Below is a breif overview of BCI with a valuation at the end. Just to add, 82% of the stock is owned by the top 20 shareholders who are holding their shares tight. Because of a lack of liquitity, BCI can't attract funds to invest. The share price jumps around due to a lack of volume, but doesn't represent it's real value in my opinion. Behind the curtains, the two biggest shareholders -- Palmary Enterprises (ConsMin) and Regent Pacific are grabbling for control of the company or trying to obtain the most amount for their stock. There's currently a stalemate between the two entities. In my opinion, these two entities could control as much as two thirds of BCI in retail and institutional shares. Obviously this causes a liquidity problem if my hunch is true.
Please understand the following is not meant as financial advice :)
BCI OVERVIEW ~
BC Iron Limited is an iron ore producer and exporter based in the Pilbara region of Western Australia. The company’s core asset is the Nullagine Iron Ore Joint Venture (NJV or the Project) a 50:50 joint venture with Fortescue Metals Group (ASX: FMG).
The company owns 100% of BC Iron Nullagine Pty Ltd. BC Iron also owns 100% of the Bungaroo Project, which comprises five granted Exploration Licences (E47/1887 1891), which are located within the Robe River drainage system in the West Pilbara. The Bungaroo Project sites are all close to the existing Rio Tinto rail system, and the proposed rail and Anketell multi-use port.
DELETERIOUS ELEMENTS (DE)
Iron grade is important, but the grade of the other elements is also very important. It is frustrating that the ASX does not enforce the reporting of the other elements, called Deleterious Elements (DE) such as silica (Si02), alumina (Al203), phosphorus (P), sulphur (S), and loss on ignition (LOI). Several other elements can also be considered DE but the ones above are by far the most common.
Silica and Alumina are DEs that affect the blast furnace. Phosphorous and sulphur affect the quality of the steel. Phosphorous is especially bad as it makes steel brittle. Sulphur in high amounts makes the material 'spit' in the furnace.
Different DE's will separate from the material at different heat levels. Carbonates and crystallized water will burn out of the material at low to moderate heat levels (sub1000 degrees). However, the heat level required to separate silica and alumina from the iron in a blast furnace is much higher. Normal coal cannot be used in the furnace for this process because it doesn't contain enough carbon. Only coking coal contains the high carbon required for blast furnaces to release the silica and alumina from the iron.
Phosphorous cannot be removed from the material in a blast furnace.
Steel makers can blend different ores with different DEs to achieve a proper blend for their furnace. The usual specifications they are after for furnace feed is <2.5% Al203, <5.5% Si02, (or Al203 + Si02 <8%), <0.07% P, and <0.1% S.
LOI needs to be low for lump ore but can be high for fines ore, as the crystalized water and carbonates are burnt off in the sinter process. This results in an upgrading of the iron content!
If an ore falls outside these specs, it can still be sold, as steel mills normally blend ores from different sources to achieve the desired feed grade. However, the buyer may require a discount for the DEs.
High P ores, that is any over 0.07%, can be a problem to sell and have to be sold at a discount. Pilbara Blend is a RIO product at 0.10% P, but it can be used as a sinter feed blend. Higher P can be sold but only in small consignments as the mills have to use low P ores to blend, which means holding stocks of high P ores, which costs money. Ore of 0.15% P grade may be discounted as much as 10-25%. Some people talk about ‘de-phossing’ but this can only be done by acid leach or alkali-leach, and is obviously much more expensive. Some Chinese ores are >1% P, so they are obviously working on it.
LOSS ON IGNITION (LOI)
LOI is the amount of crystalized water and carbonates burnt out of the mass during the sintering of the fines material, resulting in an iron content upgrade. Sintering converts the iron to calcined iron by heating the material to 1000 degrees.
The highest LOI figure in the Pilbara is BC Iron’s Bonnie East with a LOI of 12.5%, followed by Outcamp at BC Iron's Bonnie Creek CID at 12.3%.
KEY POINTS: PRODUCT & SALES
The nominated grade for JORC is 57% Fe. At the moment BCI is exporting from the Outcamp mine at 57.5% Fe with an LOI figure of 12.3%. Post-sintering CaFe blast furnace feed is 65.6% calcined iron.
