London Mining – serving the steel industry

It’s been a busy few weeks for London Mining (AIM:LOND) since they listed on AIM at the beginning of November. With US$230 million in the bank, the company chose not to raise capital on listing, and the 37 million shares now in the hands of some thirty London-based investors were placed with them by existing large holders of the stock at a price of £1.92 per share, implying a market capitalisation of £210.7 million. 

London Mining’s strategy is that of acquiring and rapidly developing mines to serve the steel industry: mines which are in good locations - both in terms of prospectivity and proximity to customers - with good existing or potential infrastructure and logistics, and which offer good opportunities for modular growth and on-going optimisation. The company has a pipeline of coal assets, but is currently focused on four key iron ore or projects, in four key regions of the world: Sierra Leone, Saudi Arabia, Greenland and China.

Already producing is the Chinese venture. London Mining and their parther Wits Basin Precious Metals formed a joint venture company last spring - China Global Mining Resources (CGMR). Their first purchase was the Xiaonanshan (XNS) iron ore mine and the Sudan processing plant in Anhui and Jiangsu Provinces in a deal which CEO Graeme Hossie believes was the first acquisition of its kind in China. The mine is cash flow positive, and generated US$3.7 million of profits and management fees for London Mining in the September quarter. At the end of the quarter, revenues were running at $71 per tonne of concentrate, versus costs of $40, with few logistical expenses, as the output is largely sold at the mine gate. However, cashflow is not the only benefit of the joint venture, as the company view it as a platform for the establishment of customer relationships not only domestically for the output of CGMR, but also on a wider strategic level which will benefit their other mines around the world.

Output at XNS is currently running at approximately 30,000 tonnes per month of 62% Fe magnetite concentrate, but plans are afoot to raise productivity with the aim of generating increased production as quickly as possible. This is what London Mining’s highly skilled technical team who are advising CGMR are good at – taking an underperforming mine and turning it around speedily. XNS will be no exception. An additional driver for expansion is the enlarged licence recently awarded to CGMR by the local Land and Resources Bureau, which takes in surrounding mines as well as XNS. The intention – which has government support - is to consolidate the region by combining a number of small mines, and to that end CGMR have signed an MOU to purchase two adjacent mines, Sanbanqiao and Guqiao and an associated 0.3 mtpa processing plant. Within 2 years, the consolidated entity should be at least a 1 mtpa operation with a 10-15 year mine life.

CGMR are also seeking other opportunities for expansion in China, and already have a conditional option to acquire Matang, a further local iron resource. The medium term plan is to list the joint venture via an IPO in Hong Kong to raise the necessary funds.

Of the development assets, first off the blocks will be Marampa in Sierra Leone, where an enlarged licence area and a package of fiscal incentives has just been approved by the Cabinet. Marampa was Sierra Leone’s leading iron ore mine for over 40 years prior to closure in 1975, and the intention is to bring it back into full scale production. Phase I -  the exploitation of tailings from previous operations - is being fast-tracked into production by early 2011, at the rate of approximately 1.5 tonnes per annum of 66% sinter feed, using a simple and inexpensive process route.

This first phase, currently commencing construction, will cost approximately US$85 in total including working capital requirements, and can be funded internally. Drilling of both the tailings and the primary hard-rock orebody will establish JORC-compliant resources, due imminently for the tailings and by Q2 2010 for the main orebody. Resumption of open-pit mining in Phase II will be financed by cash flow from Phase I, and a BFS is scheduled for 2011, with construction commencing the following year, to raise total production to more than 3 mtpa by 2013. 

Logistics at Marampa are simple. Existing tarmac roads have been augmented by a short 17 km section of new road taking Marampa’s output straight to a 60km river barging operation which links to a ship loading facility off Freetown. Forecast prices for the sinter feed, if sold in Europe, are at a premium of $3 per tonne over Itabara fines vs. costs of $32 per tonne of dry concentrate. However, Europe is not the only market in view: the company have held talks with major Chinese metals and ore traders and there is a possibility of co-operation and perhaps joint venture arrangements if these discussions progress.

