Last Friday, I was given an introduction to Black Iron Inc (TSE: BKI) by its chief executive officer (CEO), Matt Simpson.
Matt was trained as a chemical engineer and has worked in the mining sector for more than 20 years. Starting his career with Hatch before moving to mining major Rio Tinto, where he was a mine manager for the Iron Ore Company of Canada, he has been with Black Iron for around 10 years, leading its initial public offering on the Toronto Stock Exchange, and after 10 years of hard work, he has the company positioned in an interesting place.
Now to be perfectly honest, to say I went into this call feeling sceptical would be an understatement. In my 10 years as an analyst I am not sure I have seen a single junior iron ore play that I would want to invest in, but as it's an area I don’t have a huge knowledge base of, it felt like it would be a good opportunity to learn more about the iron ore space, so I went ahead with the call, and I’m glad I did.
Right from the outset, Matt’s investment case for the company and the Shymanivske project was clear, and he converted me from sceptic to an interested party over the course of our call.
These are the key points that I found very interesting:
Infrastructure: for any bulk company it’s the high cost of the infrastructure that can kill the project if it’s a junior behind it. Railways, grid-power, roads and ports, all cost huge sums and give bulk projects a high upfront capital expenditure (capex) that can make it un-fundable for a junior. Black Iron is located just two kilometres (km) from a railway, 30km from grid-power, and has access to five ports located between 230km and 430km from the proposed mine.
Capex: the low infrastructure requirement for Shymanivske has a knock-on effect on the capex for the project, just US$436mln for stage 1 and US$312mln for stage 2, which gives the project a capital intensity per tonne (t) of annual production of just US$95/t, which is the second-lowest of any project currently in development.
Margin: bulk commodities tend to be low-margin, which means juniors also tend to struggle when prices are low. Black Iron is expecting to produce a concentrate that contains a 68% iron concentrate, which sells for a US$18/t to US$40/t premium compared to a standard 62% iron concentrate. Added to this, the low-cost nature of the workforce means the project lies at the lowest-end of the cost curve. As a result, Black Iron produces a low-cost but high-value product, giving it a significant margin advantage over other iron ore projects.
Funding: always key for any junior looking to move a mine from development into production. Black Iron has received expressions of interest from European banks and export credit agencies for US$250mln to US$300mln of debt for the stage 1 development. In addition, two Asian based construction companies have expressed interest in investing US$50mln of in-kind equity in exchange for being awarded the construction contract. Finally, Black Iron also has a memorandum of understanding MoU for an offtake and equity investment agreement with Glencore and the capex for stage 2 could be funded from the cash flow from stage 1. Given this, the company could be able to fund the project even at its low market valuation.
A compelling case but not without risk
These key points make for a compelling investment case for Black Iron but there is still some risk, which is perhaps part of the reason the company has such a low market valuation of C$14mln.
For me the jurisdiction is an unknown, I have never looked at Ukraine as an investment destination so I need to do some more homework on that to fully assess how much of a risk the country is, though I note its rankings on the World Bank Ease of Doing Business Index has been improving year-on-year since 2012.
Secondly, while the company has some great sources of funding lined up, they are not signed up. So, there remains a risk that the project may not be funded but with such a low market valuation the overall risk-reward balance for Black Iron looks favourable.