Kogi Iron aiming to become a major West African iron ore producer
Recommendation: Speculative Buy
Sector: Materials
Target Price: $0.28
ASX Code: KFE
52 Week -:
Current: $0.095
High: $0.22
Low: $0.08
Issued Shares: 320.2M
Options: NIL
Cash: $1.2M
Market Cap: $30.4M
Enterprise Value: $29.2M
- Kogi Iron (ASX: KFE) has established first mover status for the development of Nigerian iron ore assets at the Agbaja Plateau Iron Ore Project.
- JORC Indicated and Inferred Resources of 586 million tonnes at 41.3% Fe established over 20% of Exploration License 12124.
-
The remaining 80% of EL12124 host identified targets with a conceptual
range of 1.3 – 2.0 billion tonnes at a grade of 32-48% Fe. The remaining
14 tenements are untouched by modern exploration methods.
- Kogi Iron has completed a Preliminary Feasibility Study for production of 5
million tonnes per annum of magnetite concentrate at a grade of 56% Fe,
and reported CAPEX and OPEX costs that are amongst the lowest in the
world for new iron ore mine development.
- CAPEX of US$497
million expected to be paid out from the first 48 months of production
from annualised EBITDA of US$136 million.
- Kogi Iron has potential to become a major developer of West African iron ore
assets, and help crack the current iron oligopoly between Australia and
Brazil.
- Kogi Iron has commenced a Definitive Financial Study that will look to reach
first iron concentrate production by late 2016 or early 2017.
-
The Company has managerial talent and is led by Ian Burston who was also
instrumental in the development of the Western Australian iron ore
industry. He served as Managing Director of Hamersley Iron and Portman
Mining, Non-Executive Director of Fortescue Metals Group, Chairman of Aztec and Executive Chairman of Cape Lambert Resources.
- Kogi Iron estimate annualised production of 5 million tonnes of iron concentrate
will produce an EBITDA of ~A$154 million (A$0.88) for the first stage of
the Agbaja Project.
- Proactive investors forecasts that Agbaja will be worth A$90.8 million, or $0.28 per Kogi Iron share (undiluted) on completion of Definitive Financial Study at the end of 2014 (see peer group analysis).
- Our peer group analysis and valuation sees additional and significant valuation increases as Agbaja is funded and developed.
- It has not factored in a potential investment from an Asian steel company, which would boost this valuation.
SPECULATIVE BUY
Kogi Iron Ltd (ASX:KFE) is an ASX listed explorer and developer of the Agbaja Plateau Iron Ore Project (Agbaja Project) that is located in Kogi State, Republic of Nigeria.
AGBAJA IRON PROJECT IN NIGERIA
The Agbaja Project is 100% owned by Kogi Iron and includes 17 exploration licenses that cover 400 square kilometres.
Drilling and development efforts are focussed within Exploration Licence
EL12124 where a current JORC 2012 compliant Indicated Resource of 466
million tonnes at 41.4% Fe (iron) and an Inferred Resource of 120
million tonnes at 41.1% Fe (cut-of grade of 20% Fe) has been defined,
and constitutes one of the highest grade beneficiable iron ore deposits
in West Africa.
Magnetite iron mineralisation is contained
within very shallow and flat lying channel iron deposits that are ideal
for low cost surface mining. Kogi Iron has completed drilling and resource estimates over 20% of the Agbaja
Project area and has identified additional conceptual exploration
targets of 1.3 – 2.0 billion tonnes at 32 – 48% iron within EL12124 and
adjacent licenses.
DEVELOPMENT FOCUS AT EXPLORATION LICENCE 12124
Agbaja is ideally located close to the Niger River, and within 60 kilometres of an under-utilised heavy haulage rail line that leads to the Port of Warri, and just north of Lokoja with a population of 90,000 which serves as the capital city of Kogi State. The State is known for production of cash crops and the country’s largest steel facility at Ajaokuta, and largest cement factory at Obajana.