Further downstream are the iron ore development projects in Greenland at Isua, and at the 50% owned Wadi Sawawin in Saudi Arabia. Recently announced JORC compliant resources at both projects credit Isua with 574Mt at 37% Fe, around one quarter of which is at Indicated status, and at Wadi Sawawin the total resource is 230Mt at 41% Fe, of which two thirds is Indicated, with a further in-house exploration target of 80-120Mt grading 38-42%. Further drilling is planned to incorporate this target during 2010.

Wadi Sawawin, a strategically important project for Saudi Arabia which has undergone decades of development work in the past, is located 52km from the Red Sea port of Duba in Saudi Arabia and is held through Saudi London Iron Limited, the Saudi joint venture company owned 50:50 by London Mining and the Saudi Arabian National Mining Company. The first development phase, on which a bankable feasibility study has just been completed - is the construction of an open pit mine and crushing facility on-mine, with beneficiation and pelletising facilities on the Red Sea, adjacent to deep-water port facilities, power and desalination plants. The intention is to produce - from 2013 - 11.6 million tonnes per annum (mtpa) of concentrate suitable for a 5mtpa DR pelletising operation. Total capex is calculated at $2 billion – although this would reduce to $1.6 billion should the power and desalination plants be built and controlled by a third party. Operating costs are forecast at $47.44 per tonne of pellets, or $58 if power and water is bought in from the said third party, against a long term forecast selling price of $119 per tonne FOB Red Sea. Proximity to its likely markets means reduced shipping costs for customers which will give London Mining a significant competitive advantage.

The company believe that the long-term price for DR pellets is likely to rise to $134 and, according to an in-house study, such an increase would raise the current project NPV from $225 million (assuming ownership of power and desalination plants) to $668 million on the same assumption. If a third party supplies power and water, these figures rise to $282 million and $734 million.

The BFS is based on a mine life of 14 years utilising present resources, but the company believe that after further exploration Wadi Sawawin will comfortably support a 20 year minelife at double the initial output. The in-house study reveals that capex intensity and opex could be significantly reduced by the construction of a 10Mtpa pelletising operation, resulting in a project NPV of $1.127 billion. If pellet prices should rise according to the company’s expectations, this would increase to $1.775 billion. 

The location is ideal for the seaborne markets, and has been specifically planned to take advantage of the forecast undersupply of pellets for Direct Reduction Iron plants in the Middle East and North Africa (MENA). One of the leading industry consultants, CRU Strategies, has estimated that demand in the MENA region will reach 43Mt in 2013 – by which time there will be a 17Mt deficit of demand over supply - and 62Mt in 2019.

Accordingly the operation is likely to be scaled up, to double the output from Wadi Sawawin by 2017, and the ultimate aim is to produce up to 20mtpa of DR pellets through further development of additional Wadi Sawawin licences or by potentially taking feed from the Isua project in Greenland as well as from Wadi Sawawin,

Whilst Wadi Sawawin and Isua are both funded up to BFS – due next year for Isua - finance is now being sought to take both projects through to production. The SLI joint venture expects to raise financing to build the Wadi Sawawain project through a combination of funding from local sources (including the government-led PIF and SIDF), commercial debt and the provision of offtake arrangements in exchange for an equity stake.

Taking production from its current level of under 0.4mtpa to the 24mtpa planned for these four key projects by 2018 looks like an ambitious target. But any scepticism should be moderated by the company’s performance in Brazil, where they bought an under-performing, family run iron mine for $65 million, spent $32 million on turning it around inside 12 months, and sold it to Arcelor Mittal for $810 million. This takes vision, determination, and high quality technical skills, all of which London Mining possess in abundance. They’ve done it once, and Graeme Hossie is convinced they can do it again – and again – and again…http://www.proactiveinvestors.co.uk/companies/news/11859/london-mining-serving-the-steel-industry-11859.html