Black Iron started at "outperform" by AltaCorp, provides "attractive entry point"

Black Iron (TSE:BKI) provides an "attractive entry point" for investors seeking iron ore and global steel production leverage, according to a new research note from investment bank AltaCorp Capital.

AltaCorp has initiated coverage of the Ukraine-focused iron ore explorer with an "outperform" rating and a price target of $1.50, double its current trading level. Black Iron is developing the 100%-owned Shymanivske project and holds an exploration permit for the adjacent Zelenivske property.

In a research note, AltaCorp analyst Maxim Sytchev said Black Iron's equity value resides with two iron ore properties in an active and well-developed iron ore region of Ukraine called KrivBass, which is 300 kilometres away from capital city Kiev, and 70 kilometres away from the city of Krivoy Rog, which has a population of 700,000.

According to its NI 43-101 estimate, Black Iron has 468 million tonnes of inferred resources. Sytchev said that with additional drilling over the next nine months, investors should expect a migration of a portion of this resource into the higher measured and indicated category.

AltaCorp said it sees other sources of resource upside on the horizon that could, in a best case scenario, result in 1.5 billion tonnes of iron ore resource.

Indeed, there is potential for a 20-30% increase in Black Iron's resource estimate on the northern part of the Shymanivske deposit, said the analyst, and drilling in the middle and the eastern part of the ore body could add more resources to the current estimates.

Black Iron's differentiating factor relative to other exploration companies is the geographic location of its assets, which provide access to key European, Middle Eastern and Asian markets, coupled with established infrastructure and attractive cash operating costs due to the availability of relatively cheap and trained labour, AltaCorp said in its note.

The KrivBass region, where Shymanivske is located, has been producing iron ore since the days of the Soviet Union and the Ukraine's iron ore reserves are one of the world's largest, representing some 3% of global production, something Sytchev believes will change over time.

The Ukraine also exhibits a "contained geopolitical profile" in comparison to other companies in its peer group operating on continents such as Africa and South America. Investors should be more comfortable with the perceived rule of law in the Ukraine as the nation makes concerted efforts toward westernization, the research note said.

At this time, the primary near-term concern is the suspension of activity at the Shymanivske property. Although Black Iron announced the temporary suspension of activity at the project in July, the AltaCorp analyst suspects that the drilling program could restart in "a matter of weeks".

The iron ore sector has seen a number of recent M&A transactions, which highlight the appetite of larger producers to augment their production profile and gain greater exposure to global iron ore prices.

Late last year saw Cliffs Natural Resources (NYSE:CLF) acquire Consolidated Thompson Iron Mines for $4.9 billion, while steel giant ArcelorMittal (NYSE:MT) and private equity vehicle Nunavut Iron Ore Acquisition paid out $570 million for Baffinland Iron Mines.

On the horizon, Sytchev is awaiting the results of a scoping study for the Shymanivske project, due around November, as well as a feasability study in October 2012, which could well lead to further upside for the explorer.