AGBAJA IS A HIGHLY UNIQUE IRON PROJECT
MAGNETITE WITHIN AGBAJA FORMATION (LATERITE AND OOLITE), WIDTH OF 3-6 KM AND LENGTH OF 20 KM ACROSS TOP OF MESA
Agbaja is a unique sedimentary magnetite
Channel Iron Deposit (CID) that is located across the top of a large
mesa that has a width of 3-6 kilometres and length of 20 kilometres. The
resource carries grades of ~46% Fe, and softer and coarser ore that
liberates at ~250 microns.
Most magnetite deposits are
classified as Banded Iron Formation (BIF) with grades of 25 – 40% Fe
that liberate at ~45 microns, and are significantly more expensive to
process.
PRELIMINARY FEASIBILITY STUDY CONFIRMS ROBUSTNESS OF AGBAJA PROJECT
Kogi Iron has just completed a Preliminary Feasibility Study “PFS” that was
headed by Coffey Mining for resource and mining planning, and Tenova
Australia for metallurgy and processing. Seven additional consultants
reported on bioleaching, pipeline, barging, operations, markets,
financial modelling, environmental and social issues.
The PFS
was based around a magnetite concentrate production rate of 5 million
tonnes per annum, over a mine life of 21 years and projected:
- CAPEX of US$497 million to generate an Internal Rate of Return of 23.7%.
- Pre-tax Net Present Value of US$420 million, at a 12% discount rate.
- Capital intensity of US$99.4 per tonne.
- Average OPEX of US$42.98 per tonne, Free On Board or FOB.
- Four year CAPEX payback.
- Based on a long term FOB price of US$73.00 per tonne of iron ore concentrate.
- Producing a net margin of US$30.00 per tonne and EBITDA of US$136 million per year.
This
places Agbaja in the bottom quartile for capital intensity, and bottom
half of the operating cost curve of global magnetite projects. A
Definitive Feasibility Study has now been approved and is expected to be
completed by the fourth quarter of 2014.
Low CAPEX and OPEX driven by:
- Low strip ratio of 0.55:1 for open pit operations.
- Soft and coarse ore requires no drilling or blasting, moderate grinding costs, and use of simple plant design.
-
Excellent local infrastructure that includes availability of natural
gas to power plant, and river barges to transport concentrate to port.
- Life of Mine of 21 years applied in the PFS, but Indicated Mineral Resources are sufficient to maintain an output of 5 million tonnes per annum for over 35 years.
LOW STRIP RATIO
Kogi Iron reports a low strip ratio of 0.55:1, whereas typical West Australian
iron ore miners report higher strip ratios of ~1:1.and up to 4:1. Low
strip ratios reduce both capital and operating expenses that are
incurred at the commencement of open pit mining, and opening up of new
areas of production.
SOFT AND COARSE ORE – EASY TO MINE
Agbaja
is unique in that it is only one of three globally known sedimentary
hosted magnetite deposits. Typical magnetite deposits are found in
banded ironstone formations or “BIF” that require large amounts of
energy and intensive grinding to liberate the iron from associated
natural matrix.
Agbaja ore is soft and friable that requires a
coarse grind and simple magnetic separation, providing lower capital and
operating costs. BIF magnetite deposits typically grade 25-40% Fe,
whereas Agbaja averages 41.3% Fe, and with selective mining of higher
grades will provide a head grade of 45.7% Fe to the process plant.
EXCELLENT INFRASTRUCTURE
Agbaja
is 15 kilometres northwest of Lokoja which is serviced with electric
power, cell phones, schools, and hospitals. The city is located on the
Niger River which has a nearby barge loading facility at Banda that is
underutilized, and suitable for shipment of iron ore concentrate to the
Gulf of Guinea.
The immediate area is served by a dual lane road
that links to the capital of Abuja which is 165 kilometres to the
southwest, and has an international airport.
