Mamba Minerals tables offer for Champion Iron

Champion Iron Mines (TSX: CHM; US-OTC: CPMNF) brought its Consolidated Fire Lake North project in the Labrador Trough to the prefeasibility stage, and Mamba Minerals (ASX: MAB) believes it has what it takes to advance the iron-ore project all the way to production, with the expertise of Mamba’s managing director, Michael O’Keeffe.

Relatively unknown in Canada, O’Keeffe is a big name in mining and financial circles in Australia and the U.K., where he is best known for turning strategic investments into major resource projects. As a managing partner at Glencore Australia for nearly a decade, he was instrumental in boosting Glencore’s market share in Australia and Southeast Asia — growing turnover from US$100 million to US$2.4 billion.

Later, as executive chairman and CEO of Riversdale Mining from 2004–2011, he raised A$780 million for the company before selling it and its coal assets in Mozambique to Rio Tinto (NYSE: RIO; LSE: RIO) for A$3.9 billion (US$4 billion).  (In 2012 Rio recorded a US$3-billion, non-cash impairment charge related to the 2011 acquisition, telling shareholders that developing infrastructure to support Riversdale’s coal assets in the African nation was “more challenging” than it “originally anticipated.”)

“O’Keeffe is very well connected in the industry — he’s a mine builder, and he’s going to take Fire Lake North to the next level,” Adam Lucas of London-based Ocean Equities says in a telephone interview. “He has huge institutional support in Europe and Australia to support these kinds of projects, and he’s going to be valuable to Champion, moving the Fire Lake North project from exploration and development, and building it into an industry player.”

Ocean Equities acted as financial advisor to Champion on the junior’s friendly takeover talks with Mamba, which culminated yesterday in news that the two companies had reached a definitive arrangement in which Champion shareholders would receive 11 shares of Mamba in exchange for every 15 shares they own of Champion.

The deal values Champion shares at 39¢ each, or $59.8 million on a fully diluted, in-the-money basis, and represents a 72% premium to Champion’s 20-day, volume-weighted average price as of Dec. 5.

Once completed, Champion shareholders would own 50.5% of Mamba’s issued share capital on a fully diluted basis, and the combined entity — to be called Champion Iron Ltd. — would have a $25 million in cash. The transaction is expected to close in April 2014.

As a condition of the arrangement, Mamba has agreed to undertake an equity financing for at least A$10 million that will “further strengthen the merged entity’s balance sheet and provide financial flexibility for further development of the Fire Lake North project,” Lucas explains in a research note on the deal emailed to The Northern Miner.

O’Keeffe will be executive chairman of the new company, and Champion’s current president, CEO and chairman Thomas Larsen, will retain the CEO role. Larsen described O’Keeffe and Mamba’s management team as having “an outstanding track record in developing and financing bulk-commodity infrastructure projects.

Mamba also brings the Snelgrove project to the company, an iron-ore property in the Labrador Trough, which it believes could become a hematite and multi-billion-tonne magnetite project. In July 2012, Mamba entered into an option agreement with Altius Minerals (TSX: ALS; US-OTC: ATUSF) to acquire 100% of the project by spending $6.5 million on exploration. Altius will retain a 3% gross sales royalty and a 20% equity stake in the company.

Snelgrove — 55 km southeast of Schefferville, Que. — covers 33 km of the prospective Sokoman Formation, the main ore-bearing horizon within the Labrador West mining district. The project is 65 km east of a heavy gauge-rail connection at Schefferville, with available capacity to the Port of Sept-Îles. It can also access low-cost hydro power at 4¢ kilowatt per hour from the Menihek hydro power station, 45 km away.

Champion’s Consolidated Fire Lake North project, meanwhile, is part of the company’s Fermont property holdings over 750 sq. km in the Quebec portion of the Labrador Trough, and is the most advanced of the five iron-ore projects within the Fermont portfolio. The project is north of ArcelorMittal’s (NYSE: MT) operating Fire Lake mine and 60 km south of Cliffs Natural Resources’ (NYSE: CLF) Bloom Lake mine.

A preliminary prefeasibility study released in February 2013 concluded that the project could produce 9.3 million tonnes of concentrate grading 66% iron for almost 20 years. But as The Northern Miner reported at the time the study was released, there remains “lingering uncertainty over how to move that concentrate to market.”

A day after the prefeasibility study was made public, Canadian National Railway (TSX: CNR; NYSE: CNI) announced it was suspending a feasibility study on a proposed multi-user rail line through northern Quebec that would have run 800 km from Sept-Îles to Schefferville, and through the iron ore deposits of the Labrador Trough. CNR justified the suspension by citing uncertainty about project developments that would use the line. And without a multi-user line, Champion will have to build its own rail connection to Sept-Îles.

Champion is focused on a feasibility study with the objective, among other things, of reducing rail transportation costs and sustaining capital. When asked during the conference call whether the new company would take on a joint-venture partner to help advance the project, O’Keeffe said it was a possibility and that he had good relationships in both China and India, and that it was also obvious that Arcelor “would be strategically advantageous to us.”

Lucas of Ocean Equities — who spent two weeks in the Labrador Trough last year analyzing 14 mining operations and projects — is optimistic that infrastructure can facilitate mining development and expansion in the region, and believes the area could become one of the world’s major producing iron-ore regions.

Unlike Australia’s Pilbara, for instance, where “the inability to access the infrastructure owned and operated by major iron-ore producers (BHP Billiton, Rio Tinto and Fortescue Minerals) constrains the junior iron-ore producers from developing their respective projects,” railways in Canada that cross provincial and international borders are deemed common carriers.

“That’s one of the things that Mamba likes about the trough,” he continues. “The common carrier legislation within Canada puts iron-ore mining operations at a huge advantage in comparison to other mining jurisdictions around the world, as not only does a mining company have the right to use a common carrier railway, providing a route to the export market, but they also minimize the project capital required to develop an iron-ore project.”

There are six railways that service iron-ore operations connecting the mines to the Port of Sept-Îles–Pointe-Noire and Port Cartier, he notes. And in October, the Quebec government announced that it would allocate $20 million to complete a prefeasibility study on building a third railway link to move ore from the Labrador Trough.

That positive news — along with the synergies the merger should bring — will help move the project
forward, Lucas says.

“The proposed deal allows Champion to gain the critical mass, reinvigorate its capital-markets profile, attract institutional shareholders to the register and generate the momentum that is critical to creating value for all stakeholders, and allow the large sums of capital required to be raised,” he concludes. “We are confident that the project will now move forward, regardless of a new multi-user rail project.”

Daniel Greenspan of Macquarie Equities Research wrote to clients that while the offer is a significant discount to his net asset value for Champion of $2.17 per share, uncertainty about infrastructure options over the last year has hurt the stock price.

“Champion has had a difficult year, which began with CN Rail pulling the plug on a rail feasibility study for the region in February, which led to Champion terminating its contract with the Sept-Îles Port Authority in July,” he says. “The continued lack of clarity on infrastructure options has impacted the share price, and while positive steps have recently been taken by the Quebec government to get the rail study back on track, there is still uncertainty regarding the timeline for a rail, and as a result, the Fire Lake North project. Given the ongoing timeline risk, we view the immediate offer and premium to the share price as reasonable.”

Greenspan downgraded the stock to “neutral” and cut his 12-month target price by 10¢, to 40¢ per share.

At press time Champion was trading at 28¢ per share within a 52-week range of 15.5¢ to 81¢. The company has just over 137 million shares outstanding.