NSL Consolidated (ASX: NSL) has received a vote of confidence from a major Singapore investment and trading house, which is providing A$2.5 million in funding as well as an iron ore Marketing Agreement.
The funds from the low cost unsecured Convertible Note with Resources First Pte Ltd, which is related to the investment and trading house, will be used to further underpin and expand NSL's iron ore production in India.
"This package provides flexible, low cost expansion funding for our early iron ore production period. It will allow NSL to potentially bring forward both the development of Phase 2 at Kurnool, and to fully focus on optimising production rates, as we are now more than fully funded for our requirements into next year," managing director Cedric Goode said.
NSL has also entered into a marketing Agreement with Resources First to market its iron ore and procure sales contracts in a manner and at a price consistent with industry standards.
This can include Resources First directly purchasing the iron ore.
As part of the Marketing Agreement, NSL's own marketing team will be leveraging off the experience, contacts and expertise of Resources First. NSL will retain the ultimate and final say to whom, and for what price the iron ore is sold.
NSL will pay a 2.5% commission for any sales secured to or by Resources First from Kurnool to a cap of 300,000 tonnes per annum, or about three quarters Kurnool's current anticipated nameplate total output of 400,000 tonnes per annum.
The agreement does not apply to any other iron production projects which may be developed by NSL in India.
"This is a welcomed development against a backdrop of highly cyclical commodity and equity markets domestically and globally, and delivers certainty to NSL's bulk commodity strategy in our key iron ore production ramp-up period," Goode added.
"It also provides a marketing edge and access to a wider pool of potential offtake customers, either through direct purchasing of our iron ore, or access to strong steel mill relationships and supply history. Resources First has an existing strong presence in India and global iron markets.
"Importantly, the product Marketing Agreement is non-exclusive so there is no restriction on NSL's own sales endeavours and success to date."
Resources First said it was very excited about NSL's progress in India to date as well as its potential growth opportunities both near Kurnool and in India.
"We are looking for this investment to potentially be the first of more opportunities to work together."
NSL will issue three-year unsecured Notes to Resources First for a total face value of A$2.5 million with an interest rate of 6%.
Interest payments will be yearly on an arrears basis, with the Notes convertible into NSL in two tranches at a 10% discount to the 20 day Volume Weighted Average Price of NSL's ordinary shares on issue.
The tranche conversion dates are any time after 12 months and 24 months respectively from the date of issue.
NSL can elect to buy some or all of the Notes at its election at any time during the three year term without penalties.
Any shares issued from converted Notes will be voluntarily escrowed for a period of three months post conversion.
Resources First has considerable experience in supplying Indian steel mills with iron ore through its related companies.
Its related companies also export a considerable amount of iron ore to China, both from India and Australia.
NSL is currently ramping up towards its targeted Phase 1 production capacity of 200,000 tonnes per annum from its Kurnool dry separation iron ore plant, with beneficiated grades of up to 58% achieved earlier this year.
In Phase 2 of the project, NSL aims to ramp up production to 400,000 tonnes per annum at higher grades of between 58% and 62% iron. This is expected to be brought into operation later this year with completion and first sales anticipated in the first half of 2013
NSL is targeting production of 1.5 million tonnes per annum by the end of 2014, which is achievable through strategic acquisitions and supply agreements.
NSL is the only foreign company to own and operate iron ore mines in India.
The Kurnool stockyard in southeast India is a 12 acre industrial site located adjacent to NSL's existing Kuja iron mine in Andhra Pradesh. The stockyard will source its iron from the nearby Mangal iron ore mine.
Indian steel consumption on the rise
India is the world's third largest iron ore exporter and has low production costs and well established infrastructure. Iron ore is a large but fragmented industry with small-scale operations.
This feeds into a strong domestic market for steel, forecast to increase substantially.
Resources First agreed, saying that India's requirements for iron ore and steel are anticipated to expand substantially over the next 10 years.
The increase in funds being allocated to domestic infrastructure projects is driving a forecast increase in Indian domestic steel production from 77 million tonnes to 200 million tonnes by 2020.
The National Mineral Development Corporation, India's largest domestic supplier of iron ore, continues to increase pricing, with rises of 10% occurring in the past week.
The deal with Resources First is a major step forward for NSL as it moves to generate cash flows from Kurnool, funding the company into 2013 at a crucial optimising production phase.
First ex gate iron ore sales were achieved to a domestic customer during the June quarter.
While NSL has already received strong interest from domestic steel producers looking to secure offtake from its Kurnool iron ore project in India, allowing an experienced trader to arrange sales for three quarters of its anticipated nameplate total output will ensure the company receives the best possible prices for its iron ore.
To top it off, the non-exclusive nature of the arrangement gives NSL the flexibility to reach its own sales agreements if need be.
NSL is already receiving pricing for its trial ore production in line with the prevailing market where 54-58% iron ore can be sold ex-gate to domestic steel mills for around US$65 to US$93 per tonne. This compares to anticipated production cash costs of about US$18 per tonne.
Implying that at 200,000 tonnes per annum production, NSL is looking at first phase revenue of $13 to $18.6 million. This is against a market valuation of $18 million. Clearly, there is a looming mis-pricing between expected revenues and current market cap.
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