MINE LAYOUT AND MINE PLAN
The
Company has identified two mining areas for Stage One and Stage Two of
operations. Sites have been selected and designs completed for the
process plant and open pit mining operations.
Stage One contains
~158 million tonnes of Indicated Resources with an average grade of
46.1% Fe, and strip ratio of 0.55:1. This will provide an initial mine
life of 15 years at 5 million tonnes per annum.
Stage Two
contains ~66 million tonnes of Indicated Resources with an average grade
of 44.8% Fe with a strip ratio of 0.56:1. This area will provide plant
feed for an additional 6 years at a rate of 5 million tonnes per annum.
MINING OPERATIONS
The
Company has opted to utilise contractors to complete site development
and conduct mining operations. Detailed proposals have been received
from three contractors, two of which are based in West Africa, and all
are similar in approach and price.
Mining costs (as stated in
the PFS) are currently at US$3.69 per tonne for ore delivered to the
process plant, and are US$8.12 per tonne for processed magnetite
concentrate ready for shipment.
METALLURGY AND PROCESSING
Tenova
Mining and Minerals and Trical Mining and Metallurgical Services
completed metallurgical test programs that confirmed a primary grind
size of 600 microns to liberate the iron, and a final grind size at a
relatively coarse 250 microns. This will be followed by Low Intensity
Magnetic Separation, which is a well proven technology for processing
high volumes of iron concentrates that will take an iron feed of ~45%Fe
to a concentrate of ~56% Fe.
SCEMATIC LAYOUT OF MINING OPERATION, PROCESS PLANT AND BARGE LOADING FACILITY
The milling circuit will process a
nominal 3,900 tonnes per hour of solids based on a circulating load of
100% of new feed of 1,590 tonnes per hour. Mill discharge slurry density
will be maintained at 70% and fed to the Rougher Magnetic Separation
“RMS” circuit.
Each RMS unit is expected to recover 67% of the
feed to the circuit and produce concentrate slurry at 60% solids density
which will feed to a Cleaner Magnetic Separator “CMS”. The CMS circuit
will upgrade the slurry to 56% Fe, with non-magnetic material reporting
to tailings, and 5 million tonnes per annum of magnetite concentrate
reporting to bioleach ponds.
Microbial treatment in the ponds
will reduce the phosphorous content to 0.25%. Once the phosphorous level
falls within the target range the slurry will be thickened and pumped
along a pipeline to the Banda barge loading facility. The slurry will
then be vacuum filtered, washed with water and sent to the product load
out station with a maximum moisture content of less than 10%.
Recovered process water will be piped back to the process plant and river barges will transport the concentrate to a barge transfer station at Escravos from where it will be transferred to ocean going barges for delivery to a transhipment facility moored in the Gulf of Guinea.
POWER
Power
for plant operations will be provided by a dedicated natural gas fired
electric power station. The gas will be supplied from the prolific oil
and gas province in the Niger Delta and supplied via an underutilized
natural gas pipeline that runs close to the proposed plant site.
Dedicated diesel gensets will power the Banda barging facility and the Escarvos transfer station.
TRANSPORTATION OF CONCENTRATES
Studies
indicate that barge shipments of concentrates along the Niger River
will be 2-2.5 times less expensive than rail transportation to the port
of Warri. The concentrate will be loaded into Mississippi type barges
(carrying a total of 19,200-32,000 tonnes) that will be propelled in
groups of four barges by push boats operating at 10 knots per hour.
Travel time from Banda to the Escravos Transfer Station in the Niger
Delta will take around 33 hours and cover 602 kilometres.
The
river barges will transfer the concentrate into a 20,000 tonne
self-propelled and self-unloading ocean going barge. The ocean going
barge will then travel 33 kilometres into the Gulf of Guinea and
transfer the concentrate to a floating transhipment storage facility
with a capacity of 200,000 tonnes. This facility will load Panamax and
Cape size ships for export of iron concentrates to world markets.
