I have done a lot of research on these guys over the past couple of weeks and just wanted to share some of the results of that research. I like to always start looking at a company in terms of the narrative and then roll that into some numbers to finish off. By ‘narrative’ I don’t mean fairy tale, I mean:-Can we see over x amount of time a coherent flow of progress from point A to point B?
-Are they executing sound strategy and showing astute management?
-Are they hitting their objectives on time and doing what they said they were going to do?
Anyway, from a numbers point of view, this is what I have put into my rough calcs:
I’m focusing on the 20mtpa and the 100mtpa scenario because Vale isn’t mucking around with an 8mtpa operation of DR Pellets, and they certainly wouldn’t muck around with 8mtpa project that only produces Blast Furnace concentrate. Grades used as per below. You can see the metallurgical properties of their product speak for themselves.Before we get into the numbers, it is important to know that in 2013 a PEA was conducted that delivered the following numbers:
7.2bn tonne resource @ 29.% grade
NPV: $7.4Billion CAD @ 8% WACC
Annual production 16.6mtpa
Opex $46.60 per tonne
The report stated the above figures were based off processing 2bn tonnes of the 7.2bn tonne resource and that this would support a 30 year mine life using a pit shell operation, in green, as compared to the total resource which would eventually be mined via a larger open pit model. This report was recommissioned in 2020 by another independent auditor and updated to ensure it was updated for present day prices etc and it was still just as attractive.
In April this year they updated their MRE from 7.2Bn tonnes to 16.6Bn tonnes, grade remained constant. The 2.15Bn tonnes being used in modelling to project the economics on a 30 year mine life project was now also categorised under “Indicated” resource category which further improves the confidence of the resource and any future study results.
Recovery rates used in my calcs were 85.1% for the DR pellets, 97.6% for the Blast Furnace conc, and 10% for the Reverse Flotation conc.
I used the present day Iron Ore price of $104 per tonne as the benchmark price, and for added the following premiums for each Iron Ore product that CLE aims to produce:
-Blast Furnace concentrate at 69.8% Fe content: $139 per tonne ($35 premium).
-DR Pellets at 71.3% Fe content: $154 per tonne ($50 premium).
-Reverse Flotation concentrate at 68.3% Fe content: $129 per tonne ($25 premium).
I also used the $46.6 per tonne figure that has been repeated a few times for Opex estimate.
Scenario 1: 100mtpa phased over 10 years - see diagramabove
Capex:
1 Upfront
.462BN
2 Year 2
$350m
3 Year 5
$400m
4 Years 10 to 30
$3.1BN
Cashflow:
Years 1 to 5: $757m revenue less $250m Opex = $506m per annum
This is made up from 8mtpa ofBlast Furnace concentrate and obviously assumes no ramp-up risk.
Years 5 to 10:
This is made up of 6.15mtpa of Blast Furnace concentrate, 13.43mtpa of DR Pellets and 1.8mtpa of Reverse Flotation concentrate.
Years 10 to 30:
This is made up of 42.9mtpa Blast Furnace concentrate, 50.8mtpa of DR Pellets and 6.7mtpa of Reverse Flotation concentrate. It doesn’t take into account the few million tonne pa of DR concentrate as the sheer scale of these numbers was going to be more than enough to illustrate the opportunity.Punching these numbers into a basic formula with an 8% discount rate yielded the following results:
NPV: $29.556Bn
IRR: 21%pa
Payback period: approximately 7-8 years
CLE 25% holding of Iron Bear: $29.556Bn x 0.25 = $7.389Bn
Typically, we see market cap to NPV ratios of about 0.1-0.3 for early exploration companies who are still heavily risked, have not conducted feasibility studies, have not been through permitting and don’t have any offtake partners or secured funding etc.
And we typically see market cap to NPV ratios of about 0.3-0.6 for advanced stage development plays who are derisked to a greater degree, fully permitted etc. you get the drift.
