A Case for AKO to Make an Extra $100m More Per Year when in Full Production

A couple of weeks ago I shared a link to an announcement from Champion Iron (CIA) about their acquisition of the Pointe Noire pelletising facility - https://hotcopper.com.au/threads/ann-acquisition-of-pellet-plant-signing-of-mou-with-steelmaker.6749251/



This is an initial $2.5m outlay, which will also require significant investment to complete studies for upgrades as well as capital works once the scope of work is understood.

As you can see from the photo above, the site is quite large, and has some existing infrastructure, but the plant has been on care and maintenance for some time, and whether the equipment is usable is still to be determined.

When AKO need to build port facilities for the larger scale operations, they should be able to find land that is suitable and build the pelletising plant for processing raw materials prior to bulk loading onto ships.

Earlier today I posted a comment that referenced the newsletter published by Champion Iron - https://hotcopper.com.au/threads/ann-champion-iron-newsletter-october-2022.7006378/

This newsletter provides some insight in to business case for CIA to consider this undertaking.

This got me thinking about my comment in another thread where I said I would like to see AKO go down this path of vertical integration by commissioning their own pelletising plant.

Anyways, I decided to do a little bit of digging around, and I came across some pretty interesting information that, I think, makes for a pretty compelling business case.

An Iron Ore DistrictIf we refer to page 11 of the "North American Conference Presentation" from 22/06/2022


We can see that there are 6 magnetic anomalies that are hosted on AKO tenements.

The strike at Bekisopa is approximately 6km long, and the strike at Satrokala is approximately 10kms long.

Other significant, but un explored opportunities are BEK_A5, BEK_C and PR35828 anomalies which definitely appear to be longer than the 6km strike of Bekisopa.

30% drilling of Bekisopa has returned nearly 200Mt of iron ore, with the potential for a lot more iron ore to be proved up at Bekisopa alone.

By my non scientific estimation, it looks like there could be more than 40km of strike length across all anomalies in this region that are marked in red on the map.

There is a lot more work to do to verify these other opportunities, but the potential for a significant district is very real.

Pellet Plan Costs
Metso Outotec appear to be the leaders in the development of pelletising plants - https://www.mogroup.com/metals-refining/solutions/sintering-and-pelletizing/

In July of this year they announced "Metso Outotec launches its industry-leading pelletizing plant technology in a new, compact size" - https://www.mogroup.com/corporate/media/news/2022/7/metso-outotec-launches-its-industry-leading-pelletizing-plant-technology-in-a-new-compact-size/

I won't go into the details here, but there are a number of benefits to this new smaller size.

There is a webinar that you can watch that supported that announcement and explains the benefits and changes - https://www.mogroup.com/insights/webinars/webinar-the-future-of-pelletizing-is-3-meters-wide/ or on YouTube

The new plants come in 3 sizes and can offer different configurations and optimisations.



In April of this year Metso Outotec also announced they won a contract to build one of these smaller scale plants in India - https://www.mogroup.com/corporate/media/news/2022/4/metso-outotec-wins-order-for-a-compact-size-iron-ore-pellet-plant-in-india/

"Metso Outotec’s order value is EUR 24 million ($34m AUD / $23m USD), and it has been booked in Metals’ Q1/2022 orders received.

The compact, three-meter-wide travelling grate pellet plant will be installed in Nagarnagar, Chhattisgarh, in central India. The plant, which will produce 2 mtpy of high-quality iron ore pellets is expected to go into production in 2024. (2 year design, build and commissioning)"

DR Pellets
In the Champion Iron newsletter, the company share some details around the prices and premiums achieved from DR pellets.

Key passages from the newsletter:

"Champion entered into a Memorandum of Understanding (the "MOU") to complete a feasibility study with a major international steelmaker, to evaluate the re-commissioning of the Pellet Plant and the production of Direct Reduction (“DR”) Grade Pellets. DR grade pellets are required in the Direct Reduced Iron (“DRI”) steel making method, which utilizes Electric Arc Furnaces (“EAF”) that can reduce emissions by more than 50%, compared to traditional steel making using Blast Furnaces (“BF”) and Basic Oxygen Furnaces (“BOF”)."

"In tandem with this project, Champion is evaluating the potential to upgrade some of its market leading high-purity 66.2% Fe iron ore concentrate to a DR grade pellet feed product.This higher purity product would serve as the primary feed to produce DR grade pellets, which can be converted to DRI and substitute prime scrap and/or pig iron as a source of virgin iron units in the EAFs. Additionally, such higher quality products can contribute to reach the low impurity levels required to produce flat steel products in the EAF."

"While higher purity products, such as DR grade pellet feed and DR grade pellets, play a meaningful role in reducing emissions for our customers, they also attract premiums over the traditional iron ore indices. In fact, DR grade pellets currently attract a US$95/tonne premium above the P65 index currently used as a benchmark for Champion’s 66.2% Fe iron ore concentrate. This premium, which averaged US$44.1/tonne over the P65 index, since the index was created in 2015, also proved to be resilient in cyclical downturns, including the most recent 2015 iron ore price correction. Further to such historical premiums, a recent study completed by Wood Mackenzie examined the projected impact of the steel industry‘s transition to EAF steelmaking in response to meeting required emission reductions by 2050. This transition is expected to trigger an increase in demand for DR grade pellets of more than 500%, representing a potential supply shortfall of nearly 350Mtpa."


So from what I understand is that 65% grade DR pellets realise a premium of ~$44 USD/T on the 65% price.

Given I don't have the exact numbers, and the numbers CIA seem to be achieving are higher than what I am seeing for the 62% and 65% price, I will use a fairly standard calculation using conservative numbers.

62% IO = $95/T as per https://www.marketindex.com.au/iron-ore


The Math
Lets assume that each 1% above 62% achieves a $10 premium (I think CIA are achieving a $15 premium, but I can't be sure).

This gives us a $30 premium for 3% above benchmark 62% price for a total of $125/t

Now I do not know how much "weight" is lost from the pelletising process, but let's assume there is 10% loss / waste from this process.

This is not for the DSO ore, but the full scale plant.

If we are planning to create a 10Mt plant, and we have a 30% recovery rate, we should produce ~3.5Mt per year.

If we lose 10% of this from the conversion process, we would produce ~3.1Mt of DR pellets per year.

3Mt of DR pellets at a $40/t premium would result in an additional $120m in revenue per year.

Of course there would be operational costs associated, and I imagine it would be quite an energy intensive process, but as per the EUR 24 million ($34m AUD / $23m USD) example above, the return on investment / business case could be quite compelling.

It could also mean that the per tonne shipping cost would deliver a higher margin, as less "waste material" is transported as the iron ore had already been processed.

Summary
As mentioned, these are comparisons to Champion Iron - whose share price was similar to ours 6 years ago.

There is also the post I did about the cost of wages for AKO staff in Madagascar compared to CIA staff in Canada, which had about $100m in increased profits - https://hotcopper.com.au/threads/ako-general-discussion.6779410/page-138?post_id=63619825

All of these factors and opportunities point to a very compelling business with the potential for a sector leading EPS despite the fact that it may not be the lowest cost or highest volume producer.

DSO > Very High Grade > DR Pelletisation > Lowest staffing costs > Massive opportunity.

It is a very long way between now and full scale production, but the path could be extremely lucrative if my research turns out to be even 75% accurate.