Advanced Explorations Releases First Feasibility Study

Advanced Explorations Inc. (AEI), a partner of Roche Bay plc, delivered the first feasibility study on the Roche Bay Magnetite Project on Friday. As the CEO of Roche Bay, I have spent 12 years of my life working on the Roche Bay Project. What follows is a commentary on the significance of the feasibility study, but keep in mind I have a biased point of view. Roche Bay and Oreninc are both actively involved in this project, so we urge you to verify the information and ideas I present here and form your own opinions.

Over the last few months, it seems as though very little of the news coming from junior companies has been viewed favourably by the general market, as evidenced by AEI’s share price crash. Overall, the natural resource capital market is at its lowest point in recent history. Unless a project delivers credit card-level IRR’s and a Capex that can also be financed on a charge card, there seems to be little demand for shares on the TSX-V.

 

However, on the flip side, major companies will look at material projects with the potential to generate significant cash flow; size is the key issue here. According to AEI’s feasibility study, the Roche Bay Project comes in at $1.37 billion in capital for a starter mine, and combined with other iron ore targets including Tuktu, the project will likely be much larger than the 5.5 million tonne initial mine size planned. Capex is $250 per tonne, but some of the money will go towards regional infrastructure that will contribute to AEI’s future expansion plans.

Why do we like the option on the Roche Bay Project, which both Roche Bay and Advanced Explorations hold?

Iron ore prices: A strong oligopoly controls the supply of iron ore. Big projects like Sierra Sul have been delayed to keep supply tight, and in the long term the price of iron ore will be maintained by limiting the number of big projects.

No railroad: If a company needs to build a railway in order to access tidewater, the railroad alone will cost roughly $50-100 per tonne of capacity plus $15-20 per tonne in Opex. The Roche Bay Project’s proximity to the coast means the district could support 5-25 million tonnes per year of production without a rail line. Even Tuktu is only 60 km from tidewater, and road building is fairly simple. It will be cheaper to send ore by truck or conveyor belt over 60 km than to build a rail line.

Shipping: Baffinland assumes year-round shipping is possible for its project. For the Roche Bay Project, AEI gives a much more conservative estimation of 180 days. If AEI goes to year-round shipping, the IRR will significantly increase as stockpile costs decrease. I would expect the same mine to produce more but with minimal capital upgrades.

Freight rates: There is an overabundance of shipyard capacity. New ships are being built every week, and freight rates are down to record lows. I expect rates to stay record low for the next 10 years. This helps projects such as Roche Bay, as there will be little to no freight rate risk.

Life of mine: I have not read the full study since it has not yet been released on Sedar, so I do not know why the life of mine is only 15 years, but considering the 500 million tonnes of ore in the C Zone ore body, an aggressive reduction of resource to reserve must have occurred. I would guess it had to do with stripping ratios having to stay at 0.9. However, several other zones located within walking distance of the C Zone can also supply AEI’s mill and port. If the concentrator came online, I would be willing to bet that the mine would produce for much longer than 15 years.

Operating costs per tonne: Using Arctic diesel, $49 per tonne in Opex is a very good number. For the most part, China cannot produce for less than $80-90 per tonne of ore. Although current ore prices are low, the oligopoly will support high iron ore prices in the long term. BHP, VALE, and Rio Tinto can delay projects to limit the supply of ore.

Fuel choice/electricity: The one real limiting factor is the lack of a regional power grid at Roche Bay. Most remote mines look at coal-fired plants for electricity, but Canada has banned all new coal use. AEI’s concept of using rail car-sized LNG tanks makes sense. LNG is going for $2.80-5.00 per unit or $16.80-30 per barrel equivalent, which is roughly 15-30% of the cost of diesel. The same power plant designs can run either gas or diesel. Gas is much cheaper to store in the Arctic, as the rail car-sized tanks have a small environmental footprint. AEI will have to pay for 100-300 tanks to operate, but it is an insignificant sum of capital if the fuel costs 30% of diesel and Capex is about the same otherwise.

Taxes: The Roche Bay district will include a series of projects, and I would expect the developers to continue to reinvest cash flow from the first mine into building more capacity. With the Canadian tax system, I can see limited income taxes being paid for the foreseeable future.

Ownership: AEI will own 70% of the project once the report is filed with Sedar, and Roche Bay will quickly become a rent-collecting royalty company only.

Option value: Will AEI build the mine? Maybe, maybe not. However, the option for a new mining district with the potential for 100% ownership by a single company will be attractive to either the Chinese or another bidder. Even if AEI cannot capitalize on the project, the value of the project is still significant.

Next steps: AEI must deal with the Chinese first, and in my mind AEI’s biggest risk is what deal terms they strike with the Chinese. However, AEI has a powerful card to play: the deal with XinXing Pipes Group excluded Tuktu, which had not yet been discovered when the agreement was signed. Tuktu is a much better ore body than the C Zone, which grants AEI significant leverage since the Chinese will likely want Tuktu as well.

As the CEO of Roche Bay, I want to thank Advanced Explorations for producing the feasibility study and for the wonderful work they have done. Due to the weak market and low iron ore prices, they have found themselves in a tight spot. However, if the underlying report is as good as the press release, I have no doubt it will prove the economics of the project.