Cleveland Mining Company (ASX: CDG) has signed a memorandum of understanding to acquire 80% of three iron ore exploration projects in Brazil, the first projects for a strategic alliance between the company and BC Iron (ASX: BCI) formed in August last year.
The high potential projects in the states of Salvador da Bahia and Mina Gerais comprise more than 1,200 square kilometres and have shown potential for a substantial amount of iron ore with grades typical of Brazilian product.
Importantly, with a partner the calibre of BC Iron, Cleveland can de-risk its path to production and ensure there is no impact on the company's gold activities.
As importantly, the acquisition is being completed via a staged earn-in style vend terms with no upfront cash payment.
Another plus for the alliance is the location of the projects proximate to planned open-access rail infrastructure leading to existing deepwater bulk and iron ore ports.
The highly regarded local vendors will retain a minority 20% ownership.
Cleveland and BC Iron have investigated more than 50 South American iron ore projects, ranging from exploration stage to producing mines.
The three projects under the MoU were selected for further work based on outcropping iron mineralisation, geology, geophysical signatures, community attitudes to mining and options for port and rail logistics.
The alliance is targeting itabirite iron mineralisation ranging from 30% to 45% iron that could be upgraded to a higher grade product.
This is typical of Brazilian iron ores, which are easily and cheaply processed and highly sort after by the international steel industry.
The Salvador da Bahia (Caetite and Silvestre) and Minas Gerais (Minas Novas) projects cover 194 square kilometres and 1,070 square kilometres respectively.
All are within reach of rail infrastructure that is either under construction (Bahia) or proposed (Minas Gerais).
These rail lines will connect to open access ports that are already capable of loading Cape-sized vessels with iron ore.
Cleveland and BC Iron believe that, based on the geophysics and initial surface observations, the project areas have the potential to host a significant amount of mineralised material.
The planned open-access infrastructure reduces the minimum sized deposit required to justify a mine.
Under the terms of the agreement, the alliance has the right to earn up to 80% of the projects against a schedule of milestones.
A modest first payment would not be made until after first pass due diligence, which would include further field work and a drilling program of up to 2,000 metres for each state that returns satisfactory results.
The three projects will be treated as two discrete project areas, divided by state and subject to separate agreements.
Full commercial details will be publicised on the finalisation of the Option to Purchase Contract.
The private Brazilian group that currently owns the projects has expressed an interest in maintaining ownership of up to 20% of the projects. This group brings significant local experience and important relationships from Bahia and Minas Gerais.
The MoU allows the alliance to enter into a period of exclusivity, whilst a Binding Option to Purchase Contract is formalised, along with any remaining due diligence.
Today's deal marks a major step in the partnership with BC Iron - an alliance that will help Cleveland de-risk its path to iron ore production and ensure there is no impact on the company's gold activities.
Cleveland has a different approach to project selection with project economics driving target selection. Projects are chosen according to their likelihood of generating returns at the bottom of the economic cycle.
The company's management team have a track-record for building billion-dollar projects from the ground up. This will be further strengthened with the assistance of a strong mid-tier mining company such as BC Iron.
The risk to entering these new projects is lessened with a staged earn-in and no upfront consideration.
Additionally, the planned open-access infrastructure reduces the minimum sized deposit required to justify a mine.
The staged earn-in style vend terms ensure there is no upfront cash payment.
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