Black Iron (TSX: BKI; US-OTC: BKIRF) and Glencore (LON: GLEN) are in talks to finance construction of the junior's Shymanivske iron ore project in Ukraine and have signed a non-binding memorandum of understanding to begin formal negotiations on the financing-offtake package.
"They've had their eye on this project for a while and a number of things are quickly coming together such that Glencore believes it is the right time to move on it," says Black Iron president and CEO Matt Simpson. "This is huge news."
The companies envision an investment from Glencore that will help fund construction in exchange for offtake of production of four million tonnes a year under Black Iron's phase one production plan. The terms and amount require further negotiations.
A PEA released in November 2017 envisioned building in two phases, starting at 4 million tonnes of dry concentrate per year, and ramping up to 8 million tonnes per year. Construction of phase two would start in the third year of production - funded by internal cash flow - and it would be in operation by year five. The debt would be paid down in the first couple years of production and then the third year would generate enough free cash flow to start building phase two.
Including a 17% contingency, the PEA estimated capital investment would be US$436 million for phase one and another US$312 million for phase two, for a minimum 20-year mine life from the open pit, which is open for resource expansion, particularly to the north.
Glencore's involvement strengthens Black Iron's ability to raise more funds and draws on the commodity giant's extensive international network, experience and market knowledge. The natural resources powerhouse has agreed to work with Black Iron to leverage its relationships to source the balance of funds required for construction and be an anchor investor.
Under the MOU Black Iron can also allocate offtake to other equity investors if the investment terms are equal or superior to these proposed by Glencore. Separately, Black Iron continues its debt financing discussions with international financial institutions and banks in Europe.
"It's important for people to know that even though the MOU is non-binding at this point, Glencore has spent quite a lot of money and time on due diligence, site visits, meeting government officials, and are very serious to move forward," Simpson says. "They want to help Black Iron raise the balance of money that's required to construct the project so they can market the high quality product that will be produced."
"They have very strong brand recognition globally so they'll help open doors with other equity investors and banks that might be hard for us to do on our own," he adds. "Glencore can even call the banks and say: 'We want you to meet them, we're investing in their project, we really like it, and you should invest too,' and because they are such an important client for a lot of the banks, the banks listen to them."
Similarly, an equity financing and offtake agreement with Glencore is also helpful raise equity financing, as it gives potential investors confidence that Glencore is behind the project.
The intention is to transition to a binding MOU during the course of 2019, while Black Iron works in parallel on speaking with engineering procurement construction companies, streaming and royalty companies and other groups that might be interested in investing in Shymanivske.The company has already started discussions with certain debt providers.
One of the many things Glencore likes about the project in Ukraine's Kryvyi Rih area, Simpson says, is that it's a very simple mine to build given the excellent infrastructure that exists there already. There is no requirement to build rail, a port, or bring in power. The area is also replete with abundant skilled labour.
If all goes according to the company's plan, Shymanivske should be back to a construction ready state by early 2020, followed by a two-year build period. It will need to complete an environmental impact assessment in order to obtain its construction permit.
The project was shovel ready in early 2014 but had to be put on ice when Russia annexed Ukraine's Crimean Peninsula on the Black Sea and Russian-backed separatist forces launched a civil war to bring the country's two easternmost provinces (in the Donbass region, about 400 km east of Black Iron's project), into the neighboring Russian Federation.
Today, "you would never know there's a war going on from where we are, life is very normal and safe," Simpson says, adding that "the front line of the civil war hasn't moved in five years and there's no reason to think it will now."
He also points to an announcement by Arcelor Mittal (NYSE: MT) in November 2018 that it is investing US$1.1 billion into its PJSC mine, less than 1 km from Black Iron's project.
"If Arcelor Mittal, being a global giant with operations in several countries including Canada, is choosing to put that much money into the Ukraine, it must be because, number one, they're comfortable politically with the war, and number two, because they're making a tonne of money because of how economic it is to mine iron ore in the country."
Simpson notes that it costs 25% to 30% less to produce a tonne of iron ore in Ukraine (US$31 per tonne) than it does in Canada (US$45 per tonne), for a similar quality of product.
Black Iron plans to produce a 68% iron content pellet feed concentrate with very low levels of trace elements that can be used to produce high-quality iron ore blast furnace pellets or premium direct reduction grade pellets. It can also be used as a sweetener in the feed for sinter production, which is then processed to steel in blast furnaces."The reason why the product is so interesting is because of the high iron content but also because it has very low phosphorus and alumina," Simpson explains, contaminants that can affect the quality of steel produced and making it brittle.
"High quality steel needs to be flexible-ductile-like in a skyscraper that can move a little bit because of the wind or if you're in an earth-quake prone zone you need the building to move slightly and not crack. Similarly, if you hit a pot hole you don't want the rim of your tire to crack, and the way to make the steel more flexible is to make sure your phosphorus and alumina are low."
Black Iron's product is in high demand, Simpson says, and the recent tailings dam disaster at Vale (NYSE: VALE) along with that company's decision to shut down many of its operations, which will remove an estimated 10% of the world's iron pellet feed from the world market, only increases the need for low impurity iron.
"A lot of people are aware that Vale has shut down 11 of its operations, taking about 70 million tonnes of capacity offline," he says. "Some of that can be replaced by Vale themselves, or more easily by Rio Tinto or potentially BHP if they can increase production, but part of that 70 million tonnes is 10% of the pellet production and that can't be replaced by Rio Tinto or BHP very easily because they'd need to build a pellet plant and potentially an iron ore concentrator. To do that, you have to design your plant, permit your plant, construct your pant, and that's easily three years plus."
The Shymanivske project contains a NI 43-101 compliant resource estimated to contain 646 Mt Measured and Indicated mineral resources, consisting of 355 Mt Measured mineral resources grading 31.6% total iron and 18.8% magnetic iron, and Indicated mineral resources of 290 Mt grading 31.1% total iron and 17.9% magnetic iron, using a cut-off grade of 10% magnetic iron. Additionally, the Shymanivske project contains 188 million inferred tonnes grading 30.1% total iron and 18.4% magnetic iron.
The deposit, discovered in the 1920s, has an estimated mine life of 20 years. Under the current mine plan, the final pit would be 1.2 km long, 750 metres wide and 300 metres deep.
The mine will have a very conventional flowsheet with a gyratory crusher, a secondary crusher and high-pressure grinding rollers.
At press time in Toronto, Black Iron was trading at $0.10 per share within a 52-week range of $0.045 and $0.12 per share. The company has about 160 million shares common shares outstanding for a market cap of $16 million.