A face-to-face meeting with Advanced Explorations’ (TSX-V:AXI, FSE:AE6) President & CEO John Gingerich leaves a strong impression that this junior iron ore company has no intention on spending shareholders’ capital on kicking rocks. Indeed, the first fifteen minutes of an interview with Gingerich is focused entirely on management and their track record in developing assets.
Gingerich’s - a professional geophysicist - previous incarnation was as co-founder of East Asia Minerals (TSX-V:EAS), a CAD $550 million Asian exploration company, so he knows a thing or two about building up microcap companies into a junior mining company with good growth potential.
This is reflected in the team he has build around him, which includes James Excell who has worked on some of the world’s major mining projects, including the CAD $700 million Ekati Diamond Mine for BHP Billiton (NYSE: BHP); Steve Roebuck who has spent much of his career in the Arctic, including time as a production engineer and geologist for BHP Billiton; Florin Gheorghiu, Vice President of Engineering and Technology, who has more than 35 years experience in ore crushing, grinding and enrichment processes and Bernie Swarbrick who recently joined the team as the new VP Capital Projects & Studies. Gingerich is also keen to note the crucial roles played by Robert Collette, former Canadian Ambassador to Switzerland, and Lei Guo, a specialist in securing finance from China for Canadian mining companies.
Management focus has been targeted on attracting Chinese investment for iron exploration and production. China currently produces 620 to 630 million tonnes of steel, recording a yearly growth rate of 10%, and has been seeking to diversify ore supplies away from Australia, Brazil and India. This has set off substantial growth in Canadian exports of iron ore, from a low base of 8.65 million tonnes per year, and created great interest in Canadian companies with undeveloped iron ore resources.
Baffinland Iron Mines Corp (TSX: BIM), whose flagship property is also based in Nunavut, carries a market capitalization of $340 million and is under a hostile takeover offer to capture a $4 billion development project, that will potentially produce 500 million tonnes of high grade iron ore over 20 years. New Millennium Corporation (TSX-V: NML) capitalized at $167 million, has 9 billion tonnes of taconite resources in the Millennium Iron Range in Northern Quebec- Labrador, and has attracted Tata Steel of India to invest $300 million in a joint venture to develop the Project.
AXI has 4 iron ore discoveries on the Melville Peninsula in Nunavut, which have already attracted two Chinese investors. The Roche Bay Banded Iron Formation extends for 140 kilometers, within which the C Zone covers 4.8 kilometers and carries a NI 43-101 Inferred Mineral Resource of 357 million tonnes of ore grading 28.7% of iron ore to a depth of 250 meters, where iron was intersected at depths of up to 540 meters. The conceptual size of the total resource exceeds 1 billion tonnes, and is situated next to deep water, which translates into a saving of $20 per tonne on shipping costs.
XinXing Pipes Group, which is the world’s largest producer and vendor of caste iron pipe, has committed $5.3 million to take a 19% stake in AXI at 25 cents per share, and funding of $20 million to complete a Definitive Feasibility Study along with $30 million for working capital. XinXing has the right to earn in 50% of the Roche Bay Project and a 50% off-take agreement of all iron ore production, and on completion of a positive DFS, commits to funding $1 billion to build an open pitmine, concentrate plant, iron nugget plant and export terminal with supporting infrastructure.
The project will likely deploy low cost modular components shipped in and completed on site. The Net Present Value of developing the C Zone, to produce 1 million tonnes of iron nuggets per year is US$1.16 billion, with an Internal Rate of Return of 24.4%, assuming an iron nugget price at US$500 per tonne. Recent metallurgical studies indicate that high quality iron concentrate of greater than 65% can also be produced at the rate of 3 million tonnes per year and sold into the seaborne iron trade for additional cash flow.
AXI explored different development scenarios for Roche Bay, among them a 3 Mt/year 63% Fe concentrate operation and a 1 Mt/year 96% Fe iron nugget operation. The most likely scenario based on the needs of its Chinese partner will be a start-up concentrate operation followed by a nugget plant. The nugget operation was initially chosen due to its unique benefits based on a new iron reduction technology that produces high quality pig iron as iron nuggets. Steel Dynamics (NASDAQ: STLD) has successfully commissioned the ITmk3 process at its Mesabi Nugget Plant at Hoyt Lakes, Minnesota. A large ball drum tumbles a moist mixture of pulverized coal, flux and binder and iron ore concentrate into ¾ inch balls that are dried and then roasted in a rotary hearth furnace to produce 96% iron nuggets that are a high quality pig iron suitable for mini mills to make steel. The whole process carries a low capital and operating cost and is expected to reduce emissions by 40% with a 30% less energy consumption than current steel plants.
The Shandong Fulun Steel Company has also invested in AXI taking a placement of 7 million warrants and shares at 40 cents for $2.8 million. The two companies have established a mutual co-operation agreement for the possible development of AEI’s other iron projects not pursued by XinXing, such as the Alaska Iron Sands Project or the Tuktu Prospect which hosts the potential to become a multibillion tonne iron ore deposit, located 60 kilometers north of Roche Bay. Fulun will also be able to secure 19% of the iron ore production from those projects if it proceeds to exercise its 7 million warrants at 55 cents within the next 4 months.
AXI is also developing a pipeline of other projects on the Melville Peninsula including the SikSik iron discovery, which is 40 kilometers west of the Tuktu massive magnetite zone, and has staked 22,000 acres of claims over molybdenum, copper, gold and silver showings. AXI has an Alaskan prospect at Port Heiden, containing tracts of coastal sands with potential for an economic resource of iron and titanium. This project may represent a potential low cost dredging operation with product shipped directly to Asian markets.
With Advanced Explorations’ current market capitalization of $72.5 million, it is clear to see there is plenty of head room for appreciation in the share price, and with two Chinese groups already on board, the company looks nicely set up to advance several projects towards production decisions while also utilizing its sound management team to build out additional opportunities.