Strike while the iron is hot

April could be the kindest month for companies mining iron ore for the steel producers of the world. The industry is predicting that this month’s round of contract price negotiations between suppliers and users in China and elsewhere could bring price increases of 50 to 100 per cent, to well above $200 a tonne, and many suggest that deals will be fixed for three months only, rather than a year.

Strange as it may seem for those with memories of how the British Steel Corporation faded into near collapse before eventually becoming part of India’s Tata group, steel-making continues to thrive in the world’s new manufacturing powerhouses, such as China, India and Brazil. Luxembourg-based steel producer Arcelor Mittal has predicted an 80 per cent hike in iron ore prices this year and plans to increase production from its own mines by 50 per cent.

Eventually, no doubt, the boom will be overdone and China, for example, will at some stage have to curb its growth rate, for a while at least. But for the time being the pressure is on, demand for iron ore shows no sign of abating and investors can still make money.

British mining giant Rio Tinto, with massive iron ore deposits in Western Australia, has newly signed a memorandum of understanding with Chinese corporation Chinalco for a £1 billion joint venture to develop the 2.25 billion-tonne Simandou prospect in the West African state of Guinea, despite previous attempts by Israeli tycoon Benny Steinmetz to wrest control of a big chunk of the project from Rio. The recent arrest of Rio’s top iron ore salesman in China on bribery charges is unlikely to affect these prospects.

Unsurprisingly, Guinea is attracting other companies hoping to emulate Rio Tinto’s success. Bellzone Mining, headed by colourful Aussie entrepreneur Nick Zuks, formerly of Kingstream Steel and New Millennium Resource, plans to raise more than $100 million (£66 million) on AIM to develop deposits in the country.

Tapping the markets
Investment group Canaccord Adams is helping raise the money for Bellzone, which is seeking to tap and substantially increase an estimated iron ore resource of 2.4 billion tonnes and to put in place the required infrastructure to shift it. The company has a non-binding memorandum of understanding with Chinese interests to fund a feasibility study on the Guinea project.

Canaccord Adams says the as-yet unpriced AIM float placing would put a value of between $400 million and $600 million on Bellzone, which boasts Simon Farrell, boss of Coal of Africa, as a non-executive director. The company expects to be in production in four years.

Along the coast, AIM player African Aura, formerly Mano River, is poised to sign an agreement with the Liberian government to develop the one billion-tonne £1.3 billion Putu iron ore deposit in partnership with Russian steel-maker Severstal. The company has a 38.5 per cent stake in the project, which chief executive officer Luis da Silva says could produce 20 million tonnes a year ‘of higher quality and better grade’ than Bellzone’s project, and an offtake (sales) deal with Severstal.

Controversial entrepreneur Frank Timis recently proved the City’s appetite for iron ore investments by raising £80 million at £4 a share for his company, African Minerals, to develop another West African iron ore project at Tonkolili in Sierra Leone. AIM-quoted African secured the funding in an underwritten institutional placing, with the help of Canaccord Adams and Mirabaud Securities, in order to start infrastructure building in Sierra Leone.

The company hopes to double a currently estimated resource of 5.1 billion tonnes there to ten billion tonnes and to start production early next year. The placing proceeds will go to build a 120 km haul road from the mine site at Tonkolili to the nearest railhead and to refurbish rail and port facilities. In addition, African Minerals has granted options to subscribe for £11.5 million of shares at the placing price to China Railway Materials Commercial Corporation, with which the company already has a supply agreement.

Timis, the former boss of Regal Petroleum and owner of 33.5 per cent of African Minerals, declares that the funding and offtake deals struck for Tonkolili’s output ‘place the company in a very strong position to realise iron ore production from Tonkolili during the first quarter of 2011’. Floated at 75p three years ago, African Minerals’ shares, which dipped to 20p at one point, have recently been star performers, hitting a 440p high, and now trade at 373p.

Brazilian opportunities
Brazil is another major source of iron ore and investors are keenly watching revived plans for a £2.5 billion London float for Brazilian producer Ferrous Resources, headed by Gordon Toll, a veteran of Rio Tinto, BHP and fellow iron ore producer Fortescue Minerals, with targeted annual production of 50 million tonnes. Another 2010 float candidate, resources investor Baker Steel Resources Trust, has more than a third of its assets in Ferrous Resources.

