Thursday 8th December 2016

Resource Clips


The Ore From Capanema

Hilltown Will Produce Brazilian Iron Ore for Vale

By Ted Niles

In the two years Hilltown Resources CNX:HLT spent looking for iron-ore opportunities in Brazil, Kent Ausburn ensured the company wasn’t too hasty. “We’ve tried to avoid picking up just any property just because we need a property,” the President and COO emphasises. “A lot of the Australian and Canadian juniors I know down there trying to do the same thing in the iron-ore space—their assets are not the quality that we’re looking for.” Ausburn believes the joint venture it has undertaken with Mineracao Siderurgia Socoimex Ltda to develop the Capanema Iron Mine is the project to point Hilltown toward its goal of becoming a mid-tier iron producer.

“I hate to use the term ‘can’t miss,’” Ausburn says, “but it’s pretty close to a guaranteed deal. We look at it as, if not a company maker, then certainly a company starter.” Located in the Iron Quadrilateral Mining District of Minas Gerais State—Brazil’s largest iron-ore producing district—Capanema is owned by Vale SA, itself the largest iron-ore producer and exporter in the world. Vale operated the mine from 1982 to 2003 in joint venture with a Japanese consortium, producing 190 million tonnes of ore at an approximate grade of 64% iron. Capanema’s remaining (non-NI 43-101 compliant) resource is approximately 1.16 billion tonnes of ore at an average grade of 51.9%. Of that, the mine contains 23.24 million tonnes grading 62.09%. Ausburn reports, “Capanema is about 12 kilometres from another large deposit that Vale has, the Timbopeba Mine, that they’ve been using for the same focus. That is, providing high-grade iron ore to blend with lower-grade deposits. They’ve got only about 40 million tonnes of ore left there.”

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Ausburn explains, “Sixty-two percent is the magic concentration number for ore. Anything at 62% or above can go directly into a pig-iron smelter. If you have a deposit that’s lower grade than that, you can either concentrate it up or blend it with higher-grade ores. The Timbopeba mine is where all [Vale's] facilities are. Since it is a limited resource now, having access to the Capanema Mine—which has a billion tonnes of about 52% iron, with pockets of much higher-grade ore—will enable them to continue to use that big facility.”

Hilltown announced December 19 it had signed a letter of intent to form a 50/50 joint venture with Brazilian company Socoimex to finance mine development, construction and operation for commercial production of iron ore at Capanema. Under the production contract with Vale the two companies will extract a minimum of 20 million tonnes of ore, at an average grade of 62%, over 13 years—three years designated for licensing and development/implementation and 10 for production.

Of the $52-million capital requirement, Hilltown is responsible for $30 million, which will be put towards the construction of a crushing-classification plant at Capanema, as well as a two-kilometre-long conveyor belt to the Timbopeba facility. The mine’s resource will need to be brought up to NI 43-101 compliancy, but otherwise most of the heavy lifting on the project has already been done. “The resource has been drilled out; the resource has been calculated; a mine plan has been developed—everything that would equate to a feasibility study,” Ausburn declares.

While the production contract gives three years for licensing and development, Ausburn believes two years is more likely. Over its 60 years, Socoimex has operated 30 mines under contract with Vale. “When Socoimex sold all their assets about 10 years ago,” Ausburn relates, “they had to sign a non-compete clause that they would stay out of the iron-ore business for 10 years. Since the non-compete has ended they want to get back into iron ore.”

I hate to use the term ‘can’t miss,’ but it’s pretty close to a guaranteed deal —Kent Ausburn

Vale will purchase 95% of the iron ore produced by the joint venture at a guaranteed minimum set price of roughly $58 per tonne, which will be adjusted for inflation going forward. Vale will be paid a royalty of $32.88 per tonne. “Part of the deal is that the joint venture gets to keep 5% of the production that we can sell on the market,” Ausburn notes. “The market price right now [for iron ore] is about 40 bucks a tonne. We’ll have to figure out a way to deliver it to whatever buyer we want—and there is an independent rail line that’s not far from there—but that will give us an additional 50% of what the profit from the Vale contract is.”

Ausburn points out, furthermore, the possibility of Vale increasing the two-million tonne output from Capanema. “This year Vale missed their iron contract by thirty million tonnes. They need as much production as they can get. We’re building the plant and the conveyor belt to have a capacity of four million tonnes a year. We’ll start out at two million tonnes, but we’ll be able to increase our production to four million.”

Capanema is well placed for infrastructure. “Almost everything in that whole district is related to iron-ore mining,” Ausburn reports. “Iron-ore mines, roads and rail lines essentially. Essentially the area’s whole reason for existence is to produce iron ore. And like any industrial mineral, it’s all about getting it to the market. He who controls the transportation lines controls just about everything. And Vale controls most of the rail lines.”

He concludes, “Hilltown’s business plan is to focus on high-grade, small- to medium-sized deposits. There are a lot of them in Brazil, and they are too small for majors to produce. We’re negotiating right now for two additional properties. In two years we’d like to be close to development at Capanema and have a couple of other projects at the development or exploration stage.”

Hilltown is listed on the CNX and, at press time, is trading at $0.15. The company plans to apply for a TSX or TSXV listing within the next two years.

Disclaimer: Hilltown Resources is a client of OnPage Media and the principals of OnPage media may hold shares in Hilltown.


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