Look out, here comes Oceanic Iron Ore
When Steven Dean stepped down in 2002 as president of Teck Cominco, now Teck Resources (TCK-T, TCK-N), his motivation was simple: he wanted to spend more time with his family after spending years on the road, a fact of life in the mining business.
But Dean didn’t completely opt out during his time off from the industry. Among other things, he co-founded a copper company in Chile and got involved with a fertilizer play in China. But as soon as his kids headed off to university, he decided he should "probably get a little more serious about doing something."
That something turned out to be putting together a team to fast track the development of an iron ore project in the Labrador Trough of Quebec called Hopes Advance, and launching Oceanic Iron Ore (FEO-V, FEOVF-O) in late 2010. The team included Dean, chief financial officer Irfan Shariff, and more recently, Alan Gorman as president and chief operating officer.
The project had been tangled up in arbitration between hard-driving Toronto-based mining entrepreneur Pat Sheridan and a group of Middle Eastern partners. The dispute started five or six years ago, Dean says, when Sheridan thought he had sold the property to partners in the Middle East. The disagreement ended up in the hands of lawyers.
"The resource was locked up in international arbitration in London for a long time, so we said to the feuding parties, ‘Stop — the project is not advancing while it is locked up in court. Let’s settle the arbitration dispute and add some real value to the project.’"
Last week Oceanic Iron Ore completed a prefeasibility, demonstrating the project has a base-case, after-tax net present value of $3.2 billion, an after-tax internal rate of return of 16.8% unlevered (19.2% levered) and life-of-mine operating costs of just $30 per tonne.
"There are very few assets like this left in the world," Dean says, explaining how the project, which sits just 20 km from the coast, lured him out of retirement. "When it comes to bulk assets like this one, being on the coast is a huge advantage. There’s not another project like it, not in Brazil, not in Australia, not in West Africa. They all have railway lines to build."
As a footnote, Dean calculates that building a 1,000 km railway line is typically a $2.5-billion to $3.5-billion capital project, if you can get it approved, and if you don’t have to string it across multiple country borders in places like West Africa, or through different aboriginal communities in Quebec.
In the iron ore business in Canada, he continues, having to rail product adds costs of $15 to $20 per tonne. "That doesn’t exist in our scheme of things," he says. "So almost by itself, that rail component makes us one of the lowest cost producers in Canada — and in fact, anywhere."
The large-scale deposit has a 2-billion-tonne iron ore resource, which translates to proven and probable reserves of 1.36 billion tonnes grading 32.2% iron, and a mine life of about 31 years. The concentrate grade would be 66.5%.
Construction capex is expected to come in at US$2.85 billion, with expansion capital costs of US$1.61 billion. In the first 15 years the project’s strip ratio would be 0.5 to 1, and over the life of the mine it would run at 1.17 to 1.
Production could get underway in 2017 at a rate of 10 million tonnes per year, and expand to 20 million tonnes per year in 2027. At full production Hopes Advance could be the largest iron ore mine in North America, Dean says.
The company expects to provide its own power generation in the first eight years using a low-cost generating facility run on heavy fuel similar to bunker fuel, after which the project is expected to be connected to the Hydro Quebec power grid.
Oceanic believes it can complete an environmental impact study and a feasibility study next year, and start construction between 2014 and 2016.
Dean and his management team are focused on tying up a deal with potential strategic partners that are primarily in China. Oceanic envisions structuring a transaction, probably an offtake agreement with an Asian steel company, and selling a piece of the project to the partner for a value based on its economics.
"We would sell thirty percent, forty percent, maybe as high as fifty percent to them, and they would pay us an amount over time that matches various milestones," Dean explains. "The third piece of a transaction, and we’re not pioneering this model, is that you would bring a financing component — a debt-financing component. If you get a Chinese partner, you’d typically bring, say, an export-development bank, like Exim, or the China Development Bank, and they do it because they see the potential for trade."
Dean estimates that of the $2.8 billion, for instance, as much as $1 billion of the capital could be supplied by China. In that way, he explains, it’s a trade deal and a bank-financing deal, as well as a deal that sources raw materials and participates in project profits.
At press time Oceanic was trading at 18¢ within a 52-week range of 13¢ to 45¢. The company has about 174.7 million shares outstanding and 229.2 million fully diluted.
Daniel Greenspan of Macquarie Capital Markets in Toronto has an "outperform" rating on the stock and a 12-month price target of 50¢ per share.
"Oceanic remains a compelling, early stage iron-ore development story," Greenspan writes in a note to clients. "The positive prefeasibility study is an important milestone . . . which helps de-risk the technical aspects of development. We continue to believe that over the medium to long-term, production in the Labrador Trough will migrate further north. And with its low operating expenditure estimate reflecting the location close to tidewater and the low strip ratio, we believe Oceanic is in a good position to develop Hopes Advance relative to its northern peers."
Gary Lampard of Canaccord Genuity also has a target price of 50¢ on Oceanic, and holds a "speculative buy" rating on the stock.
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