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Black Iron is potential "powerful addition" to Ukrainian iron ore scene, says Eavex Capital

Eavex Capital has initiated coverage on Ukraine-focused Black Iron (TSE:BKI) with a "buy" rating and $1.51 target price.

Tuesday, Black Iron shares closed at $0.65. Since the start of 2012, the stock is up 18 percent.

Black Iron is an iron ore exploration and development company advancing its 100 percent-owned Shymanivske project located in Kryviy Rih, Ukraine.

The company has two 100 percent-owned projects: the flagship Shymanivske iron ore property and the Zelenivske iron ore property, located a few kilometres south of Shymanivske.

In a research note, Eavex analyst, Ivan Dzvinka, said: "Black Iron represents a potentially powerful addition to the stable of Ukrainian iron ore thoroughbreds. The company, currently in the exploration stage, intends to launch production by 2015 with annual output of 7 million tonnes, assuming it can obtain funding for its required capex of $900 million.

"The most likely route to such funding is via an M&A deal or a joint venture with a steelmaker. A historical analysis indicates that news about either of these arrangements should be a sharp trigger for Black Iron’s share price."

A major advantage of Black Iron's ore assets is their geographic location. With Ukraine adjacent to Europe, the company would be able to export using rail links, whereas shipping is the mode of transport for most global iron ore exports.

Ukraine possesses 30 billion tonnes of iron ore reserves, which is 17 percent of the global total. Iron ore production in the country was 77 million tonnes in 2010, or three percent of global output. Iron ore is the raw material used to make pig iron, which is one of the main raw materials used to make steel, and is therefore one of the most integral commodities to the global economy.

Ukraine exported some 45 percent of its iron ore output in 2010, with 95 percent of this export volume going to China and Europe.

Black Iron's Shymanivske project contains an NI 43-101 compliant resource with 373 million tonnes measured and indicated resources grading 31.3% iron and 480 million tonnes of inferred resources grading 30.2% iron. The project is surrounded by five other operating mines, including steel giant ArcelorMittal's (NYSE:MT) iron ore complex, and it is nearby key European and Turkish customers.

A recently completed preliminary economic assessment at Shymanivske outlined, as a base case scenario, an operation producing 7.3 million tonnes of pellet plant feed per annum for 28 years at an average cash cost of $52 per tonne.

This would yield a projected 42.1 percent internal rate of return (IRR), with a whopping US$3 billion net present value, at an 8 percent discount rate.

Development capital expenditure was estimated at $896 million in the study, with production start-up targeted for late 2015.
Black Iron is also contemplating the construction of a pelletizing facility, which would result in Black Iron selling 7.6 million tonnes of iron ore pellets per annum for 28 years at a cash cost of $64 per tonne.

The second scenario for Shymanivske outlines the option to produce a higher margin pellet product of 65 percent iron grade, generating a much higher net present value of US$4.1 billion at the same discounted rate, but with a reduced 35.2 percent internal rate of return, due to raised construction costs.

Total capex for the pellet production alternative was estimated at $1.571 billion, or $675 million more than the pellet feed base case scenario.

In January, the company said it hired resource and engineering firm WorleyParsons Services Canada to complete a feasibility study for its Shymanivske project.

Looking ahead, the Eavex analyst sees three possible drivers for Black Iron's stock over the next one to two years.

These are announcements regarding a merger with/acquisition by another company, a joint venture arrangement with a strategic partner, or an expansion of Black Iron’s resource base.

Such events have proven to be strong catalysts for iron ore exploration and development companies in the past, and Eavex presumes that Black Iron's share price would react positively to any of these developments.

The iron ore explorer is currently drilling at the northern end of Shymanivske, with 20,000 metres expected in the next year.
In terms of iron ore prices, Eavex's Dzvinka said that fueled by resilient demand from emerging markets, especially China, he expects global iron ore prices to remain above the $100 per tonne level for at least the next several years.

In December, RBC Capital Markets also initiated coverage of Black Iron, giving it an initial "outperform" rating and $1.50 price target.