is 15 km south of the border between Sweden and Finland and within 150 km of Western Europe’s two major iron mines (Kiruna and Malmberget), both operated by Swedish state-owned miner LKAB. Northland claims Sahavaara and Tapuli share geological similarities with Kiruna and Malmberget and demonstrate affinities to iron oxide copper gold (IOCG) class deposits. Under the most up-to-date mine plan, the Tapuli pit will produce at a maximum capacity until the Sahavaara pit opens in 2016. A third satellite deposit called Pelivouoma is likely to be integrated into the production schedule at a later date.

The Kaunisvaara processing plant is permitted for an output capacity of 5 million tonnes per year, with a nominal capacity of up to 12 million tonnes per year of run-of-mine ore.

According to the latest updated definitive feasibility study, the net present value at an 8% discount rate is US$800 million with an internal rate of return of 20.1%. Estimates of life-of-mine capex including contingency total US$1.09 billion. Total opex per tonne of concentrate delivered FOB at the port of Narvik over the life of mine will average about US$55.6 per tonne concentrate, the company estimates.

The premium for Northland’s pellet feed is estimated to be US$7 per iron percentage unit. The life of mine has been calculated at seventeen years. Waplan points out that the Kaunisvaar project has a number of strong attributes including its location in a very favorable mining region with low political risk. “There is no discussion at the moment about increased royalties or increased taxes on mining,” he says of Sweden. “The royalties are already among the lowest in the world: just 0.2% of the value of the ore mined each year. Three quarters of that goes to the landowner and one-quarter goes to the government and there is no discussion on changing that.”

Northland will use already existing roads (150 km) and railway (226 km) from Kaunisvaara to the ice-free Port of Narvik in Norway, where the iron ore concentrate will be reloaded onto Cape Size vessels. Northland has also received a construction permit for a new iron ore terminal at Narvik. The terminal, which is expected to efficiently load vessels of up to 180,000 tonnes, will consist of a quay, an unloading facility for the railcars, a storage building and a ship loader. The project also benefits from low cost power that is expected to run about US$0.05 per kilowatt hour.

Finally, labor is abundant and costs will be competitive with countries like Australia and Canada, he says. “One shortage in many mining areas is labor and we are now recruiting our operational team and we have a huge number of applicants for all of the positions,” he says. “We have been able to hire the key positions already and now we’re getting down to the operators and shift leaders and we have had a huge number of applications. For 150 positions we had 2,000 applicants.” Waplan adds that with huge unemployment in Sweden’s forestry sector, many forestry workers are eager to find jobs in the mining industry.

In addition to Kaunisvaara, Northland is also developing its Hannukainen iron-copper-gold deposit, a brownfield project in Finland. A definitive feasibility study on Hannukainen is expected in the second half of 2012. Northland anticipates a production rate there of 2 million tonnes per year of about 69% iron concentrate.

At presstime in Toronto Northland’s shares were trading at $1.07 within a 52-week range of $1.00-3.19. the company has about 514 million shares outstanding.

Geordie Mark of Haywood Securities has a 12-month target price on the stock of $3.60 per share. Mark lowered his target price from $5.90 per share in late February, primarily due to  the dilutive effect of the US$325 million financing.