The key thing to remember about Black Iron Inc’s (TSE:BKI) Shymanivske iron ore project in Ukraine is it’s just three short years since it was almost brought to a fully-financed state, with directors’ fingers poised to press the development button.
The Russian invasion of Ukraine put an end to that though, as chief executive Matt Simpson delicately puts it.
“We took a pause at that point,” he says.
Shortly afterwards, the iron ore price dropped away too as Chinese steel demand faded and the majors continued to pump out ever-increasing volumes. At the same time, the overall public junior resource market continued to languish. With limited liquidity and some substantial selling pressure Black Iron’s share price suffered.
Although the company went through the cost-cutting measures that would be considered standard in such a situation, it was fortunate to have such a strong balance sheet that it could actually afford to bide its time.
“We sat quiet for about three years to preserve shareholder cash for better days,” says Simpson.
Quiet for three years but ...
Although quiet operationally, Black Iron did make some corporate decisions during this period that are now helping to build momentum. In May 2016, the company made a strategic investment by using some of its idle cash to purchase shares in what is now Euro Sun mining. This investment is beginning to pay off, with the share price increasing substantially over the past month.
Also during this time, Black Iron was successful in advancing discussions with the Kryviy Rih City Council to lease the surface rights for the land upon which the company’s Shymanivske ore body will be mined.
Early this year, with the sustained rebound in iron ore prices and greater stability in Ukraine, Black Iron appointed a highly successful businessman Michael Spektor as President who has extensive experience building large companies from the ground up in Ukraine, to help drive the project forward towards construction again.
“Meanwhile in that same three-year period the front line in the Ukraine hasn’t moved. Mr Putin seems to have achieved his goals and we see it as a frozen conflict that is about 450 kilometres away from us,” says Simpson.
Shymanivske away from conflict area
During this time, several other Iron Ore operations located in the same area as Shymanivske have been profitably producing and shipping concentrate on a business as usual basis.
To be a little more precise, Shymanivske sits west of the Dnieper river in an ethnically Ukrainian area, while most of the conflict has been either in the eastern edge of the country in an area known as the Donbass, or south in the Crimea where a Russian naval base is located.
So, the project itself is well out of the firing line and has been all along. But other things have been going on in the wider world, while Ukraine’s been quietening down. For one thing, the conflict in Syria has focussed people’s minds and military muscle elsewhere.
But more to the point for Black Iron, the iron ore price has been on the move.
Higher grade iron
Chinese steel demand is on the rise again, and not just because the global economy is picking up. According to Simpson, there’s no mystery about the simultaneous existence of Chinese iron ore stockpiles and increasing demand plus price. The simple truth is that these stockpiles are mainly comprised of low grade ore typically comprising only 58% iron, and therefore will cause significantly more pollution and emissions to make steel, which is a highly sensitive topic in China nowadays.
“The Chinese are using higher purity material to cut down emissions,” says Simpson. That suits Black Iron well, since its plan is to produce ultra-high grade 68% iron ore product, as compared to the benchmark 62% iron grade product generally shipped out of the major mines in Australia and Brazil.
“Historically, for every percentage point above 62% you’d get an additional US$3.00-US$4.00 per tonne,” he says. “But currently it’s US$7.00, as recently reported by Bloomberg.”
Whether Black Iron’s product actually ends up in China or not remains to be seen. It’s certainly one possibility, alongside the obvious European, Turkish and Middle Eastern markets.
But wherever it goes, it’s likely to be competitive, and not just because of the higher grade.
There’s also the question of overall costs, and here Black Iron is enjoying considerable benefits from allowing those three years to pass.
Exchange rate boost
Among the conditions of the IMF bailout for Ukraine which allowed the part of the country not occupied by Russia to survive economically was that the currency be devalued.
Earlier this summer Black Iron announced the engagement of BBA to develop a revised PEA based on the current more favourable Ukraine exchange rate and a phased plant development. When the report, which is expected to be finalised and released in the fourth quarter of this year, it will highlight the economics of proceeding with Shymanivske under Black iron’s new go forward plan. The report will also show the economics scenario even if lower prices were to return for a period.
The capital expenditure to put the new mine plan into operation is expected to be significantly lower. This is due not only because the assessment will be based on smaller, yet scalable operation, but also because of the exchange rate. When Black Iron released the original feasibility study in 2014, the Ukrainian hryvnia to U.S dollar exchange rate was 8:1. Today it is 26:1. This will likely have a significant impact as far as lowering the construction and ongoing operational cost of the Shymanivske project.
It’s worth noting that larger peer Ferrexpo PLC (LON:FXPO) has enjoyed a US$18 per tonne drop in costs at its nearby operations since 2014. In the full year to 2016 Ferrexpo reported operating cost of US$28 per tonne.
With the iron ore price currently at around US$79 per tonne for products containing 62% iron, that’s highly significant in percentage terms, even if the effects of inflation do muddy the waters slightly.
The benefits at Shymanivske might be even greater, as it’s closer to the port than Ferrexpo, and as anyone in bulks knows, access to infrastructure is key. And on this score, Shymanivske scores several times over, as there is rail and power just a couple of kilometres away.
The plan at this stage is to start at four million tonnes per year, and work up in four million tonne increments as the mine starts to pay for itself. The wait might have been slightly longer than expected, but it looks to have been worth it.