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Doug Hadfield
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An investor, researcher and writer for years, Doug is the VP of Operations and Executive Editor at Resource Intelligence and RI Video Solutions. He graduated from the University of British Columbia in 1997 with a Bachelor of Arts degree.
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  • Palladon Ventures Advances to $744M Net Present Value: PEA 1 comment
    Oct 14, 2009 12:59 PM | about stocks: PLL

    I wrote about Palladon Ventures (TSX.V: PLL) a few weeks ago, prior to the release of the company’s Preliminary Economic Assessment. I said that I saw promise in the new management team, headed by a capable and thorough John Cutler as interim President and CEO. The PEA shows a clear way forward for a brownfield expansion company that has managed to pick itself up and dust itself off from an economic aneurysm that nearly stopped the global economy in its tracks.

    The upshot of the PEA is that based on numerous variables the company’s Comstock Mountain Lion (NYSE:CML) iron deposit is a clear winner: The project has a Net Present Value of US$766 million and an IRR of 24%. On one hand that’s very good; on the other it’s just the beginning for Palladon; the existing high-grade 40 million ton deposit represents just a fraction of the total resources that could be at Iron Mountain.

    Then there are other factors: The market fundamentals for iron ore has taken a hit since its historic highs of 2008 (compare with the steel index below). Nevertheless, indications suggest that once the recession is behind us, domestic and international demand will pick up from where they left off.

    The signals from the steel industry (steel is a combination of iron with a small amount of carbon)  suggest that Chinese growth merely hiccuped during the global recession. As a result, analysts are now lining up to give a thumbs up to steel (and by extension, iron). Macquarie raised its global steel price outlook for 2009 and iron ore contract prices for next year, citing a strong recovery in China and ensuing tightening in global supply of the steelmaking ingredient.

    Citigroup research has said these price escalations will provide record profits for mining groups. Brazilian giant Vale is expected to double earnings from iron ore by 2009.

    BHP Billiton Ltd. and Rio Tinto Group, the biggest and third-largest mining companies globally, had their profit estimates raised by as much as 40 percent by JPMorgan Chase & Co. because of rising iron ore prices.

    In the long-term BMI, which provides intelligence on global markets, has said it expects the steel and iron industries to expand, driven by the increasing demand on steel from growing economies of Asia’s developing countries.

    Interestingly, some have noted that Chinese steel prices have fallen 20-25% since an August post-recovery peak, with the suggestion that this could be an early sign of a Chinese slow-down. I can’t think of anything more absurd. China is growing like gangbusters, and that’s not going to stop soon.

    Mining Journal recently reported that China – the world’s biggest consumer of iron ore – may buy 20% more than forecast of the material next year because of its CNY 4 trillion stimulus package.

    The Australian Bureau of Agricultural and Resource Economics said, “China is expected to continue to underpin demand for iron ore. Globally demand for steel, and therefore steelmaking raw materials is expected to increase in response to an assumed economic recovery beginning in the H2 of 2009.”

    Whether you attribute this long-term demand to stimulus packages or the Chinese growth/real estate bubble, most economists believe China’s growth curve has a long way to go before it slows down. Corrections are expected along the way, but a Chinese slow-down is not likely. Heck there are still 100s of millions of countryfolk moving into the cities in a country with little a debt and a huge monetary reserve. This in itself will drive infrastructure projects for the next decade.

    Palladon hasn’t yet decided if its market will be US or Asia (or both) although the numbers in the PEA were based on a domestic market. The company’s CEO John Cutler points out that Palladon is still considering its options, but doubts that a run-of-mine (NYSEARCA:ROM) operation would be economic at recent iron prices.

    Now with a new plan in place to build a modern facility to upgrade the ore, Palladon is seeking to answer some key questions: What type of facility to build? What kind of iron product is most profitable, given the type of deposit and ore contained within it?

    The company has some options. The simplest and most economical is to mill the ore and upgrade it to a 67% iron concentrate. The end product would be less valuable than a high grade product like Direct-reduced iron (NYSE:DRI), but would also require lower capital expenditures.

    DRI is another option – and the one that SRK explored in the Preliminary Economic Assessment.
    DRI is a widely manufactured and traded commodity involving the reduction of iron ore with a reducing agent (coal or natural gas) without the formation of molten metal, hence its name.

    Whereas DRI is typically 91% Fe, another option is the Midrex ITmk3® process, which produces a more valuable iron nugget with 98% Fe, and with a fraction of the carbon emissions, according to numerous industry articles. The Midrex ITmk3® process requires a newer, less widely used technology that is expected to see commercial production later in 2009. Palladon will have to continue with metallurgical and other studies to determine which method is best suited to its deposit.

    Market studies conducted for Palladon by Hatch Management Consulting indicate that present US domestic mini-mill demand could support the sale of up to 1 mtpa of DRI or nuggets, also known as Alternative Iron Units (AIU). The scrap-short Asian market could also be a good source of demand for AIU.

    Within 1,200 miles of Palladon’s project location there are eight end users who purchase roughly 1.1Mst of AIU per year. In North America, there are 29 end users that use over 4.8Mst of AIU per year. Currently, the majority of this AIU requirement is met with either DRI or imported pig iron.

    In other words, there appears to be both a domestic market and an international market for the product that Palladon will produce.

    The Deposit

    The deposit at Comstock Mountain Lion is presently comprised of 40 million tons (mT) of ore grading an average of 45% Fe. Three million tonnes of iron (9 mT ore grading 34% Fe) are sitting on the surface in stockpiles.  Consider that SRK Consulting, an independent consulting firm, in creating its 43-101 compliant Preliminary Economic Assessment for the CML Project used a price of $378/metric tonne. As such, the 9 mT of ore at surface is worth about a billion dollars, less costs, royalties, taxes, etc.

    To better understand the value of this deposit, you’ll want to look at the resource calculations and data in the calculator here: http://shareknow.net/companies/1759. The project has a pre-cost value of $5.3 billion (the PEA makes it $5.4 billion). Now take off costs in the Operating Calculator and you’re left with about $2 billion or $14.02 per share. Those are good, solid numbers.

    Take away a discount for the entire investment of 8%, as the consultants do in the economic assessment, and it still looks healthy, with a NPV of US$766 million and an IRR of 24%.

    Of course there will be some future dilution due to fund raising for capex but $14.02/share is orders of magnitude from the company’s current $0.10/share.

    Next Steps

    Clearly a processing plant isn’t going to be build here overnight (though there is an existing mine), but with the report from SRK, I think Palladon is armed with the weaponry it needs to make big strides forward. There is some decision-making do be done, and to get there Palladon has to raise $5 million by October 15 to meet its debt obligations with Luxor and to complete a Feasibility Study.

    While all this is happening, the company’s share price will fluctuate. But for those investors who see the long term potential in Palladon Ventures, there is clear upside. The stock price hasn’t really budged on any of this news. The company flies under the radar still.

    I’m sure some investors who bought into this one last year have grown impatient. They were expecting a current producer out of Palladon. It’s not a current producer, but the team is clearly laying a strong foundation, with 43-101 reports, independent consultants, twinning historic drill holes and proposed drilling. And that’s infinitely better than the shaky legs this project was walking on a year ago.

    Disclosure: No Positions
     

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Comments (1)
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  • James Duade
    , contributor
    Comments (303) | Send Message
     
    Very good report. Someone tipped me off about this company, and I did a search for articles and came across yours. I'm curious, but do you now own shares? I appreciate your hard work in putting this article together, and would be interested in your take on more recent developments. Thanks again.
    16 Feb 2011, 06:48 AM Reply Like
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