It is rare these days to see a mining company join the stockmarket or add a secondary listing because there simply isn't the appetite from investors. Yet there's still room for exceptions if there's a compelling asset. This certainly applies to Toronto-listed Black Iron (BKI:TSX) which yesterday secured a strategic investor. This significantly de-risks its story and makes the long-awaited London flotation much more likely to happen.
Ukraine-based Black Iron says it will consider admitting its shares to the London stockmarket later this year, adding that the first half of 2014 is a more likely scenario. It reckons the market has a good understanding of Ukraine, helped by the presence of geographical and sector peer Ferrexpo (FXPO) in the FTSE 250 index.
Black Iron wants to develop the Shymanivske project in Kriviy Rih, a deposit that is capable of producing a very high-grade (68%) iron concentrate. It is situated near to operating mines owned by steel giants ArcelorMittal (0NSF) and FTSE 250 group Evraz (EVR). While the market expected one of these parties to be the logical partner for Black Iron, the junior surprised investors yesterday by signing up with Metinvest, Ukraine's largest mining and steel producer.
The project will cost $1.1 billion to build, of which Black Iron expects to get 60% via debt. The remaining $450 million will come from equity, half sourced from Metinvest. So that leaves $225 million equity for Black Iron to source. It expects to get a good chunk from offtake agreements. It has been in discussions on the latter issue for some time and expects to reach a deal in the fourth quarter of this year or first quarter of 2014. Once in production, operating costs are expected to be very low.
It will take two years to build the operation. What's compelling about the story is its superior economics. A bankable feasibility study concluded the net present value of the asset to be $3.5 billion, based on a long-term iron ore price of $95 per tonne. That equates to an internal rate of return of 45.9%, a very good result for a mining project.
Getting Metinvest on board is very positive, as it addresses much of the finance concerns - explaining why the Canadian-listed shares jumped 34% on the news.
Yet there is still another hurdle to clear. Black Iron is fighting a surface rights battle with Yugok, the joint venture between Evraz and Smart. The junior wouldn't comment on whether this spat could be resolved through a cash settlement or partnership, merely saying a resolution is desired in the near future. Sadly, mining stories rarely come without a catch and Black Iron will need to get this cleared up if a London flotation is to be a success.
