Here comes Oceanic Iron Ore

When Steven Dean stepped down in late 2002 as president of Teck Cominco, now Teck Resources (TCK.B-T, TCK-N), his motivation was pretty simple: he just wanted to spend more time with his family after spending years on the road, a fact of life in the mining business.

Of course Dean didn’t completely opt out during his time out from the industry. Among other things he co-founded a copper company in Chile and got involved with a fertilizer play in China. But as soon as his kids headed off to university he decided he should “probably get a little more serious about doing something.”

That something turned out to be putting together a team to fast track the development an iron ore project in the Labrador Trough, Québec called Hopes Advance and launching Oceanic Iron Ore Corp. (FEO-V, FEOVF-O) in late 2010. The team included Dean, chief financial officer Irfan Shariff, and more recently, Alan Gorman, president and chief operating officer.

The project had been tangled up in arbitration between hard-driving Toronto-based mining entrepreneur Pat Sheridan and a group of Middle Eastern partners. The dispute started five or six years ago, Dean says, when Sheridan thought he had sold the property to partners in the Middle East. But the case ended up in court.

“The resource was locked up in international arbitration in London for a long time so we said to the feuding parties: ‘Stop. The project is not advancing while it is locked up in court. Let’s settle the arbitration dispute and add some real value to the project. “

Fast forward to last week and Oceanic Iron Ore has completed a prefeasibility that demonstrates the project has a base-case, after-tax net present value of $3.2 billion, an after-tax internal rate of return of 16.8% unlevered (19.2% levered) and life-of-mine operating costs of just $30 per tonne.

“There are very few assets like this left in the world,” Dean says, explaining how the project, which sits just 20 km from the coast, lured him out of retirement. “When it comes to bulk assets like this one, being on the coast is a huge advantage. There’s not another [project] like it, not in Brazil, not in Australia, not in West Africa. They all have got railway lines to build. A 1,000-km railway line is about a $2.5 to $3.5 billion capital project if you can get it approved and if you don’t have to go across multiple country borders in places like West Africa, or if you can get alignment from three different aboriginal communities in Quebec. That doesn’t exist in our scheme of things.”

Dean adds that in the iron ore business in Canada, having to rail product adds a cost of about $15 to $20 per tonne. “So almost by itself that rail component makes us one of the lowest cost producers in Canada — and in fact anywhere.”

The large-scale deposit has about a 2-billion-tonne iron ore resource, which translates to proven and probable reserves of 1.36 billion tonnes grading 32.2% iron, and a mine life of about 31 years. The concentrate grade will be 66.5%.

Construction capex is expected to come in at about US$2.85 billion with expansion capital costs of US$1.61 billion. In the first 15 years the project’s strip ratio will be 0.5:1 and over the life of the mine it will run at 1.17:1.

Production is expected to get underway in 2017 at a rate of 10 million tonnes per year and expand to 20 million tonnes per year in 2027. At full production Hopes Advance could be the largest iron ore mine in North America, Dean says.

The company expects to provide its own power generation in the first eight years, essentially a low-cost generating facility run on heavy fuel similar to bunker fuel, after which the project is expected to be connected to the Hydro Quebec power grid.

Oceanic expects to complete an environmental impact study and a feasibility study next year and start construction in 2014-2016.  

Currently Dean and his management team are focused on tying up a deal with potential strategic partners — primarily in China. Oceanic envisions structuring a transaction, probably an off-take agreement with an Asian steel company, and then sell a piece of the project itself to the partner for a value based on its economics.

“We would sell 30%, 40%, maybe as high as 50%, to them, and they would pay us an amount over time that matches various milestones,” Dean explains. “The third piece of a transaction, and we’re not pioneering this model, is that you would bring a financing component, a debt financing component. If you get a Chinese partner, you’d typically bring say an export-development bank, like Exim, or the China Development Bank, and they do it because they see the potential for trade. Of the $2.8 billion, as much as $1 billion of the capital could be supplied by China . . . so it’s a trade deal, a bank financing deal, a sourcing of raw material deal, and participating in the profit of the project deal.”

At presstime Oceanic was trading at 18¢ within a 52-week range of 13¢-45¢. The company has about 174.7 million shares outstanding and 229.2 million fully diluted.

Daniel Greenspan of Macquarie Capital Markets in Toronto has an “outperform” rating on the stock and a 12-month price target of 50¢ per share. “Oceanic remains a compelling early stage iron ore development story,” he writes in a note to clients. “The positive prefeasibility study is an important milestone . . . which helps de-risk the technical aspects of development. We continue to believe that over the medium to long-term, production in the Labrador Trough will migrate further north and with its low opex estimate reflecting the location close to tidewater and the low strip ratio, we believe Oceanic is in a good position to develop Hopes Advance relative to its northern peers.”

Gary Lampard of Canaccord Genuity also has a target price of 50¢ and holds a “speculative buy” rating on the stock.