Are You Capitalizing on Rising Iron-Ore Prices?
February 23, 2018 9:06 pm ET
Global equities have moved off of their all-time highs, with the FTSE Global All Cap Index trading more than five percent lower over the past month. Commodities haven’t fared much better with flat gold prices and a greater than five percent drop in crude oil over the past month. Iron-ore is a notable exception, having risen more than 30 percent off of its October 2017 lows to retest all-time highs on the way to $80 per ton.
Black Iron Inc. (TSX: BKI, OTC: BKIRF) offers investors a unique opportunity to capitalize on the strength in the iron-ore market, both in the short-term and long-term.
Rising Iron Ore Prices
Iron ore prices are revisiting their all-time highs thanks to strong demand and limited supply stemming from China. Last year, the country’s economy grew at its fastest pace in seven years due to rising exports and heavy spending on infrastructure ahead of the Communist Party’s congress. The wider global economic recovery has also translated to higher demand for steel products around the world for building and other applications.
Figure 1: Iron-Ore Price Chart
At the same time, Chinese steel exports have fallen for the 18th straight month through January due to strong domestic demand and new air pollution controls. The government ordered steel companies to cut production in November to improve air quality in about 30 northern cities. The move forced many Chinese ironworkers to leverage higher-quality Australian iron-ore, which led to a nearly 20% jump in iron ore imports in January over the prior month.
Many analysts see these trends playing out well into 2018. On February 9, Goldman Sachs analyst Jeffrey Currie wrote, “we are maintaining our bullish three-month iron-ore target of $85 per ton.” The short-term iron-ore outlook may be bolstered by temporary cutbacks in production and higher demand from one-time infrastructure spending, but the improving global economy could keep long-term prices above the high-$60 per ton range.
Black Iron’s Unique Position
Black Iron was on the brink of building a mine in Ukraine a few years ago, with a full feasibility study and financing in place through construction. In fact, one of the largest companies in Ukraine was going to finance half the project and one of the world’s largest traders was going to finance the other half through a prepaid offtake agreement. Russia’s invasion of Ukraine in February 2014 led to a sharp fall in iron-ore prices and for the deal to fall apart.
The company’s largest shareholders dumped the stock and it moved down from more than C$1.00 to less than C$0.04 by 2016. But, things began to change in mid-2015 when iron-ore prices started to recover from their lows of around $40 per ton to nearly $80 per ton today.
Black Iron CEO Matt Simpson, who was recently interviewed by SECFilings, pointed to three factors that could make 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 anytime soon. With reduced geopolitical risk, the company will have an easier time finding financiers to bring the project back online.
Iron-ore prices have experienced a sharp rebound since early-2015, which has dramatically changed the project’s economics.
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 fallen to 28-to-1 today. This means that the project has significantly lower costs than originally planned.
Simpson estimates that the company could conservatively generate an unlevered 36 percent after tax internal rate of return with a long-term iron-ore price of $62 per ton. When current iron ore prices and reasonable leverage is applied, these returns could increase to around 65 percent, making the project extremely attractive. The company’s management team has already floated the new economics to potential investors and several companies are under an NDA to consider investment.
Finally, it’s worth noting that conventional iron-ore, which is quoted by the NYMEX, has a 62 percent grade. The company estimates that its project would yield 68 percent grade iron ore that could generate a $40 per ton premium, especially if China becomes increasingly selective about the quality of iron-ore it uses to control pollution. The project also has immediate access to all the infrastructure needed and is close in proximity to a highly skilled workforce.
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. Given the recent rally in iron-ore prices, investors may want to consider taking a second look at the stock as it pursues its options with financiers to bring the nascent project back online.
For more information, visit the company’s website at www.blackiron.com.