The
Free On Board transport cost including all vessel and transhipment
storage facility costs are estimated at US$18.77 per metric tonne, or a
rate of US$0.0296 per metric tonne for each kilometre travelled.
OPERATIONS MANAGEMENT – WORKFORCE
Construction of mine and process plant at Agbaja will require a temporary work force of 800 – 1,000 personnel.
The
Company projects manning levels for Kogi at 274 directly employed
staff, 224 mining contractor staff, and 43 other contractors.
Recruitment will focus on employment of skilled local residents that
will meet their own accommodation needs.
ENVIRONMENTAL AND SOCIAL ISSUES
Greenwater
Environment Services has completed an Environmental and Social Impact
Assessment or ESIA that concluded there are no environmental or social
impediments for the development of the Agbaja Project. The project area
covers low value scrub land, savannah woodland and grasslands that have
limited agricultural use or environmental significance.
The
statement also notes that the project will generate long term employment
and service opportunities that will enrich and develop local
communities.
An Environmental Management Plan has also been prepared that mitigates the environmental impact of proposed mining and processing activities.
CAPITAL EXPENDITURE (CAPEX)
Estimates
include mine development US$11.9 million, process plant US$132.7
million, pipeline to Banda and Escravos facility US$120.2 million,
utilities and infrastructure US$108.2 million, insurance, fills and
spares US$32.5 million, EPCM contract US$46.5 million, contingencies
US$45.1 million for a total of US$497.1 million or US$99.4 per tonne.
OPERATING EXPENDITURE (OPEX)
Estimates
include mining US$8.12 per tonne, processing and pipeline costs
US$13.96 per tonne, Barging and FOB US$18.77 per tonne, general and
administration US$2.13 per tonne for a total of US$42.98 per tonne.
CATALYSTS – 2014 TO FIRST QUARTER OF 2017
- Completion of Definitive Financial Study by end of 2014.
- Approval of Environmental and Social Impact Assessment by Nigerian authorities.
- Grant of mining lease and completion of project funding by the end of 2014.
- Engineering, Procurement and Construction Management Contract executed.
- Construction phase of 76 weeks commencing early to mid-2015.
- Commissioning Q4 of 2016, or Q1 2017.
NIGERIA – A RESOURCE DRIVEN ECONOMY
Nigeria
is a former British colony that gained independence in 1960. The
country has a population of 163 million people that elects its President
and parliament by popular vote.
Oil production is currently at
2.5 million barrels per day and makes up 95% of all exports. Higher oil
prices have allowed the nation to run a budget surplus in 2012, and
provided for a GDP growth rate of 7.2% in 2013.
Standard Bank
forecasts that Nigeria will be the fastest growing of the MINT economies
(Mexico, Indonesia, Nigeria and Turkey) and will be driven by the
strongest fiscal balance, lowest public debt and market reforms. The
country currently attracts $8.9 billion in foreign investment, which is
16% of Africa’s total.
Citigroup studies project that GDP growth for Nigeria has potential to place it within the top ten world economies by 2050.
The
Agbaja project is governed by the contemporary Nigerian Minerals and
Mining Act 2007 that provides a quick and easy approvals process, and
does not impose any free carried participation by government or local
entities. The corporate tax rate is set at 30%, iron ore royalties at
3%, and provides a transparent and consistent tax structure.
IRON ORE MARKET AND KOGI PRODUCT
China
is expected to import more iron ore as domestic production grades
continue to fall. Asian countries such as India, Indonesia and Vietnam
are expected to increase iron ore imports to fuel greater
industrialisation.
West African iron ore resources such as
Agbaja have the potential to break the current iron ore supply oligopoly
that exists in Australia and Brazil, and supply global markets with an
additional source of good quality iron ore.
