Monday, 3 December 2012

Ukrainian economics set to positively impact Black Iron


Economic dynamics in the Ukraine are set to position Black Iron (TSE:BKI) as among the top developers in the iron ore sector. 
UBS recently has taken a closer look at fellow Ukrainian-focused Ferrexpo (LON:FXPO) and sees no reason to change its positive stance on the Swiss iron ore producer.  The company operates a mine and a processing plant near Kremenchuk in Ukraine, an interest in a port in Odessa, and a sales and marketing company in Switzerland and Kiev. 
UBS analyst Myles Allsop notes that while Ferrexpo is set to increase pellet production at its Ukrainian asset by more than 10% per annum in fiscal 2013/14 to 12m tonnes, “the capital intensity of the growth is below average and execution risk low, being brownfield.”
UBS expects iron ore prices to fall from 2014 but Ferrexpo can partly mitigate the effects of this with improved product quality and lower freight costs, Allsop argues.
“FXPO is in the lower half of the pellet cost curve, but could be the lowest-cost producer if the UAH [Ukrainian hryvnia] devalues the US dollar as expected by our economics team,” the Swiss bank’s mining analyst predicts.
UBS, with a target price of 345 pence for the stock, sees a UAH devaluation as a potential material positive share price catalyst over the next four months and ascribes a more than 10% upside risk to consensus 2013 earnings per share forecasts.
The same dynamics could also bode well for iron ore development company Black Iron, whose main Shymanivske iron ore project is located in Kryviy Rih, Ukraine. Last month, the company released a bankable feasibility study for the asset, projecting a whopping pre-tax 45.9% internal rate of return (IRR) and a net present value of US$3.5 billion. 
Completed by WorleyParsons Canada Services and two other firms, the feasibility report outlined a 16-year mining operation producing 9.2 million tonnes per year of high grade 68% iron ore concentrate -  “well above” the benchmark of 62.0 per cent.
Total capital costs, excluding sustaining capital of US$689 million, were projected at $1.09 billion. VP of corporate development Aaron Wolfe told Proactive Investors that on a capital sensitivity basis, capex actually went down when compared to the preliminary economic assessment - saving about $4 per tonne, as the new study is supporting 26% more production. 
The total average operating costs over these 16 years were calculated at $43.97 per tonne, compared to a sale price of around $120 per tonne today, with average annual cash flow seen at $593 million. 
"There are some real significant margins there. The iron ore price would have to go down below the $60 range for us not to break even. I haven't seen anyone predict prices that low - it is a very robust model," Wolfe said at the time. 
The Shymanivske property is surrounded by existing infrastructure, including access to power, rail and port facilities, which the company has said will allow for a quick development timeline to production. 
Two operating mines - ArcelorMittal’s Kryviy Rih iron ore complex and YuGOK, owned by Evraz and Smart Holding - are essentially adjacent to Black Iron’s asset, and have been successfully producing concentrate for years.
The project has proven and probable reserves of 448.2 million tonnes at a grade of 31.1% iron and a measured and indicated resource of 645.8 million tonnes at 31.6% iron. Physical construction of the mine is set to begin in the latter half of next year, with plant start-up and commissioning projected for the fourth quarter of 2015. 

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