I’m using a ratio of 0.35 to reflect that Iron Bear is sort of on the threshold of going from explorer to developer because whilst they aren’t permitted, and still await scoping studies due out next year, they have extensive work already being done on the metallurgical aspect proving up the resource and the product, they have produced samples ready to ship to offtake partners, we have two very attractive valuations provided by reports in 2013 and 2020 all of which were based on a resource estimate and grades that have significantly improved in overall size, and quality/grades, plus we have to assess this from the perspective that funding is quite derisked due to non-binding MOU with Vale. Yes it needs to be ratified, but for the sake of looking ahead, we’d base our assessment on the assumption this is locked in because if it falls through, the whole thing is cooked and none of this means sh*t anyway. Either you take a position now and assume it’s a done deal, or you wait until you see the outcome which if positive will give you an entry price that will be multiples higher than the current price, so play your strategy to your own risk appetite.Potential Market Cap: $7.389Bn x 0.35 = $2.586Bn
Current Market Cap: $16m (mightneed a double check on that as a few different sources show different figures).Anyway, this equates to a share price of around $4.00 or 16,000% upside.
Scenario 2: 20mtpa
This is essentially years 5-10 in the first scenario but extrapolated across the full 30 year mine-life.
In this scenario I come up with a figure very similar to what the existing two PEA’s already delivered.
NPV: $7.358Bn
IRR: 19%pa
Payback period: 5 years
CLE 25% holding of Iron Bear: $7.358Bn x 0.25 = $1.84Bn
Potential Market Cap: $1.8Bn x 0.35 = $644m
Share price of around $1 or 4,000% upside.____________________________________________________________________________________________
They’re the numbers, what about the narrative? These guys have really impressed me with how they have turned this company around and the consistent and reliable results they have been delivering even in the face of a severely depressed share price, and what would have been increasing pressure from the prospect of all their work culminating in a stranded asset and the company failing.
To illustrate it clearly, you can look to these slides from the past year:12 months ago
Notable: Pilot Plant ready ahead of schedule and on budget.
April
Notable: MRE delivered late but with significant upside (7.2bn tonne to 16.6bn tonne).September
Their goal at this point has been to de-risk the operation and the asset to enable a potential JV partner to feel comfortable enough to do a deal, as they know that the success of the project is reliant upon striking a deal with a major player who can carry them through to production. With such a unique and high quality product, such players were limited to only 4: Vale, Samarco, IOC, and LKAB. They were only going to have 4 chances at getting something done. Illustrated graphically with the 'strategy on a page' slide you can clearly see steady working through the milestones with positive outcomes and good execution of strategy. We all know what happened next but it's worth pointing out, they are a company who said we 'aim to do xy and z!' And then they went out and did it, and against all odds!October
The hits keep coming with the pilot production run completed, and first world class DR pellets produced confirming the exceptional quality of the ore in the ground. Objective is to start shipping samples to offtake candidates in mid-east and europe by Q2 2025.November
Non-Binding MOU with Vale!
The key catalyst on everyone’s lips is will the MOU be made binding within the 90 day period? If it does, there is not going to be many things standing in the way of this JV and getting to a DTM. Vale will pay up to $120m to get the PFS done. The worst of the best case scenario’s is going to be something like Vale buying out the final 25% earlier than planned which would likely have to be somewhere in the area of $250m, a comfortable 10-bagger. Beyond this we look to 2025 to see shipping of samples to steel producers, offtake agreements signed, PFS completed. Looking at the track record of how things have gone from June 2023, and the astute execution of their strategy thus far, why would we have any doubt that these milestones won't also be checked off (barring any left of centre surprises)?Additional notes for anyone wondering:
-Geology is very favourable with a 0.36 strip ratio (under 1 is considered fantastic). Barely any overburden at all.
-Ore hardness shows BWi 16.7kwh/t and SMC 11.2kwh/t which are average and exceptional respectively and indicate the ore should be favourable in breaking down = less operational costs, less energy requirements, less wear and tear etc. supports low Opex estimates.
-There won’t be a need for a tailings dam.
-There is one other player in the area producing a similar yet still very inferior product in the region: CIA.ASX who produce 11mtpa of magnetite concentrate. They are capped at $4.3bn.
GLTAH & DYOR
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