Baker Steel Capital Managers has established the trust to make pre-flotation investments in the sector. London-based Baker Steel, at which ex-Merrill Lynch luminary Trevor Steel is chief investment officer, says it is targeting £100 million of assets and annual returns of 25 to 30 per cent following its planned £70 million placing on the London Stock Exchange at a price yet to be decided.

Baker Steel Resources Trust 'offers a great opportunity for investors who want to access quality resources companies at an early stage’ claims Trevor Steel. The new launch follows a restructuring of Baker Steel’s £40 million Cayman Islands-based Genus Capital Fund, which the company launched in 2008 with partners AWR Lloyd, an Asia-based investment group, and Red Rock Capital Partners.

Baker Steel says the Genus Dynamic Gold Fund has achieved a compound annual return of 26 per cent since its launch in 2003, against 14 per cent shown by the FTSE Gold Index. RIT Capital Partners, in the J. Rothschild investment stable, Canada’s RBC Capital Markets and Baker Steel management partners together currently hold more than 60 per cent of the shares.

Projects proliferate
Closer to home, the prospect of surging ore prices provides encouragement to Beowulf Mining, which boasts promising projects at Kallak and Routevare in Sweden. The AIM-quoted company, chaired by entrepreneurial Clive Sinclair-Poulton, suggests it could potentially have 100 million to 150 million tonnes of iron ore at Kallak and 200 million to 250 million tonnes at Routevare and implies these two projects could be producing 24 million tonnes of iron ore a year by 2013 or 2014.

Thetford-based Beowulf, which lost £520,100 last year, bases this prospect on independent estimates foreshadowing $6.8 billion (£4.5 billion) revenues from Kallak over 15 years, with operating expenditure over that time of $3 billion, capital costs of $910 million and net annual cash flow of $191 million, while Routevare is seen as potentially generating $6.85 billion revenues over a similar period, with operating expenditure of $3 billion, capital costs of $800 million and net annual cash flow of $250 million.

Beowulf, which raised £500,000 at 2p in June, recently tapped investors for another £1 million at 2.5p to confirm its estimates of Kallak and Routevare and fund work on project feasibility. The game plan is to interest a major group in the projects, but not before doing more work to establish their commercial potential.

The current climate should favour projects like these, though clearly an element of commodity price, funding and project risk remains. Shares in Beowulf, which has undergone significant changes since its 2005 AIM float, fell from 10.37p five years ago to 1.25p within the past year, but have now reached 2.75p.

Fully listed Russian gold miner Petropavlovsk, steered by the entrepreneurial Peter Hambro, has a £222 million collaboration deal with China’s Xuan Yuan Investment Group to develop iron ore deposits in far eastern Russia. AIM newcomer London Mining, hitherto listed in Norway on Oslo’s junior Axess market, has high-grade projects, in Sierra Leone, Saudi Arabia, China and Greenland, and an eventual production target of 20 million tonnes of iron ore per year.

Co-founder and managing director Graeme Hossie, a Canadian former management consultant and sector specialist, says the company should start producing next year at an initial annual rate of 1.5 million tonnes from its Marampa project in Sierra Leone. London Mining has recently told the market that its 50 per cent-owned Wadi Sawawin iron ore project in Saudi Arabia is commercially viable. A bankable feasibility study of the 50 per cent-owned project suggests that production at both five million and 10 million tonnes a year would be worthwhile.

The study indicates that capital spending of £1 billion would support a five million-tonne project, generating an internal rate of return of 9.4 per cent, which the company could increase to 13.5 per cent by 60 per cent borrowing, while regional market conditions would support an operation of twice the size. Other projects include Isua in Greenland, with an estimated 507 million tonnes of iron ore, and a 50 per cent-owned venture at Xiaonanshan near Nanjing in China.

Unlike most AIM mining hopefuls, London Mining, one of whose founders was former Tory minister Sir Nicholas Bonsor, came to market with more than £140 million cash, having profitably sold a Brazilian iron ore operation to steel producer Arcelor Mittal for £500 million and returned a hefty chunk of the proceeds to shareholders. Some key investors used the company’s AIM admission to sell down their holdings with a placing for around £74 million at a discounted 192.4p.

London Mining, which is considering floating its XNS Chinese subsidiary in Hong Kong, reduced its losses last year by 22 per cent to £19 million and is still sitting on £133 million cash. The company is negotiating with potential providers of funding and offtake agreements for Wadi Sawawin and has established an estimated iron ore resource of 952 million tonnes at Isua in Greenland.