Black Iron (TSE:BKI) had its price target boosted this week by analysts at Cormark Securities, on the back of a definitive development agreement with Metinvest B.V. to advance the company's Shymanivske iron ore project in the Ukraine putting the iron ore development company "back on track". Cormark's price target was increased to $1.10 from 75 cents previously, with the firm's "buy" rating maintained.
Metinvest, Ukraine's largest integrated mining and steel producer, will take a 49 per cent interest in the project for an initial US$20 million investment and fund its share of capital going forward, Black Iron announced Tuesday. More compelling over the long term is the commitment from Metinvest of dollar-for-dollar matching of all the equity financing Black Iron raises, of up to $536 million.
"The agreement provides Black Iron with a strong strategic partner with political and financial support to get the project developed and should underscore the low market valuation," wrote Cormark analyst Cliff Hale-Sanders in his research note the day after the news was announced.
With only about $220 million now needing to be raised, the company's management highlighted on Tuesday that it still has 100 per cent of offtake available for raising additional financing. Black Iron also remains the operator of the project.
Cormark's Hale-Sanders pointed out that while the transaction results in a significant ownership dilution for Black Iron on the project, the market had been valuing the company's shares as if the project was unfinanceable. "Both partners have agreed to fund the development on their proportionate interest or be diluted down. Using the projected capital investment of $1.1 BB from the December 2012 feasibility study and 60% debt, we believe Black Iron will need $219 MM in equity to fund development," wrote the analyst in the note.
Last December, Black Iron filed a feasibility study that showed a 45.9 per cent internal rate of return, a 2.2 year payback period and a US$3.5 billion net present value, on a pre-tax basis, for a 9.2 million tonne per year operation, producing high grade, 68% iron concentrate. Capital costs were projected at $1.09 billion, or $119 per tonne of installed capacity, ranking it in the first quartile of development projects, according to Black Iron's statement last year.
The Shymanivske property is surrounded by existing infrastructure, including access to power, rail and port facilities, which the company has said will allow for a quick development timeline to production. Two operating mines - ArcelorMittal's Kryviy Rih iron ore complex and YuGOK, owned by Evraz and Smart Holding - are essentially adjacent to Black Iron's asset, and have been successfully producing a high quality concentrate for years.
The company, which has a large historical compliant resource of 814 million tonnes grading 31% iron, will benefit from an expected offtake arrangement, with such a deal anticipated to finalize in the second half of the year. Production start-up from the project is expected in the second half of 2017.
"This [Metinvest] transaction puts BKI back on track for development and should support a strong rerating of the shares as milestones are met," concluded Hale-Sanders. Metinvest is Ukraine's largest mining and steel producer and has a track record of developing and operating iron ore projects. In 2012, it produced 36.2 million tonnes of iron ore and 12.5 million tonnes in steel, the analyst added.
Desjardins Capital Markets analyst John Hughes also released a research report on the back of the news, reiterating his "buy" rating and $1.00 price target, saying the investment by Metinvest is regarded as a positive and necessary step toward progressing the project to production.
"Metinvest appears to be well connected at the political level in Ukraine. This should benefit Black Iron in terms of securing land, as well as with two permitting issues the company has found challenging on a project‐to‐date basis," Hughes wrote.
The deal is still subject to the approval of the TSX and the government of Ukraine's anti-monopoly division, which is expected to take around three months to secure.
The news sparked some encouragement from investors, with Black Iron's shares picking up over 33 per cent this week, currently trading at about 20 cents on the Toronto Stock Exchange.
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