Some notes…
They paid $20k to eResearch to say good things about them
To have eResearch conduct research on the Company on an Annual Continuous Basis, Canadian Orebodies Inc. paid eResearch a fee of $20,000 + HST.
http://www.eresearch.ca/_report/CO_061412-B.pdf
What a waste of money. These shills generate no value for society. (If there is a polite way of saying this, I clearly haven’t thought of it.) Here is Canadian Orebodies’ press release regarding eResearch.
Short version of the rest of this post
I don’t think that this is a good long or a good short. This is a sketchy junior (which makes it a bad long) that has found something vaguely promising (which makes it a bad short).
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Manganese
From the technical report:
The average Mn content of the Hematite Iron Formation zone at 0.89% still remains an issue that needs to be resolved with further mineralogical work. Assessment of its distribution, grain size and potential liberation characteristics is the subject of ongoing mineralogical work.
[…]
Mean manganese grades at 0.88% are relatively high in comparison to many other iron deposits with the exception of Cleveland Cliffs Natural Resources operating Scully Mine in Wabush and Alderon Iron Ore Company’s Rose Central deposit which carry Mn grades in excess of 1%.
Of course, the company’s presentations make no mention of this issue.
Overall economics
- Processing the iron ore requires grinding it and this will turn the ore into fines. This type of iron ore sells at a slightly lower price than ore that was not ground for processing (e.g. Baffinland Iron Mines’ deposit).
- In terms of ore characteristics, Alderon has ore with similar (but higher) manganese content to CO and it expects smelter/quality deductions (in its PEA) of around $15/t. CO should receive a similar penalty to its ore price.
- Shipping the ore concentrate to the customer will require ice-class vessels in the winter (at minor additional cost). Or, ore concentrate could be shipped only during the summer and stockpiled at the customer.
- Right now, the plan seems to be to ship mined ore to another location for processing. Because the deposit is on an island, it will be really expensive to get the electricity needed to run a processing plant. So, they could build a processing plant somewhere (e.g. in Quebec) with cheap electricity.
- Capital expenditures would include 2 ports, a processing plant, and a power line to said processing plant. The plant may also need an airstrip and living facilities to fly employees in and out. I’m not knowledgeable enough to figure out how much all this infrastructure will cost. But, the general idea is that a larger operation will benefit from economies of scale. The larger the deposit, the more economic (or less uneconomic) this deposit will be.
- Compared to Alderon, I would expect CO to have higher capex (assuming that the deposit size is the same, which it is not). Alderon’s capital costs are:
- Mining: $141.4M
- Concentrator and Site Infrastructure: $579.7M
- Environmental and Tailings Management: $19.8M
- Rail Transportation: $44.7M
- Port Facilities: $203.3M
CO will save on rail transportation. Its port facilities will likely be at least double that of Alderon’s since Alderon can share its port facilities with other miners and enjoy economies of scale. Also, CO will need larger ports as the one at the mine site will be shipping ore alongside future tailings. The port at the processing plant site will need to both send and receive material. Site infrastructure will be more expensive for CO since the deposit is on an island. Everything needs to be shipped in. In the end, it might simply be cheaper for CO to do ore processing on site and pay a lot for electricity (imported diesel power is not cheap). Capex and operating costs would likely be significantly higher than projects like Alderon.
- Some of the ore is underneath bodies of water. There will be de-watering costs.
- The mine will drastically change the landscape and create a lot of noise. Local residents may not be happy about that (though there will be an influx of jobs).
To summarize
- Deposit size: They will (likely) need to discover a lot more ore to potentially form an economic deposit. I’ll just throw out a wild (not very informed) guess and say that they need at least 2B tons of ore to have vaguely comparable economics to Baffinland Iron Mines or Alderon.
- Marginal economics: Baffinland might seem comparable to CO since it had a deposit on an island. However, its economics are far superior since its ore does not need any processing and receives a premium for its lump ore. No processing means it doesn’t pay for expensive electricity. And there is no manganese problem. Alderon has comparable quality ore (its manganese problem is worse than CO) but Alderon will almost certainly have superior capex and opex. However, not all promising deposits turn into mines.
- Metallurgy: Hopefully CO can figure out how to get high iron recoveries without a lot of manganese and other deleterious elements. If not, the whole project won’t really work.
- Management: I am unsure if anybody on the management team has actually brought an iron ore mine to production / has the expertise to do so. It seems to me that they should do some metallurgical testing first as it would cost a fraction of their planned drill exploration program. They should wait for the initial metallurgy tests to pass before drilling. And paying for shills is just ridiculous!!!
- Iron ore prices need to stay strong. If prices fall, I don’t think that iron ore miners will pursue high capex low-margin projects.
CO needs to run through a gauntlet of risks. Any one of the following can kill its project: disappointing exploration, high capex, metallurgy, and a fall in iron ore prices. The chance of passing all those items is very low. And even if CO does succeed, most of your profits may be diluted away.
Or, simpler yet… buy shares of Altius Minerals. Alderon Resources may be worth buying, though I have yet to evaluate it.
Disclosure: I took a token position in this stock (meaningless amounts of money) and will try to sell at slightly above my entry price.