Some simple MathThe NPV set out in scoping study is...

Some simple Math

The NPV set out in scoping study is US$9.79B.

Assuming that is the value of the project and Vale buy out CLE's 25%, then that is US$2.45B or AUD$3.5B (at USD/AUD $0.70).

Let's assume that there will be 1.6B shares on issue at that time (being current shares, plus options and a few for staff rewards etc.).

That equates to $2.19 per share.

I know that Vale have not yet made that decision to mine yet, so ....

What's the risk?

When considering the usual risks of can a company build a mine, I look at things like access to power, water, rail and port, as any one of these can be a deal breaker. Iron Bear has ticked these boxes. Further, if Vale thought that there was an obvious deal breaker, they would not be spending US$18M for Phase 1.

Another consideration is geopolitical risk - and I think mining is relatively safe in Canada.

I also look at the product and potential future supply and demand considerations. In this respect, Iron Bear is not just an iron ore deposit, it is a magnetite deposit capable of producing high purity iron (which Canada lists as a critical mineral - and Australia should too). High grade low impurity iron is required to make green steel (note that 65% hematite ore is not high enough for electric arc furnace feed stock and not currently suitable for green steel in commercial scale processes). Therefore, the product from Iron Bear is likely to be in demand as the world decarbonises the steel industry. So future demand is looking good. On the supply side, there are currently few operating mines capable of producing the grades and low impurities required to make green steel. Therefore, I see little risk on the supply side.

As I noted in another post, the demand/supply the risk would be from a technology risk, being whether the likes of BHP and Rio can come up with a process to make green steel with 58% to 65% hematite. Whilst they are trying, any processes that I have come across are far from commercialisation. And even if they can commercialise the process, can they make steel more cheaply and as green as using high grade magnetite in an Electric Arc Furnace. The steel manufactures appear to be saying no as they are making investment decisions to build Electric Arc Furnaces as part of the green steel strategy.

We can then turn to the JV partner and ask if they are likely to have the desire and the capacity/ability to proceed. Myself and others have posted about Vale's ambition to be the world's premier mining company and number one iron ore producer - therefore they have the desire. A significant mine like this outside of South America also helps with diversification for Vale. In terms of the size of the investment, earlier this year Vale announced the Novo Carajás Program which is expected to spend R$70 billion (approximately $13.7 billion USD) in investments by 2030 to expand iron ore and copper production in the Carajás region of Brazil. So Vale is capable of making investments of the size required.

In terms of the investment relative to production, Fortescue's Iron Bridge project (another magnetite project) had costs of around $6.2B for a 22Mtpa per annum output (while noting that projected costs were originally much lower, those decisions were made some years ago and there is a much stronger focus on green steel now).

A more recent and much closer comparison is Champion Iron's Kami project which has recently entered a JV with Nippon Steel Corporation ("Nippon Steel") and Sojitz Corporation. The Kami Project Study details a 25-year life of mine with average annual DR quality iron ore concentrate production of approximately 9.0 million wet metric tonnes per annum grading above 67.5% Fe. As detailed in the Kami Project Study, the capital expenditures were estimated at $3,864 million, resulting in a Net Present Value ("NPV") of $541 million and an Internal Rate of Return ("IRR") of 9.8% after tax , based on conservative pricing dynamics compared to prevailing iron ore prices, or an NPV of $2,195 million and an IRR of 14.8% after tax, based on the three calendar years' average of the P65 index price which preceded the Kami Project Study. From what I could find, I think the conversative price assumption of US$120/t for 65% whereas Iron Bear adopted US$113/t for 65%. There might be CFR differences between that comparison, as Champion was to China and Iron Bear to Middle East (I think). But it seems that the pricing assumptions for Iron Bear's NPV might seem comparable to Kami's conservative assumptions.

So compared to what other companies are investing in, the size of the investment (Iron Bear at US$4.6B pre production) does not seem to be a concern relative to potential output in both tonnes per annum and economic measures.

Therefore, the only real risk that I currently see, is whether Vale decide that there are better options to invest for growth than Iron Bear. However, when thinking about feed stock for making green steel, there will be limited other options for resources of the size and relatively low risk to be considered an alternative.

So whilst it might take a little while for the market to catch on, I see plenty of upside and whilst it is not without risk, the risk reward looks pretty good to me.