Tata Steel wants New Millennium’s iron ore

Tata Steel of India has joined the ranks of foreign steelmakers that are trying to nail down long-term iron ore supply in Canada. The South Asian steel giant has signed a binding heads of agreement with New Millennium Capital Corp. (NML-V) to develop the Montreal-based junior’s LabMag and KeMag iron ore deposits, collectively called the Taconite project, which straddle the border between Quebec and Labrador. 

Tata needs the iron ore from Canada to make its operations in Europe self-sufficient and under the agreement will contribute 64% of the costs of a $50 million feasibility study, with New Millennium the balance of 36%. Once a feasibility study is completed (about twenty-one months), and Tata chooses to develop one or both of the deposits, the two companies will form a binding joint venture.

Under the joint venture, New Millennium is expected to hold a 36% equity interest in the Taconite project, including a 20% free carry equity interest. It will also have the right of first refusal to acquire an additional 4% of paid equity if a third party investor enters the project, for a maximum of 40% in the venture.

Tata will arrange the required equity portion of the financing based on a maximum capital expenditure of up to $4.85 billion if both deposits are developed and up to $4.68 billion and $3.76 billion, respectively, if only the KeMag or LabMag deposits are developed.

Currently Tata is New Millennium’s largest shareholder with 27.2%.   

Tom Meyer, a mining analyst at Raymond James, has raised his six to twelve month target price on the stock to $7 per share from his previous target of $4.75. At presstime in Toronto New Millennium was trading at $4.16 per share.

Meyer has also increased the net asset value of New Millennium to $6.35 from $4.28. “The increase reflects the positive benefit from the Tata agreement and the recent dilution from the recent $87 million equity financing,” in February, he wrote in a note to clients on Mar. 7. “For conservatism we assume New Millennium retains 20% of the project instead of the likely 36% and assume a start-up date of 1Q17 (prev. 2Q15) following a 24 month construction cycle.”

The LabMag deposit is in the Labrador portion of the Millennium Iron Range, which stretches for 210 km from western Labrador through eastern Quebec. KeMag is in the Quebec portion of the iron range.

According to a January 2009 prefeasibility study on KeMag, pre-tax cash flow from the Taconite project is estimated to be more than US$1.1 billion per year, based on a pellet price of US$90 per tonne. Currently pellets are running about US$200 per tonne. 

Together the two deposits have more than 9 billion tonnes of reserves and resources that could potentially produce 22 million tonnes per year of concentrate, with a potential mine life of 100 years.

LabMag contains 3.5 billion tonnes of proven and probable reserves at a grade of 29.6% iron plus 1 billion tonnes of measured and indicated resources at an average grade of 29.5% iron and 1.2 billion tonne of inferred at an average grade of 29.3% iron.

KeMag contains 2.1 billion tonnes of proven and probable reserves at an average grade of 31.3% iron and 1 billion tonnes of inferred at an average grade of 31.2% iron.

Over the last 52 weeks, New Millennium has traded between a low of 76¢ per share on Aug. 18 2010 and a high of $4.96 per share on Mar. 4 2011, two days before the agreement was announced.