Ring of Fire update (Noront, KWG Resources, Cliffs Natural Resources)

Cliffs Natural Resources

Cliffs is crazy.  When commodity prices were high, they were taking on debt and expanding like crazy.  They also started to engage in greenfield exploration, which arguably does not make sense.  Cliffs needs around $3B in capital to build a chromite mine and its associated infrastructure.  Cliffs will have a shortage of capital and it doesn’t make sense for them to have too much on their plate.

After iron ore prices plummeted, Cliffs was furiously scaling back its expansion plans (e.g. at its Bloom Lake iron mine) and its exploration activities.  It also sold its stake in the Amapa iron ore mine and sold its Sonoma coal mine interest.

Cliffs’ battles with KWG Resources are a little silly.  Cliffs is KWG’s majority shareholder.  Yet KWG has engaged Cliffs in a legal battle over land rights to the Ring of Fire.  It is fighting itself.  If Cliffs were smarter, it should have bought out KWG a long time ago so that it would own royalties over its chromite deposits (Big Daddy and Black Thor) and avoided the elevated G&A costs that juniors typically have.  When KWG was selling its royalties, Cliffs should have stepped in and bought those royalties (sold for $18 million, easily worth several times that).

First Nations issues

In general, Canada is kind of racist.  (I am Canadian.)

The Canadian government’s treatment of First Nations is extremely patronizing.  Many reservations are not actually self-governed as they need approval from government bureaucrats to get funding.  In general, these bureaucrats are much better paid than tribe leaders.  It is an extremely wasteful system.

On top of that, First Nations are treated with a different set of standards than other Canadians.  If the residents of Attawapiskat were mainly white, the government would probably spray a lot of money at the problem to fix their housing crisis.  At the end of the day, there is a massive double standard.  The well-publicized Attawapiskat housing crisis continues today because they still haven’t gotten enough money to fix the problem.

The Canadian press is generally unhelpful.  Many media outlets have run stories that basically imply that First Nations are to blame for their misfortune because their leaders are overpaid, corrupt, and incompetent.  These stories are almost always the opposite of reality.  If you compare First Nations leaders to white politicians or government bureaucrats/employees, First Nations leaders aren’t paid very well.  In the Attawapiskat housing crisis, there was no evidence of corruption or incompetence and a court judge made a ruling in the community’s favour affirming that view.  Yet the Canadian media run stories that perpetuate prejudices against First Nations.  The media also plays a role in perpetuating the view that First Nations are trying to exploit the generosity and goodwill of Canadians.  Personally I believe that the media tends to give people what they want.  People want entertaining stories and they want their dogma to be reinforced, not challenged.

As far as the Ring of Fire goes, I expect history to repeat itself.  I expect development in the area to be delayed as so far Cliffs and the province of Ontario has been pretty belligerent in not consulting with First Nations in the area.  Both Cliffs and the provincial government act as if relations are good but relations between First Nations and mining companies have been pretty bad to date (e.g. exploration drilling being blocked).


Previously I wrote that Noront has a shortage of capital and will likely need to raise capital soon.  This may not need to happen soon as Noront sold its Windfall Lake property for $10 million in cash (among other things).  Next year, Noront may try to raise money as it will need tens of millions of dollars to start building an underground decline.  Its latest MD&A states:

Eagle’s Nest Operations Update

The Company has delayed mobilizing equipment to the site this winter which would have allowed the start of portal construction for the underground decline. As a result, the Company has delayed its planned production date. This delay is due to the lack of a definitive agreement on access infrastructure between government, First Nations and industry compounded by general market conditions impacting the financial sector through most of the past year. Management continues to work towards a resolution on infrastructure and is now planning on mobilizing equipment to begin project development in the winter of 2014.

In theory, Noront could start work in the winter of 2013 instead of 2014.  I suppose that they are so depressed about their chances of raising money that they think it will take until 2014 (or later) for them to have the money.

In the meantime, Noront shareholders will have patiently wait for positive developments to happen.

Wes Hanson, the CEO, has resigned.  I’m not exactly sure what to make of it though the resignation looks amicable.  Perhaps the board is frustrated with Noront’s low share price and Hanson’s ability to promote the company.

