KWG/NOT update – Cliffs’ Black Thor project has bad economics

A year ago, Cliffs put out some information on the economics of its Black Thor project in its Investor’s Day presentation by Bill Boor (see Cliffs’ website).  I’ve only stumbled across it and read it now.  In the figures given out in the presentation, there are some extremely aggressive price assumptions used and the stated IRR is only 14-17%.  The projects’ economics are overstated and this project doesn’t look economic at all.  I wish I had realized this sooner.

Now I’m in an uncomfortable position with KWG Resources and Noront.  Both their fortunes are tied to Cliffs building a mine and smelter that it shouldn’t.

Black Thor’s economics

Page 13 of Boor’s presentation states that the price assumptions are:

  • US$390/ton for chromite concentrate CIF China
  • US$1.40/lb ferrochrome, US$/lb contained Cr

Both are well above the 3-year trailing averages for these products.  Cliffs’ presentation doesn’t even mention what the 3-year average is, which is the industry standard.  But you can tell from Cliffs’ charts that the price assumed is far, far above the trailing 3-year average.

cliffs-price-assumption-01 cliffs-price-assumption-02

As well, there are some unknowns that Bill Boor glosses over:

  • The level of government subsidies
  • First Nations issues
  • Surface access issues – Cliffs is currently in a legal battle with itself over this (Cliffs is the largest shareholder in KWG Resources)
  • Uncertainties in metallurgy, resource estimation, the cost of infrastructure, etc.  Cliffs says that a road to the Ring of Fire will cost $600M while KWG says that it will cost $1B (to be fair, KWG has an incentive to say that a road costs more than it does and may be exaggerating).  The cost of infrastructure is uncertain and Cliffs may be overly optimistic.

At the end of the day, it seems to me that this project should NOT be pursued at this time.  Cliffs is absolutely crazy in wanting to build this thing.  This is the same company that bought Bloom Lake claiming that cash costs would drop to $35/ton (lower than the low-cost producers such as Vale and BHP Biliton) $50-55/ton.  Cash costs are currently around $85-90/ton.

I really don’t know if I want to speculate on Cliffs on doing the wrong thing.  I see it as greater fool investing.

Comments by Robert Yuksel Yildirim

Yildirim Group owns Eti Krom, a vertically-integrated ferrochrome producer that mines and refines chromite ore.  The CEO of Yildirim is quoted in a Reuters article:

“They have an infrastructure, logistical problem,” said Robert Yuksel Yildirim, president of Turkish industrial conglomerate and ferrochrome producer Yildirim Group, who considered investing in Black Thor.

Yildirim has met with Cliffs several times, but does not plan to buy in. He is concerned about excess supply in the chrome ore market, where China is the primary buyer: “At the market price, I don’t think they will be competitive,” he said.

By saying that Cliffs won’t be “competitive”, Yildirim may be suggesting that the project is uneconomic.  The article notes that he doesn’t plan on entering into a joint venture with Cliffs.

Cliffs has announced that it has “delayed” its EA process

On June 12, Cliffs had a press release titled “Cliffs Natural Resources Temporarily Suspends its Chromite Project Environmental Assessment Activities Pending Resolution of Various Issues“.  I think that they are still seriously considering moving forward with the Black Thor project.  If Cliffs fires a number of employees at its Ferrochrome division, then it would be likely that Cliffs is mothballing the Black Thor project.

I really have no idea if Black Thor will ultimately become a mine.

Noront’s response to the delay

If Cliffs goes ahead with Black Thor, it would be wonderful for Noront since Noront would be able to share the costs of infrastructure (paying a tiny fraction of what it would otherwise cost if Noront built alone).  Noront’s press release says that Noront is “still good to go” despite Cliffs stopping its EA activities.  I don’t think it is.  Given the current drop in nickel spot price to US$6.34/lb, I don’t think that Noront will be able to go it alone.

Noront badly needs to raise capital (though it has at least a few years to do so before its debt is due) so I am not surprised the interim CEO is being promotional about the company.

KWG Resources

The CEO, Frank Smeenk, is still buying shares on the open market.  I don’t believe that any of KWG’s press releases have mentioned his insider buying (or the VP of exploration’s), which is slightly unusual because juniors are often extremely promotional.  KWG also bought back some of its shares but has stopped doing so now that it has started drilling Black Horse.

I think that Smeenk truly believes that Cliffs will ultimately build a mine and that KWG will win its legal battle with Cliffs.  Smeenk is a lawyer by training, though one could debate how good of a lawyer he is (he lost a legal fight over unlocking the cash at Bro-X/Bresea and the OSC penalized him for breaking some securities laws).  As far as I can tell, he does not have a mining background.  It’s not unreasonable for him to be optimistic for his own company since Cliffs tried to take it over in the past and is clearly trying to get Black Thor permitted.

My plan

I will try to get out of my Noront and KWG Resources positions at break-even (this could be a mistake- who knows?).  And I really should not be investing in junior explorers.  I need to stop.

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