Shares in Black Iron Inc. (TSE:BKI) soared on the back of the announcement Tuesday of a development arrangement with Metinvest B.V., Ukraine's largest mining and steel producer, that entails an initial investment of $20 million in Black Iron(Cyprus) Ltd, the wholly-owned subsidiary of the Toronto-based explorer and developer, with hundreds of millions to follow.
The arrangement, which president and CEO of Black Iron Matt Simpson described on a conference call this morning as "a game-changer", involves an initial investment of $20 million in the form of a private placement of shares in BKI Cyprus, which holds 100 per cent of Black Iron's development projects, the Shymanivske project and the Zelenivske project, both located in Kryviy Rih, Ukraine, giving Metinvest a 49 per cent shareholding of BKI Cyprus.
Black Iron plans to use the proceeds from the Metinvest subscription to finance the development of its Shymanivske project, which contains 646 million tonnes measured and indicated resources grading 31.6 per cent iron and 188 million tonnes inferred resources grading 30.1 per cent iron, as well as for general working capital.
Under the agreement, subject to final regulatory approvals, there will be no increase in shares outstanding in Black Iron, it said, and in both instances, Black Iron is to remain the operator and developer of the projects.
More compelling over the long term is the commitment from Metinvest of dollar-for-dollar matching of all the equity financing Black Ironraises, of up to $536 million.
In a conference call with investors and analysts the morning of the announcement, CEO Simpson self-effacingly described it as "helpful that half the project financing is now secured."
As for the rest, as Simpson pointed out, with only $220 million now needing to be raised, the company still has 100 per cent of offtake available for raising additional financing.
Metinvest is a vertically integrated group of steel and mining companies, producing more than 36.2 million tonnes of iron ore, 11.6 million tonnes of coal and 12.5 million tonnes of steel last calendar year. The steel maker also holds the distinction of being Ukraine's largest company, as well as being the world's 9th largest iron ore producer, 16th largest steel producer and 33rd largest coal producer.
In a company statement released with the announcement, Black Iron said of the company, "Metinvest has a proven track record of developing and operating iron ore projects in Ukraine, which will prove invaluable to Black Iron in the advancement of its projects. It will also serve in helping attract future foreign investment to Ukraine."
In addition to the private placement of BKI Cyprus shares, Metinvest will also be granted the option of acquiring additional shares in the subsidiary company up to an effective ownership of 51 per cent, once the company has achieved three months of its planned full run rate production of 9.2 million tonnes per annum concentrate.
The option exercise price will represent a 30 per cent premium over the fair full net asset value as determined by an independent third party, and will expire 12 months after vesting, according to the release.
"Black Iron selected Metinvest for its industry-leading experience in iron ore mining and steel making, as well as its operational history in Ukraine," said Simpson in the statement Tuesday. "This agreement greatly strengthens our development team and I look forward to being closely associated with Metinvest. Together, we will help bring new world class iron ore processing, safety and environmental technologies to Ukraine."
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.
General Director and CEO of Metinvest Igor Syry, added: "Metinvest believes that development of Black Iron's Shymanivske Project will be important for Ukraine and its economy. It will represent a major investment in Ukraine, resulting in increased local employment, the improvement of local infrastructure and environmental level standards in Kryvyi Rih, and become a catalyst for regional and national social and economic development."
Shares in Black Iron were trading up the day of the announcement, with 5 cents being added in morning trading Tuesday to hit 21 cents as of 10:57 am EST.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.