Black Iron provides "compelling" investment opportunity, says RBC Capital Markets

Black Iron (TSE:BKI) has received an initial "outperform" rating and $1.50 price target from RBC Capital Markets. Tuesday afternoon, Black Iron was trading at $0.62.
In a research note, RBC Capital analyst, Robin Kozar, said: "Given the existing iron ore resource, the benefit of existing infrastructure, further resource growth potential, the strong management team and relative valuations, we believe Black Iron provides a compelling investment opportunity at current share price levels.
"Black Iron provides investors with superior leverage to long-term iron ore prices, and based on our valuation analysis, is trading at attractive levels."
Kozar believes that management is "experienced and capable of executing its strategy" and will be successful in developing the Shymanivske iron ore project.
Black Iron is an early-stage iron ore exploration and development company focused on assets located in Ukraine.
The company has two 100 percent-owned projects: the flagship Shymanivske iron ore property and the Zelenivske iron ore property located a few kilometres south of Shymanivske.
Shymanivske contains 345 million tonnes of measured and indicated resources (31.8 percent iron) and an additional 469 million tonnes of inferred resources (31.1 percent iron).
Ukraine contains roughly 10 percent of the world’s known iron ore reserves, making it the fourth largest iron ore reserve base in the world behind Brazil, Australia, and Russia, according to the US Geological Survey.
A recently completed Preliminary Economic Assessment outlines, as its base case scenario, an operation producing 7.3 million tonnes of pellet plant feed per annum for 28 years at an average cash cost of $52 per tonne. This would yield 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.
Development capital expenditure was estimated at $896 million in the study, with production start-up targeted for late 2015.
Black Iron is also contemplating the construction of a pelletizing facility, which would result in Black Iron selling 7.6 million tonnes of iron ore pellets per annum for 28 years at a cash cost of $64 per tonne.
Total capex for the pellet production alternative was estimated at $1.571 billion, or $675 million more than the pellet feed base case scenario.
RBC Capital said that with ongoing drilling at Shymanivske, and exploration upside at the nearby Zelenivske property, the company has "excellent" resource growth potential.
However, the RBC analyst expects the permitting process at the project to take longer than expected "given typical bureaucratic delays" in Ukraine.
As a result, the analyst expects construction on the Shymanivske project to commence in the first quarter of 2014, with production start-up to begin in the second half of 2016.
RBC Capital's Kozar believes that Black Iron may become an acquisition target as it "continues to de-risk its flagship Shymanivske project".
As for potential suitors, ArcelorMittal (NYSE:MT) has iron ore operations nearby and purchased the Krivoy Rog integrated steelmaking complex for $4.8 billion in 2005.
Other strategic buyers could include companies looking for large, long-life resources or to diversify supply away from Australia and Brazil, or other mining companies interested in purchasing an early-stage iron ore project, Kozar said.
While a near-term acquisition is possible, RBC Capital's Kozar believes it is much more likely for a potential suitor to emerge as the Shymanivske project is further advanced and de-risked over the next six to 18 months.
Black Iron recently 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 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 is drilling at the northern end of Shymanivske, with 20,000 metres expected in the next year.