Black Iron Inc (TSE:BKI) (OTCMKTS:BKIRF) was primed for construction at its massive Shymanivske iron ore project in Ukraine when, in 2014, Russia invaded Crimea and revolution fell upon the Eastern European country.
Five years later, as the situation has calmed down in Ukraine, the company is ready to put Shymanivske into production with iron ore prices on the rise.
CEO Matt Simpson tells Proactive how the small junior plans to raise US$436 million without having to rely on equity markets and why the five-year holding period has actually benefitted Shymanivske’s economics.
Things in Ukraine seem to have stabilized. What's the situation like on the ground now?
It’s very much life as normal where Black Iron’s project is located in central Ukraine. People go to work, kids go to school, and you wouldn't have a clue that there is a conflict in the far eastern part of the country. Recently, we’ve seen troops being pulled from the front line leading up to discussions on December 9th where France’s President Macron and Germany’s Chancellor Merkel hosted Ukraine’s President Zelensky and Russia’s President Putin for peace talks, which is the first time that the Presidents of Ukraine and Russia have spoken with each other. They reached an agreement to continue pulling troops out of the front line, exchange prisoners, and to meet again in the new year to further peace discussions.
You’ve had face time with Ukraine’s Prime Minister and numerous government officials. Are they supportive of the project?
Recently elected government officials including the President and Prime Minister of Ukraine are highly supportive of Black Iron’s project being constructed. Ukraine is a country that has a very high level of education with over 99% literacy, but the GDP per capita is only around US$3,000 per person meaning the average person makes only $1.50 per hour. The country is fully aware, especially with the advent of the Internet, on how other people around the world live and they want the same kind of lifestyle. The new government was largely put in place to accelerate reforms in the country which should attract more foreign investment and ultimately improve living conditions. By having some concrete examples of successful foreign investments (and Black Iron and wants to be one of those), it will provide greater confidence to other investors considering the country, which creates a self-fulfilling prophecy of ultimately improving living conditions.
Why is Shymanivske such a standout to you?
What’s special about Shymanivske is how close it is to major infrastructure, including railway, power, ports and skilled labor. A company could easily spend half a billion dollars just building a railway before even touching the project itself. In our case, we're only two kilometres from the government-owned railway which connects to five ports, power lines run right beside the railway and there is a city of 750,000 people eight kilometres away. It's all right there allowing the mine to be constructed at much lower cost and in a more scalable manner as compared to competing development projects.
The other highlight is the ultra-high 68% iron content product that Black Iron is going to produce, which will put us in the top 4% globally and result in less emissions being generated in the production of steel. That's appealing, especially for Middle East steel mills who require a very high iron content with low impurities to make steel given they use a one-step process as opposed to the more conventional two-step process in which impurities are removed between processing steps.
The company has obviously been quiet over the past few years since the conflict that broke out in Eastern Ukraine back in 2014. Why are you getting in front of investors now?
The first, and most important, reason is that we have over five years of stability on the front line and it looks like the conflict is going to be fully resolved in the next year given the productive meeting of politicians. Second, iron ore prices have rallied quite nicely and it’s become one of the best-performing commodities over the last year. Third, when we originally started this project, Ukraine's government used to artificially hold their exchange rate at eight hryvnia to one US dollar. The IMF forced the Ukrainian government to let their currency free float as part of its bail-out plan, and once they did that, the currency shot up. It trades at around 26:1 to the US dollar now.
So the numbers in your PEA have actually gotten better.
They have. Taking into consideration inflation offsets against the exchange rate devaluation, Black Iron’s cost to construct and operate the mine are about two-thirds of what they were pre-2014 and the price paid for higher iron content products has doubled to tripled given greater global concerns on reducing pollution.
How are you going to fund construction of a US$436 million project when you’re sitting at around C$16 million market capitalization? What options are available to you?
The possibility that we'll be able to raise the bulk of the capital without having to rely on equity markets is one of the most exciting things about the project. If we split the US$436 million needed for project construction between debt and equity, we need about US$175 million of equity (40%) and US$260 million (60%) debt. The hardest thing for any junior company today is to raise equity. With iron ore, because you can sell it under a very long-term contract you can enter a prepaid offtake agreement. We’ve already announced a memorandum of understanding with Glencore PLC (LON:GLEN) to sell four million tons of annual production from our first phase over the full 20-year mine life at a discount to the actual market price in exchange for making a substantial equity investment towards project construction. Discussions are currently ongoing with Glencore and other interested parties to enter a binding contract.
To further explain the value of offtake, let’s use a simple example. If the long term price of iron ore is US$62 per ton (note: iron ore is currently trading around US$90 per ton) for product with 62% iron content, Black Iron should be able to sell our ultra high grade 68% product for roughly US$100 dollars a ton after making adjustments for the premium iron content and low impurities. If Black Iron offers a prepay discount of 2% to 5%, that's US$2 to US$5 per tonne of production. If we produce 4 million tonnes per year, that's a US$8 million to US$20 million dollars discount per year – and once you multiply that by the 20 year mine life, you can see that the math quickly adds up where you're sitting with between US$160 and US$400 million dollars of value. Now, if we bring that all back to today's dollars, that's somewhere between US$80 and US$200 million, which will form the bulk of the equity that we require.
Black Iron has also signed memorandum of understandings with two Asian construction companies that are interested to invest 10% of the total project cost as equity in kind. What I mean by equity is kind is once we start construction, every month the construction company will send an invoice for the work they've done. Black Iron will pay the majority of the invoice in cash and the remainder in shares over the 2-year construction period. Between the offtake agreements and the Asian construction group, we can get potentially secure all of the equity needed for project construction.
On the debt side, some European governments are mandating their banks and export credit agencies to find opportunities to invest in Ukraine so they can help the country move more towards European values. The problem is there's not a lot of opportunities to invest. Black Iron has already received expressions of interest from some very large well known European banks and credit agencies, so I am feeling confident that Black Iron will be able to secure all of the construction financing over the next year.
Shymanivske is going to go into production as soon as the money is raised, correct?
From a technical standpoint, it's fully de-risked. The focus now is to secure the funds for project construction and land owned by Ukraine’s government for location of the processing plant and solid progress is being made on both fronts. The nice thing about being so close to major infrastructure including railway and powerlines is it makes the project highly scalable. Let's say that for some reason they can only raise US$350 million instead of the full US$436 million targeted. Instead of starting with four million tons per year production, we could start with three million tonnes and then use the cash generated from operating to scale up production. We can even start with one million tons to get this project up and running.
What does Black Iron look like a few years down the road? What’s the long-term vision for the company?
The longer-term vision is to build the first four million tons of production, which should happen by early 2023. At that point, we'll then start to generate significant cash and have optionality. A part of it will be used to pay down our debt, but another portion will be used to fund the expansion from four to eight million tons. We may also build a pelletizing plant to increase the value of our product. There's lots of blue sky to continue to push up the potential value of the company.
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