More evidence that we might end up with a JV Partner type arrangement after African Minerals received $1.5Billion from Shandong Iron and Steel and entered into a JV arrangement!
If Hanlong doesnt improve on their offer to a level that Mr Jones and SUndance is happy with, we'll be in West Africa for a while yet! :)
Cheers Nectar
Wednesday, August 10, 2011 China still craves African iron ore
August09, 2011 By Martin Li
African Minerals has secured a major slug of Chinese financing for a key project and other African miners look well placed to benefit from similar deals, which underpin the value and viability of projects and should make the sector an increasingly attractive investment prospect.
African Minerals has concluded its agreement with Shandong Iron & Steel that will see the Chinese group invest $1.5bn (�0.92bn) in African Minerals' Tonkolili iron ore project in Sierra Leone. In return, Shandong will secure a 25 per cent shareholding and a guaranteed supply of iron ore at discounted prices. Completion remains conditional upon receipt of Chinese regulatory approvals, which it is hoped will be received no later than 31 December 2011.
Chinese demand for steelmaking materials has remained keen in recent years despite worries over its attempt to cool its economic growth and wider macroeconomic issues - particularly those affecting developed economies. This has spurred a raft of new projects in Africa that could swell iron ore output by over 500 million tonnes per annum (mtpa) by the end of the decade, according to research by RBC Capital Markets.
Not all these projects will make it into production and investment can be risky (read John Meyer's cautionary broker's view), although there are clear indicators highlighting the projects most likely to succeed. African politics and tax/royalty stability aside, the most important factors are the grade (concentration of metal in ore) and purity of the iron ore and how much infrastructure exists to transport it to market.
What they're looking for
Most iron ore is mined from haematite or magnetite deposits. Haematite, such as from Rio Tinto's and BHP Billiton's massive operations in Australia's Pilbara, is preferred because of its high grade (over 60 per cent) and low impurities. Magnetite deposits are generally lower grade (closer to 30 per cent) and have higher impurities. In order for magnetite to be used in most furnaces, it needs to be upgraded to increase the grade and reduce the level of impurities.
Upgrading costs are high, which can harm project economics. On the other hand, the occasional existence of weathered caps on top of deposits can give miners directly shippable products � 'direct shipping ore' or DSO - that can be sold without processing. This can provide quick cash flow that can substantially improve project economics.
One of the strongest indicators of success is securing major foreign investment, most commonly from China, to underpin capital investment that can often run into billions of dollars. Commenting on recent African Mineral's recent deal, Michael Starke, a mining analyst at Edison Investment Research, said: "I think we are only just beginning to see the full extent of China's role in the development of Africa's untapped mineral wealth. The Chinese typically first get involved (with relatively limited or "option" style investment) at the scoping or feasibility stage in order to make the most of the vendor's project knowledge and experience. However, we are increasingly seeing Chinese companies taking direct and significant stakes at the project or company level once they have progressed through some form of initial feasibility."
African iron ore deals
African iron ore deals Date Owner Key asset Location Acquirer Interest Consideration May 2008 Mano River (now Afferro) Putu Liberia Severstal 61.5% $37.5m Nov 2009 Zanaga Zanaga Rep of Congo Xstrata 50% $50m Jan 2010 African Minerals Tonkolili Sierra Leone China Railway Materials 12.5% $167m Mar 2010 Rio Tinto Simandou Guinea Chinalco 47% $1,350m Aug 2010 Bellzone Mining Kalia Guinea China International Fund Production rights $1,200m Jul 2011 African Minerals Tonkolili Sierra Leone Shandong Iron & Steel 25% $1,500m
It's a deal
The Shandong deal is a perfect example of increasing Chinese investment in African iron ore projects. This follows closely behind Australia-listed Sundance Resources receiving a takeover offer from its largest (18.6 per cent) shareholder, Hanlong Mining Investment, a subsidiary of Sichuan Hanlong Group.
The offer values the iron ore explorer at A$1.44bn (�0.92bn) and hasn't yet been recommended by the Sundance. The board is continuing to talk to other potential partners about possible joint ventures, financing and sales agreements to develop its Mbalam iron ore project that spans the border between Cameroon and Congo. This project is expected to produce 35 mtpa of high-grade haematite, with first production targeted for the end of 2014.
Sealing the Shandong deal took African Minerals many months longer than expected as a result of protracted due diligence, although Shandong's investment not only confirms the financial viability of Tonkolili but (along with the offer for Sundance) de-risks other African mining projects, most notably Bellzone Mining's Kalia iron ore project. Bellzone and its partner China International Fund (CIF) are together developing Kalia, which though smaller than Tonkolili's massive 13bn-tonne resource is substantial at around 6bn tonnes. Initial production is targeted of some 20 mtpa starting in 2014 and is expected to increase to 50 mtpa in 2018.
CIF has agreed in principle to finance most of the required infrastructure for Kalia. This will involve $2.7bn to develop rail, port and associated infrastructure, in addition to which, CIF will present a commercial financing package to Bellzone for its share of the estimated $1.2bn of mine development costs. In return, CIF is granted first refusal over all of Kalia's output at market prices.
Additionally, Bellzone has secured a 50 per cent interest in the Forecariah iron ore joint venture, also in partnership with CIF in Guinea. This has the potential for DSO and should be in production in early 2012. Cash flow from Forecariah and CIF's capital contribution are expected to be sufficient for Bellzone to take Kalia through to production.
Another company to have its prospects underpinned by the recent deals is Zanaga Iron Ore, which is developing a project in Congo that has a current resource of 4bn tonnes with significant scope for increase along the length of mineralisation and at depth.
SDL Price at posting:
45.0¢ Sentiment: LT Buy Disclosure: Held