KWG Resources

Technically they are buying back shares (even the CEO bought $45,000 worth of shares) but I would expect the share count to continue go up.  KWG has been selling shares just in case they need the money.  If KWG runs out of money, it will not be able to maintain its 30% interest in the Big Daddy deposit and will not have money to wage legal battles against Cliffs.  At the end of the day, KWG cannot really take advantage of its low share price by buying back shares.

The latest MD&A states what they have been up to on the legal front:

The grant of an easement to construct a roadway over the Company’s claims may only issue with its consent. That consent was sought and declined. It was declined because the consideration offered did not include either a plan to mine the Big Daddy deposit for which, in part, the claims were acquired and assessed; or, compensation of an adequate value instead. The claims provide egress with which to make the Big Daddy deposit economic by enabling its production to access markets. The Company can earn a market share with its portion of Big Daddy production, whereas the deferral of that production to favour another deposit with that exclusive egress will irrevocably lose that opportunity to the other deposit. The Company was advised that it was therefore not unreasonable to withhold its consent in the circumstances and for the compensation offered. The Mining and Lands Commissioner has been asked to determine whether that is the case, or not. While the Company is optimistic that its decision to decline consent will be vindicated, it expects the proceedings to be protracted. In the interim it intends to continue the development plan and has made application to bring the claims to lease. The Company will maintain that any Order in Council sought to exempt contiguous mineral claims from the requirement that their production be processed to final art in Canada, may only extend to mineral claims in which the Company has an interest.

Firstly, the MD&A states that Cliffs has no plans of mining the Big Daddy deposit.  It’s possible that I am wrong and that Cliffs does not intend to mine Big Daddy after they are done mining Black Thor.  However, I believe that it would make economic sense to mine Big Daddy eventually since all the infrastructure would be in place.  With the infrastructure in place, Big Daddy’s economics would be extremely attractive as it would have very low capex needs.  This is the reason why Cliffs bought out Spider Resources and invested in a private placement in KWG.

The big picture

The development of the Ring of Fire will likely depend on Cliffs and whatever support the province of Ontario and the federal government sends it way.  So far, it is unclear what the government support will be.  However, I would expect the provincial government to put in some type of financial aid so that the politicians can be seen as creating jobs and improving Ontario’s economy.  (Personally I do not think that it is a good idea for governments to subsidize private industry… but my opinion is irrelevant.)  Overall, I think that there is a very high chance that Cliffs will build a chromite mine.  The entire process will likely take much longer than what Cliffs is saying as Cliffs has historically been overly optimistic with its investors.  A future mine will likely take several years.  Both KWG and Noront shareholders will need to be very patient.  I believe that Cliffs may try to bid for KWG if commodity prices are higher and Cliffs is in an expansion-crazy mood.  Conversely, if commodity prices stay low and/or Cliffs is not expansion-crazy then KWG shareholders may not see great value for their shares.

Valuing KWG

Revenues from Big Daddy and Black Thor are on the scale of billions of dollars.  Micon has prepared a PEA for KWG Resources but I don’t trust Micon as its past work has often been overly optimistic (e.g. it was completely wrong about the cost of a railroad).  Regardless, it is not hard to imagine that the net present value of either chromite is in the range of one billion to a few billion dollars.  If the infrastructure will cost $3B, it is unlikely that Cliffs will pursue the project unless profits are at least somewhere around one billion dollars.

Cliffs was willing to pay $0.19/share for Spider (originally it offered $0.13/share for either KWG or spider)… effectively paying around C$125M for Spider’s stake in Big Daddy.  (*The original price was $85M.)  KWG more or less has an equivalent stake in Big Daddy (both KWG and Spider had 26.5% stakes that could be increased to 30%; Spider had a 26.5% stake and KWG now has a 30% stake).  Since the Big Daddy project has been de-risked somewhat due to development activities (e.g. metallurgical testing) and the deposit is closer to production, one can argue that KWG’s stake in Big Daddy is worth more than $125M.  KWG’s current market cap is $30M so KWG looks undervalued to me.

*Disclosure: Long NOT, long KWG, no position in CLF.

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