Black Iron (TSE:BKI) continues to reap the benefits of its recently-announced definitive development agreement with Metinvest B.V. to advance the company's Shymanivske iron ore project in Ukraine as off-take customers circle the project with renewed interest . "Its game changing for us," said Black Iron CEO Matt Simpson of the deal, speaking upon his return to Toronto following a two week marketing trip to Europe that immediately followed release of the news. "I don't know of any other junior developer out there that has half their project construction financed but yet still has all of their off-take to offer to secure the rest of the project financing."
The deal brings with it an initial investment of $20 million inBlack Iron (Cyprus) Ltd, the wholly-owned subsidiary of the Toronto-based explorer and developer, with potentially hundreds of millions to follow.
The initial investment, which takes the form of a private placement of shares, gives Metinvest a 49 per cent shareholding of Black Iron Inc's holding company, BKI Cyprus, which holds Black Iron's development stage Shymanivske project and the exploration stage Zelenivske project, both located in Kryviy Rih, Ukraine. More eye-catching for investors is the commitment from Metinvest to match dollar-for-dollar all the equity financing Black Iron raises, up to $536 million.
As Simpson points out, assuming a debt equity split of 60/40, this leaves only $250 million now needing to be raised, with the company still having 100 per cent of its offtake available on the Shymanivske project to offer at a slight discount to market price to raise this financing. For example, Black Iron could offer a large steel mill a $4 per tonne discount on its 9.2 million tonne per annum of production for 10 years which on a non-discounted basis is worth $368 million, which makes the ask of only $250 million quite an attractive ratio before even considering needing to issue equity.
And he says, several potential customers already circling the project, have been "re-energized" by the new deal, "because the ratios, in terms of how many dollars we're asking for from them versus the amount of material we have to offer in the offtake agreement in exchange is substantially more attractive. It's always been a good ratio but now it's even better, twice as good."
Metinvest is a big name to do business with in Ukraine. A vertically integrated group of steel and mining companies, producing more than 36.2 million tonnes of iron ore (9th in world), 11.6 million tonnes of coal and 12.5 million tonnes of steel (16th in world) last calendar year, the steel maker is not only Ukraine's largest mining and steel producer, it also holds the distinction of being the country's largest employer.
Simpson speaks highly of the company's new investor, "a group that has operated in Ukraine very effectively for a number of years and has a proven track record of success," emphasizing the wealth of synergies the Ukrainian investor brings with it. As he points out, the new investor has much to offer through association with its parent company System Capital Management (NYSE:SCM) which owns a variety of companies that could provide services to Black Iron, improve negotiating insights and/or help ensure we work with the best local company's particularly during construction; for example SCM owns an electricity producing company which generates a substantial part of the country's electricity, lending insight when the time comes for Black Iron to negotiate electricity contracts.
"They also own a company which leases the majority of private rail cars in the country, so that could be quite useful. In addition, they also own a company that has ports in Ukraine that handle iron ore and steel."
Black Iron for its part brings a wealth of experience to MetInvest, which, while it has "tremendous experience operating in the country and have done a number of brownfield projects", Simpson says, "has never built a mine from scratch."
"It's appealing for them to be joint venturing with us in developing this mine as we've built a number of mines over the years [within our parent company Forbes Manhattan] and have quite a bit of experience and success in doing so; so they're interested in us bringing that expertise and world class technologies to Ukraine to build this mine."
Industry approval of the deal was quick in coming; in the aftermath of the announcement the Toronto-based iron ore exploration and development company had its "buy" rating reaffirmed by analysts at Cormark Securities, who also boosted the company's target to $1.10 from 75 cents.
Desjardins Capital Markets also released a research report on the back of the news, reiterating Black Iron's "buy" rating and $1.00 price target, saying the investment by Metinvest was a positive and necessary step toward moving the project to production.
A close examination of the Shymanivske project itself makes it easy to see what attracted the marquee investor, who Simpson says "did quite a bit of due diligence and were sold on the economics of the project."
In the feasibility study Black Iron posted late last year, the company 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 per cent iron concentrate. Capital costs were projected at $1.1 billion, or $119 per tonne of installed capacity, ranking it in the first quartile of development projects, according to a statement released by the company last year.
The site is surrounded by existing infrastructure with confirmed capacity, including a government-owned rail line that runs within two kilometers of the property, high voltage power lines that run alongside the railway and access to five ports on the Black Sea. With all these assets in its favour, Black Iron expects a quick development timeline to production.
Simpson also points out the proximity of Kriviy Rih, a city with a population of three-quarters of a million, from where Black Ironintends to source "very highly educated skilled tradesman: electricians, welders, mechanics making $3 an hour; about a tenth of Canada and about 1/18 of what you would pay in Australia where labour is at least 30 per cent of the mines operating costs."
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.