Calculation for Bonnie fines (BCI):
1000Kg minus 123Kg (Carbonates and Water) = 877Kg (post-sintering).
575Kg (Iron content) divided by 877Kg = 65.6% CaFe.
Because of this extremely high CaFe grade. BCI's Bonnie fines are linked to CFR62 - which is mainly meant for lump producers and not CFR58 - which is meant for fine ore producers. The fine ore benchmark is Yandicoogina fines with a Value in Use of 100. Being the benchmark most fines producers receive a discount to this rate. BCI however, due to the fact it has a higher CaFe grade (thanks to it's ultra high LOI)and low DEs, has been given a VIU of 106.
BC Iron has spoken of potentially selling its lower grade ore of 55% Fe (average blended grade). Asian mills current requirement for a fines product is a minimum CaFe figure of 62%. BCI could sell down to 55% Fe due to BCI's extraordinary LOI figure. In fact, BCI could lower it's Fe figure to 54.5%Fe and the post-sintering figure would still be above 62% CaFe.
Atlas Iron (AGO) is currently exporting ore at 56.5% Fe. AGO cannot lower its Fe figure because AGO has a LOI figure of 9.2%. AGO would fall below the required 62% CaFe if it lowered its Fe figure any further.
BCI's CEO Mike Young confirmed in a BRR interview that he is confident of a buyer for the lower grade ore at 55% Fe. At the 3.18 minute mark:
However, the interview occurred over 21 months ago and Mike Young has made no move on sales of the lower grade ore, nor has an explanation been given about the lower grade stockpile, which remains at BCI's mine. Shaw Brokers research analysts said that they were comfortable with an eventual DSO figure of over 80Mt @ 57% Fe at BCI's East Pilbara mines. In fact, Shaw said that they considered that figure maybe conservative.
Alkane Resources, who were the original owners of the Bonnie Creek CID, stated that they believed there was between 200Mt to 600Mt of CID at Bonnie Creek, depending on the average thickness. Average thickness of 5m ~ 200Mt, 15m ~ 600Mt. However this total resource once averaged would most probably come in at sub 50% Fe. The current CID has a resource of 54.1% Fe. Bonnie Creek is one of three CID's under BCI's licences, the other two CIDs are Shaw River and Nullagine River.
BCI has stated that the ore to waste figure for Bonnie Creek will be 1:1 for the life of the mine. Outcamp and Bonnie East has sub 1:1 ore/waste figures, whilst the Coongan well is above 1:1. This is based on the 57% Fe average. So at present, BCI deems any ore below the blended grade of 57% Fe as waste.
What would be the true ratio at Outcamp if BCI did in fact have a customer for the blended 55% Fe ore as well? Could BCI potentially export most of the CID through blending and simple dry screening? What would be the potential number if BCI could sell down to 54.4% Fe (part of the averaged 55% Fe), bearing in mind that BCI has a current inferred/indicated CID figure of 106Mt at 54.1% Fe? The Shaw figure is a DSO number of 80Mt @ 57% Fe, but this could be much higher. Early results indicate that BCI may well be able to upgrade the 55% Fe material to a 57% Fe grade through dry sceening and therefore also be in receipt of CFR62.
The product from BCI's Bonnie Creek has always been considered by analysts as a boutique product for a niche market. That's because it's has the lowest P hematite in the world. Outcamp Well ~ P 0.014%; Coongan Well ~ P 0.011% and Bonnie East ~ P 0.010%. This is all ultra-low phosphorus product. (WPG has claimed to have the best fines product in the world, and it's true that WPG's Peculiar Knob does have marginally lower impurities than BCI, but WPG is a Magnetite product. Magnetite mines generally have much higher opex costs in comparison to Hematite mines. This makes WPG vulnerable if the iron ore price declines rapidly.) Because BCI’s deposits are in the form of mesas, there is no drill and blast required, rather BCI extracts the DSO by pulverising the rock with surface miners. This is the most cost effective form of mining DSO; the opex for BCI is currently $42 a tonne. BCI claims that if the price of iron ore remains above AUD$60t, Bonnie fines (BCI) are still viable. Having the world's lowest P hematite mine in the world at BCI's Bonnie Creek is the real kicker, and makes the mine virtually recession-proof.
