Black Iron CEO Outlines Turnaround Potential in Exclusive Interview
January 29, 2018 12:47 pm ET
Some of the best investment opportunities are turnaround plays that arise when uncontrollable factors precipitate a company’s decline. When those issues are resolved, it often takes the market a long time to realize the opportunity, which provides a window for value investors.
Black Iron Inc. (TSX: BKI) is an iron-ore mining company with an advanced-stage project that fits these criteria. After Russia’s invasion of Ukraine, the company was forced to table its project until the situation improved. Three years later, Ukraine has stabilized, iron-ore prices have recovered, and the opportunity is ripe to move the project forward.
Black Iron Inc. CEO Matt Simpson recently sat down with SECFilings.com’s Mike Elloitt to discuss the company’s history and where it’s headed:
Black Iron Then and Now
Black Iron was on the brink of constructing a proposed mine in Ukraine a few years ago, with a full feasibility study and financing in place through construction. One of the largest companies in Ukraine was going to finance half of the project, while one of the world’s largest traders was going to finance the other half via a prepaid offtake agreement. But, an unfortunate series of events unfolded that would derail the project.
Russia’s invasion of Ukraine in February 2014 and a sharp fall in iron-ore prices over the ensuing years caused the company’s top two existing shareholders to drop down and dump their shares. The stock fell from more than C$1.00 to less than C$0.04 by 2016 due to the strong selling pressure and the geopolitical risk kept other financiers at bay. But by mid-2015, iron-ore prices started to recover from their lows of around $40.00 to nearly $80.00 today.
CEO Matt Simpson told SECFilings three factors that have changed recently making it a great time to relaunch the project:
The front-line in Ukraine hasn’t moved in four years and there’s no reason to think that it will move again anytime soon. With greatly reduced geopolitical risk, the company will have an easier time attracting new financiers for the project.
Iron-ore prices have experienced a sharp rebound from their lows reached in early-2015, which means that the economics of the project have dramatically improved from a top-line revenue standpoint.
The exchange rate in Ukraine has significantly lowered its operational costs. At first, it was 8-to-1 with the U.S. dollar, but it has since fallen to 28-to-1 today. This means that the project has significantly lower costs than originally planned.
Excellent Turnaround Opportunity
Black Iron shares moved significantly lower in 2014 after it was forced to pause development of its Ukraine project. Only very recently in December 2017 the company came out with revised economics to get investors excited about this opportunity again.
“This is a really great turnaround opportunity for investors,” said CEO Matt Simpson to SECFilings. “We have a solid management team that had brought this project to the brink of construction previously. And, the only reason why the share price is so low is because, when Russia invaded Ukraine and the iron ore prices fell, our two largest shareholders, which controlled about 65% of the share count, just dumped their shares. So, we went from a pretty high market cap all the way down to a market cap of around $10 million and a $0.04 share price. And there wasn’t really much I could do to defend that. But very late last year, about mid-December, we put up new economics on the project … and they’re spectacular.”
Simpson estimates that the company could conservatively generate a 36 percent after tax internal rate of return with a long term iron ore price of $62.00 per ton. Today iron ore is selling for ~$75 per ton resulting in even greater investment returns. When reasonable leverage (debt financing) is applied and using today’s actual selling price, these returns could increase to around 65 percent, making the project extremely attractive. The company has already floated the new economics to potential investors and several companies are under a non-disclosure agreement (NDA) considering investment.
Black Iron Inc. (TSX: BKI) represents a potential turnaround opportunity that’s ready to move into production as a producer of high-grade, premium iron-ore. The conventionally-quoted iron-ore price is a 62 percent grade product sent to China, but the company’s project would produce an ultra high grade 68 percent iron content product that could generate a $40 per ton premium. In addition, this premium grade product reduces the amount of emissions generated when making steel resulting a more environmentally friendly and sustainable feedstock. With all major infrastructure including railway, power lines and port in very close proximity to the project and highly skilled relatively low cost labour only 6 miles from site, Black Iron is poised to start construction of this project.
For more information, visit the company’s website at www.blackiron.com.