Oceanic’s creative Sinohydro deal keeps Ungava project alive

Sinohydro, one of China’s oldest state-owned enterprises set up shortly after chairman Mao Zedong’s Communist party swept to power in 1949, says it is “willing and ready” to become an equity shareholder in Oceanic Iron Ore’s (TSXV: FEO; US-OTC: FEOVF) Hopes Advance project “when the time is ripe.”

The industrial powerhouse is responsible for 65% of China’s large and medium hydropower stations as well as major infrastructure projects in transportation, civil works, mining and real estate worldwide. Sinohydro has 524 projects in more than 74 countries, and has now signed a memorandum of understanding (MOU) outlining the ways in which it can cooperate with the Oceanic to advance the junior’s iron ore project in the northernmost extension of Canada’s Labrador Trough in Quebec’s Nunavik region.

The Chinese juggernaut has agreed to help arrange project financing for Oceanic Iron Ore in exchange for engineering, procurement and construction (EPC) work. The two companies expect the non-binding agreement will merge project financing and EPC agreements.

“The basis for the relationship would be that they would arrange construction financing in exchange for EPC work,” Oceanic president andCEO Alan Gorman says, adding that the deal took half a year to forge. “Their objective is to build their international pipeline of major infrastructure projects, and we qualify because we need to build a port and we need to build a power plant.

“The way we envision this coming together is that there would be some joint-venture partner or consortium that was led by Sinohydro, but that would involve local EPC companies as well,” Gorman says.

Oceanic’s financing efforts since July 2013 have been directed almost exclusively at finding strategic investments or partnerships in Asia. But a government crackdown in China on corruption within the state-run sector has stalled talks with some Chinese state-owned enterprises, he says, while at the same time declining iron ore prices have made raising money for large iron ore projects harder.

Gorman is optimistic about finding a partner, however, given the high grade of the Hopes Advance project, and what he believes will be growing demand among Asian steel producers for higher quality iron ore to make cars and consumer goods.

“China’s steel production is transforming from construction steel to consumer steel, and that requires higher-quality iron ore feed,” he says, adding that the same trend is true of Japan. “In April I met with virtually every steel producer of any consequence in Japan, and every single one voiced concern about the quality of iron ore on the seaborne market. It’s causing problems in their steel production process, so I think we’ll see a higher interest in Canadian iron ore.”

The Hopes Advance project’s proven and probable reserves of 1.4 billion tonnes grading 32.2% iron would make a high-grade concentrate averaging 66.5% iron.

Major change on horizon?

Gorman is the first to admit there have been some hefty increases in iron ore supply from major producers Fortescue Metals Group, Rio Tinto (NYSE: RIO; LSE: RIO) and BHP Billiton (NYSE: BHP), but he doesn’t see that continuing.

“There doesn’t appear to be a big appetite by the majors to expand,” he says. “That whole scenario was like a race to the bottom with those guys, and I think they’ve determined that they were shipping a lot less product several years ago and making a lot more money, so I don’t think they’re going to continue to flood the market beyond the current point of saturation.”

He also argues that the quality of seaborne iron ore has declined globally, and has done so over the last decade. “In particular, it’s the deleterious elements that create problems in the blast furnace — the phosphorus, alumina and silica levels have all gotten worse over the last decade or so,” he explains. “So in the future, we believe that there will be some marked and significant premiums for high-quality iron ore products, and the Labrador Trough’s iron ore really is among the best quality product globally … Canadian iron ore is going to be much more of a niche market.”

Hopes Advance is also low cost, he argues. A prefeasibility study completed in mid-2013 outlined life-of-mine operating costs of $30 per tonne over a 31-year mine life. Since then, oil prices and shipping rates have dropped, while U.S. and Canadian exchange rates that had been on par now favour Canadian exporters, which could lower operating costs even more.

The next step for management, either with Sinohydro or other investors, is to raise $15 million, which would take it through the permitting process and a bankable feasibility study. The company has already secured a commitment, subject to further approvals, from the Quebec government for 25% of that amount, leaving Oceanic to find the other 75%.

Gorman says that despite the downturn in commodity markets, he’s optimistic Oceanic can raise the money it needs. “Not everybody wants to do this type of deal, but by no means am I resigned that we’ve turned over every stone and explored every opportunity,” he says. “We’re at the bottom of the cycle, and that’s the time to invest.”

Oceanic has tried to lower its burn rate and stretch its cash by reducing salaries and benefit costs, trimming the number of people on the team, slowing down environmental and feasibility work, and lowering site expenses, effectively putting the project on care and maintenance.

“One hundred percent of our attention is focused on bringing in strategic investment and partnerships — that’s the whole game,” Gorman says, adding that he thinks the MOU with Sinohydro will open some doors. “That’s absolutely our hope for sure,” he says.

“When you’re trying to raise $11.3 million to pair up with the Quebec government commitment, investors take comfort in understanding there are large, reputable state-owned enterprises like Sinohydro who are getting themselves involved. I’m hopeful that this’ll provide investor confidence that will move this forward the next step or two.”