Kogi Iron PROJECTED AT US$103 PER TONNE BASED ON 5 YEAR CHINESE IMPORT PRICING AT TIANJIN PORT
Agbaja fines are projected to contain
56% Fe, 3.8% S102, 6.6% Al2O3, P 0.25%. Low silica, phosphorus and
impurity levels will appeal to Asian buyers because they reduce blast
furnace operational issues, low titanium levels will produce more fluid
slag, and their coarse nature is ideal for sintering.
Agbaja
fines are ideal as a blend with high silica, low phosphorus product from
the Pilbara (Australia) or Brazil, and will attract a slight discount
for phosphorus and alumina content.
Kogi’s long term forecast
for these 56% Fe fines are US$73 per tonne FOB Nigeria, and equates to
iron ore fines of 58% Fe landed at Tiajin Port of China at US$103 per
tonne. This forecast pricing is at 85% of current pricing into Tiajin,
and serves as a proxy for Asian pricing of imported iron fines of the
same quality.
A more detailed marketing analysis and strategy
will be carried out in the DFS and will include sintering testing,
individual bulk samples for prospective customers, and a full Value in
Use analysis for a more complete evaluation of the product.
PEER GROUP ANALYSIS AND VALUATION
Agbaja capital intensity is estimated at US$99 per tonne, and falls into the lowest quartile for global magnetite projects.
This
is significantly more competitive than magnetite projects that have
been proposed in Western Australia, and include Jack Hills with a
capital intensity of A$140 per tonne, Extension Hill of A$145 per tonne,
and Mount Ida of A$185 per tonne. Funding will obviously flow to
projects like Agbaja that report a faster repayment of debt on a smaller
CAPEX.
Major Australian iron ore miners that mine hematite from
massive iron resources in the Pilbara are not immune from higher CAPEX.
Rio Tinto produces 290 million tonnes per annum of iron ore from its
international operations, and reports a drop in capital intensity from
A$150 to A$120-$130 per for new annualised production from the Pilbara.
A similar situation applies to OPEX. Fortescue Metals Group projects shipment of 155 million tonnes of 62% Fe from its Western
Australian operations in 2014, and forecasts a total production cost of
US$51 per tonne.
These high CAPEX and OPEX numbers are impacting
Chinese investment into development of alternative and lower cost
sources of iron ore. African Minerals Ltd (AIM:
AMI) is fast tracking the development of the Tonkolili iron ore
resource in Sierra Leone with the support of major Chinese investors
that include Shandong Iron & Steel, China Railways Material Company
and an upcoming investment of US$990 million by Tewoo for a 10% stake
that values Tonkolili at US$6 billion.
Tonkolili is currently
producing and targeting a run rate of 20 million tonnes per annum in
2014. Projected EBITDA is US$31 per tonne or US$620 million, and capital
intensity of US$120 per tonne.
The PFS for Agbaja projects an
EBITDA of US$136 million / A$154 million, and application of the same
EBITDA to market valuation that Tewoo applies to Tonkolili produces a
market valuation of US$1.5 billion / A$1.71 billion.
The AIM
market currently capitalises African Minerals Ltd at A$994.7 million for
a projected 65% interest in Tonkolili, or A$76.51 per tonne of
annualised output. Applying the same valuation to Kogi Iron’s proposed output of 5 million tonnes per annum produces a valuation of A$382.6 million or $1.19 per Kogi Iron share on an undiluted basis, and applies on commencement of production.
Zanga Iron (AIM: ZIOC) is developing a large scale iron ore resource in the Republic of Congo in a joint venture with Xstrata.
The Company owns a 50% interest and has completed studies for a 12
million tonne per annum production rate, with a capital intensity of
US$200 per tonne, and cash costs of US$40 per tonne. Zanga is valued at
A$108.9 million or A$18.15 per tonne of proposed annualised output.
Kogi Iron is currently moving into a bankable feasibility stage, and valuations
should be roughly comparable with Zanga, which remains unfunded. This
equates to a valuation of A$90.8 million for Kogi Iron, on completion of Definitive Feasibility Studies, or A$0.28 per share.
SPECULATIVE BUY
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