Alderon signs hybrid joint-venture, off-take agreement with Chinese steel leader

VANCOUVER — Vancouver-based Alderon Iron Ore (ADV-T, AXX-X) took a big step towards putting its Kamistiatusset (Kami) iron-ore project on the Labrador-Quebec border on the development track by entering into an US$195 million partnership with China’s leading steel producer, Hebei Iron & Steel Group.

The agreement was formally announced on April 13, and gives Alderon access to project debt facilities, including Chinese banks, needed to fund further exploration and eventual development — Kami has a projected capital expenditure of US$989 million.

“Alderon now has both the capital and the China market access to build a world-class company,” commented Alderon executive chairman Mark Morabito. “China continues to be one of the strongest and most dynamic economies globally with significant expertise in the iron ore and steel industry.”

Hebei’s initial investment totals US$88.5 million for which it will receive a 19.9% stake in Alderon through the issuance of 25.8 million shares at $3.42 per unit. Hebei will commit the balance of the US$195 million investment — roughly US$107 million — following a review of Kami’s upcoming feasibility study, creating a limited partnership with a 75%-Alderon and 25%-Hebei ownership split.

The staged agreement also features an off-take element, with Hebei obligated to purchase 60% of the actual-annual production from Kami upon exercising its right, up to a maximum of 4.8 million tonnes of an initial 8 million tonnes of iron-ore concentrate projected to be produced annually at 65.5% iron.

“Alderon is developing a high-quality iron ore project with abundant resources and strategic location,” explained Hebei chairman Wang Yifang. “I believe this is an important transaction in the push of China’s iron and steel enterprises to invest into overseas mining assets. In addition to the potentially attractive investment returns, Hebei is able to lock up a long term supply of high-quality iron ores, to help improve our operational performance and ensure our long-term, sustainable growth.”

Alderon filed a joint resource estimate and preliminary economic assessment (PEA) on its Kami-Rose zone March 21. The PEA was originally completed last October, and pegs Kami’s pre-tax net present value at US$3.07 billion at an 8% discount rate, and a 40.2% internal rate of return.

The project is estimated to have 490 million indicated tonnes grading 30% iron and another 118 million inferred tonnes at 30.3% iron.

Alderon’s partnership agreement with Hebei continues a growing trend of joint-ventures between industrial-growth based Asian economies and Canadian iron-ore exploration outfits.

Montreal-based New Millennium Iron (NML-T) optioned a 27% stake to Tata Steel Global Minerals, a subsidiary of India’s Tata Steel, last March in an agreement that could be worth as much as US$4.8 billion. Toronto-based Adriana Resources (ADI-V) formalized a partnership worth US$93 billion with a subsidiary of China’s WISCO International Resources Development & Investment in order to gain access to Chinese financing for its costly US$12.9-billion Lac Otelnuk iron-ore project outside of Nunavik, Quebec.

Despite under-whelming Chinese growth figures through March — first quarter GDP growth rates clocked in at 8.1% — there is definitely a sense that Chinese firms are aiming to diversify steel sourcing, and looking to Canadian deposits in the Quebec-Labrador region as targets. China is likely hoping to reduce its reliance on the big-three iron-ore producers Vale (VALE-N), BHP Billiton (BHP-N, BHP-L, BHP-A), and Rio Tinto (RIO-N, RIO-L, RIO-A), in order to gain more control over industrial supply costs.