Black Iron posts "impressive" PEA for Shymanivske, showing 42.1% IRR, and $3.0bln net present value

Black Iron (TSE:BKI) announced early Monday the results of its preliminary economic assessment (PEA) for its Shymanivske iron ore project in Kryviy Rih, Ukraine, indicating a low cost pellet plant feed operation with a projected high value and net cash flows.
The preliminary report, completed by BBA of Montreal, Quebec, considered two production scenarios over a 28 year mine life, the first being a 7.3 million tonne per year iron ore pellet plant feed, and the second being a production alternative for producing 7.6 million tonnes per year of iron ore pellets.
The first option dictates a projected 42.1 percent internal rate of return (IRR), with a whopping US$3 billion net present value, at an 8 percent discount rate. Total capital costs came in just shy of $900 million, with a payback period of 2.2 years, and an estimated operating cost for the average initial 20 years of $52.40 per tonne.
The iron grade of the final product from the pellet plant feed is to be 67 percent iron, the report said, compared to the benchmark grade of typically 62 percent, said the company on a conference call Monday, with every one percent of grade adding $5 per tonne to the product. Iron ore is the raw material used to make pig iron, which is one of the main raw materials used to make steel, and is therefore one of the most integral commodities to the global economy.
The second scenario for Shymanivske outlines the option to produce a higher margin pellet product of 65 percent iron grade, generating a much higher net present value of US$4.1 billion at the same discounted rate, but with a reduced 35.2 percent internal rate of return, due to raised construction costs, Black Iron said.
This alternative option sees a slightly higher output rate of 7.6 million tonnes per year, and a pellet sales price premium of $35 per tonne, but operating costs over the initial 20 years are projected at $64.15 per tonne, with estimated total capital costs of $1.57 billion and a payback period just under three years.
The company said that it plans to construct the mine and concentrator to produce pellet feed for start-up in late 2015, and use cash generated from operations to potentially construct a separate pellet plant, or rather increase pellet feed production and double existing capacity three to five years after start of initial output.
The final product, Black Iron said, will be dependant on the needs of its future offtake partner, and will therefore be decided once an agreement is signed.
Average annual cash flows for the first 20 years are pegged at $382.8 million for the pellet feed operation, versus  $540.7 million for the pellet production case.
"The operation outlined by this PEA for the Shymanivske Project indicates the potential for a high value, low net cost iron ore development project," said president and CEO, Matt Simpson.
"The projected high NPV, net cash flows, and relatively low unit cost for pellet plant feed arise from Black Iron's advantages, including an iron ore deposit with significant infrastructure (existing railway, power lines and port) and access to skilled labour.
"Our results to date, coupled with this engineering study, make a compelling case for expediting the development of the Shymanivske Project."
Indeed, the company said that the operations outlined in this PEA are projected to generate over US$856 million in average annual revenue over the first 20 years of mine life for the pellet feed scenario, and over US$1.15 billion in the alternative option.
The location of the Shymanivske project is ideal, as it is surrounded by seven other iron ore mines, including ArcelorMittal's iron ore complex, and it is nearby key European and Turkish customers.
Based on metallurgical work completed for the report, the process weight recovery of 29.6 percent would yield a project life of about 28 years with the current estimated NI 43-101 compliant resources, which stand at 345 million measured and indicated tonnes grading 32% iron, and an additional 469 million inferred tonnes grading 31% iron.
Black Iron said it is working to improve both technical and metallurgical aspects of the project, as part of a feasibility study that will begin once the PEA report is finalized. Work to further streamline and simplify operations, as well as reduce mining and concentrator costs for the pellet producing option, is expected to lower capital costs.
The company's COO, George Mover, added: "Through the process we gained considerable insight into potential opportunities for further improvement in the already attractive overall potential economics, including an increase in weight recovery and the simplification of the process flow sheet.
"These opportunities...should further reduce the capital and operating costs. The relatively low unit operating cost of production coupled with close proximity to Turkish and European customers, means this operation has the potential to remain profitable despite any fluctuations in the iron ore price as both demand and supply increase in the future."
Last week, the company received a favourable court ruling allowing it to resume drilling activities at the project.   The Dnepropetrovsk District Administrative Court ruled in favour of the company with respect to a temporary suspension of activity at the site, imposed by the Dnepropetrovsk Region Ecological Inspectorate.
Following the decision, the company has already started its first definition and exploration program, which is aiming to upgrade and increase the size of the resource at the property to 1.0 to 1.8 billion tonnes at a grade of 28% to 32% iron, including the nearby exploration permit located adjacent to Shymanivske, known as the Zelenivske project.
With a successful exploration and definition drill program the company expects to be able to support increased production scenarios, which would further increase the already strong project net present values, Black Iron said.
The iron ore explorer will be drilling at the northern end of Shymanivske, with 20,000 metres expected in the next year. However, Black iron cautioned that further drilling is not necessary for its mid to late 2015 production target, and if markets continue to falter, drilling could be scaled back to conserve cash. Assay results are anticipated to flow out in the next four to six weeks.
CEO Simpson concluded that with an "impressive" 42.1 percent IRR for the pellet plant feed scenario, there are "substantial opportunities" for share price appreciation, given Black Iron's current market cap of over $115 million.
Shares of the iron ore company were up 1.22 percent in early morning trading Monday, to $0.83 as of 9:33am ET.