CURRENT & FUTURE PLANS
At the present the official line from BCI management is that production for 2013F is to be 5Mtpa for the NIOJV. That's because that is the offical agreement between BCI and FMG. However, there is a 'sprint capacity' available for the NIOJV for 6Mtpa for 2013F. The ramp up to 6Mtpa has been implemented. At present the crushing plant is delivering at a run rate of 5.8Mtpa, with the Powertrans trucks hauling the same.
Mike Hallowell from BBY stated that he believes that there is a ‘very good chance’ of the NIOJV doing 7Mtpa for 2013F, with the only current bottleneck for FMG being at Port Hedland, with FMG's car dumper. The original intention was that the second FMG car dumper was to come online by year's end. But that date has been brought forward to September with FMG's capacity then increasing from 55Mtpa (at present) to 100Mtpa with the second car dumper being commissioned. It's therefore understandable that some are speculating that the NJV will also increase it's capacity to 7Mtpa just a Mike Hallowell projected.
Moreover, the original plan for BCI before the GFC was a production rate of 8Mtpa. During the GFC, BCI management decided that rather than borrowing excessive capex funds BCI would start at a much lower rate of 3Mtpa, and would pay for ramp-up through revenues, rather than capital raisings or the like. This strategy has worked well for BCI so far, with only 105M shares on issue fully diluted.
However, the mine design hasn’t been changed from the original 8Mtpa plan, which indicates that BCI may achieve this rate in the future, despite BCI’s current production rate being 5Mtpa. So infrastructure that is being implemented at the moment (such as the private road) can easily cope with 8Mtpa. Indeed, why implement 8Mtpa infrastructure if you are never going to use it? Also, this forward planning will allow BCI's future ramp-up costs to be minimal.
In comparison, AGO will need to start from scratch with costly loading and off loading.
VALUATION ~
BC IRON (ASX:BCI)
FORECAST FOR 2013 FY
All figures are in AUD
MRRT - Not included in the forecast due to the high court challenge because the MRRT is deemed unconstitutional. Post the high court challenge, the tax's future will be more certain.
ASSUMPTIONS:
NIOJV - (FMG/BCI 50:50) NIOJV - 6Mtpa 2013FY BCI - 3,000,000tpa 2013FY Bonnie fines - CFR62 Opex - $42t Capex Repayment - BCI ~ $5Mpa (HengHou Industries) Royalties WA Fines- 5.625% Marketing and Native Title - 4.5% Shipping - $8t Company Tax - 30% Average Price for CFR62 for 2013FY - $130t
CALCULATIONS:
$130t (CFR62) minus $8t (freight) = $122t $122t minus $42t (opex) = $80t $80t minus $4.5t (royalties) = $75.5t $75.5t minus $3.4t (market & native) = $72.1t $72.1t minus $1.5t (Admin, Amort & Depreciation) = $70.6t $70.6t minus $1.6t (Capex Repay) = $69t $69t plus $2.6t (Interest bearing on cash reserves) = $71.6t $71.6t minus 30% (Company tax) = $50.12t $50.12t times 3,000,000t = $150.36M (NPAT)
BCI ~ 105M shares fully diluted
PE Ratio of 1 = M Cap $150M SP $1.43 PE Ratio of 2 = M Cap $301M SP $2.86 PE Ratio of 3 = M Cap $451M SP $4.30 PE Ratio of 4 = M Cap $601M SP $5.73 PE Ratio of 5 = M Cap $752M SP $7.16 PE Ratio of 6 = M Cap $902M SP $8.59 PE Ratio of 7 = M Cap $1053M SP $10.02 PE Ratio of 8 = M Cap $1203M SP $11.46
This valuation is not meant as financial advice.
BCI Price at posting:
$2.46 Sentiment: Buy Disclosure: Held
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