Alderon Derisks, Secures Partners, Port for 2015 Iron Ore Production
By Kevin Michael Grace
If you wanted to write a textbook on how to bring a major mining operation to fruition, you would likely lead off with Alderon Iron Ore Corp TSX:ADV. Less than three years after securing the Kamistiatusset “Kami” project in Labrador, Alderon strides confidently and forcefully toward 2015 production.
In just the last three months, Alderon has announced a strategic partnership and offtake agreement with China’s leading steel manufacturer, advanced its agreement with another partner, delineated a resource of over a billion tonnes and secured a port for export.
And as the list of boxes to be ticked before production begins grows ever smaller, Mark Morabito, former President and CEO, now Executive Chairman of Alderon and prime mover of its success, looks back on what has been accomplished and forward to the benefits that will accrue to Newfoundland and Labrador and his company’s shareholders.
Morabito sums up the importance of Alderon‘s deal with Hebei Iron & Steel Group Co with a single word: “Wow!” He explains, “It is a company maker for us. The initial value of the deal is $194 million, but the real value is well over $400 million. This is the math—they’ve agreed to put in $194 million in two stages over the next six months, so they will buy 19.9% of Alderon‘s outstanding common shares. Then, when the feasibility study is published, they’ll buy 25% of the project itself. This will total $194 million. But, as a 25% holder in the project, they’ve agreed to assume responsibility with certain overrun limitations of 25% of the CAPEX. That brings the value of the deal up over $400 million. Not to mention the fact that they’ve agreed to purchase 60% of the annual production.
“So we have a customer for 4.8 million of the 8 million tonnes at a good price, which is the Platts index minus 5%. Nobody buys production for the life of the mine without some kind of benefit, and in this case it’s a 5% discount to the published stock price, which is more than reasonable and much better than a lot of other companies have been able to do.”
The Alderon agreement is Hebei’s first foreign deal, and Morabito is proud of that. “Of all the places in the world that they picked to do a deal, they picked Labrador and our project. It raises the profile of the project tremendously,” he declares.
Of all the places in the world that they picked to do a deal, [Hebei] picked Labrador and our project. It raises the profile of the project tremendously —Mark Morabito
Hebei’s commitment to Kami led directly to a further commitment from Liberty Metals. Morabito explains, “Liberty was an existing 15% shareholder, and they wanted to stay a 15% shareholder. So when Hebei agreed to take down an equity contribution, Liberty had the right to maintain their position. That’s good for us and brings in more money. Liberty is not a passive shareholder. They have a board representative, and they are prepared to step up to the plate and help out.”
It is also a source of considerable pride to Morabito that Alderon has delineated a resource greater than that of the company to which it was often most compared. Morabito says, “We did what we said we were going to do. We thought when published our first resource that we could see our way to over a billion tonnes in measured and indicated. To put that in context, I think Consolidated Thompson was 929 million tonnes when we published the feasibility study. So we published a number of 1.1 billion tonnes [at 29.8% iron], which is bigger than Thompson’s, plus there’s another inferred of about 300 million tonnes [at 29.5% iron] on top of that with extremely high confidence, given the continuity of the asset.”
Based on the previous resource estimate, the preliminary economic assessment of September 2011 projected a 2.7-year payback, a 40.2% pretax IRR, a US$3.07 billion NPV (discounted at 8%), a total operating cost excluding royalties of US$44.87 per concentrate tonne averaged over a 15.3-year mine life and production of eight million tonnes annually at 65.5% iron. The updated resource estimate means, Morabito says, “a mine life of well over 25 years at eight million tonnes. In fact, enough material to justify a Phase 2 which will take us to 16 million tonnes. That’s important because the mining permit we applied for is 16 million tonnes, not eight. So when we get that permit, it means that, subject to obtaining financing, we can add another eight million tonnes at any given time.”