KWG turns to China for help in Ring of Fire

A railway design and engineering company named China Railway First Survey & Design Institute Group Co. (FSDI) and owned by China Railway Construction, one of China’s three major state-owned rail groups, is teaming with KWG Resources (CSE: KWG) to study the design and financing options for building a railroad to the junior’s chromite deposits in the remote Ring of Fire area of northern Ontario.

KWG’s agent in China, Golden Share Mining (TSXV: GSH), facilitated the memorandum of understanding (MOU) between the two companies, and will help representatives from FSDI travel to Ontario in early March for initial consultations with First Nations groups and other stakeholders.

“This is in part driven by China’s desire to expand their rail construction industry globally,” KWG’s vice-president of exploration and development Moe Lavigne says in an interview. FSDI has led the design and construction of more than 48,000 km of railways in western China’s rail network, along with more than 5,000 km of high-speed railways and rail transit projects in over 30 Chinese cities, and thousands of kilometres of railway, highway and subway projects overseas.

Set up in the early 1950s, the state-owned enterprise has over 2,000 engineers whose signature projects include building a railway from Qinghai to Tibet and from Baotou to Lanzhou. The company is also part of a joint venture by Chinese rail companies and a U.S. passenger rail company that plans to build a high-speed railway between Reno, Nev., and Los Angeles, Calif.

But KWG’s MOU with the Chinese is mostly about finance. “We could easily build a railway using only North American talent, no question about it, but it’s not about the engineering, it’s about the financing,” Lavigne says. He and KWG CEO Frank Smeenk say FSDI will likely finance development of the chromite deposits, and says there’s “a very good chance” that the Chinese company will end up with an offtake agreement that helps KWG build a mining operation there.

“There’s no engineering company in North America that can give us that,” Lavigne says. “That’s why the Chinese will end up doing a substantial amount of the engineering work.”

The bottom line, Lavigne says, is developing the Big Daddy chromite deposit, in which KWG holds a 30% stake, and the Black Horse chromite deposit, where it has the right to earn 80%. The deposits sit in the James Bay Lowlands, about 280 km north of Nakina.

“If I go to the banks today and say I want money to build a mine, they won’t offer it to me unless I have an offtake agreement — it’s a catch-22,” Lavigne says. “We have a situation where we can bypass this catch-22 and end up with an offtake agreement that will get us the finance to build the mine, and that’s why the Chinese are important.”

Lavigne says KWG has reached out to various companies in China for years because China makes more than half of the world’s stainless steel, and consumes more than half of the world’s chromite and ferrochrome.

“China has no chromite deposits and there are no other huge sources of chromite like South Africa, so that’s where the Ring of Fire stands out,” Lavigne says. “The Ring of Fire is going to be a huge source of chromite that will probably be there for a couple of centuries, depending on what consumption rates are,” he continues. “Around 20 million tonnes of ferrochrome is produced every year, so it’s not a huge amount, and everything is sold through offtake agreements. If we didn’t have an offtake agreement with China, chromite developments in the Ring of Fire are next to impossible.”

John Gruetzner, a long-time China watcher and founder of Intercedent — an investment, corporate advisory and capital-raising services firm in Beijing that is acting as an advisor on the transaction — says resources in the Ring of Fire could be “the single-largest export item from Ontario to Asia.”

In an email, Gruetzner says the value of exports could reach US$8 billion a year.

“This is the first step forward,” he says of the KWG-FSDI MOU. “But strategically, you will see after the National People’s Congress a lot of long-term strategic interest by China in positioning its industrial capacity for the next resource boom.”

One thing that KWG brings to the table is its vision of lowering processing costs using natural gas. Over the last three years, the company has developed technology to reduce chromite in its solid state into metallic ferrochrome with natural gas, rather than using conventional smelters with electric arc furnaces.

“In an electric arc furnace you’re heating the chromite to 1,700°C to melt it, and you end up producing an iron and chromium alloy, and your slag makes up the rest,” Lavigne says. “When you use natural gas … the temperature at which all of that happens is much lower (1,200 to 1,300°C), so the total energy consumption is much lower, and the plant costs are much lower.”

Lavigne notes that in the iron ore industry they have a method called “direct-reduction in gas.” It’s not new technology, but it’s never been used on chromite before.

Metallurgical, consulting, technology and test services business XPS has worked with KWG, and its lab-scale tests have been a success. The next step is to choose a commercial furnace and do pilot-scale tests.

Lavigne adds that in South Africa, the world’s largest chromite producer, miners contemplated developing a similar technique 25 years ago, but didn’t have enough natural gas to adequately develop the technology.

“Our projections are not fleshed out because they haven’t been verified on one of the new furnaces, but based on what we know, our cost to produce ferrochrome could be half of what other producers produce it for at the moment,” he says, noting that making a pound of ferrochrome costs between US55¢ and US85¢. He is confident “we’ll at least be at the low end of that range.

“Our potential Chinese partner recognizes that one of North America’s advantages is the endless supply of natural gas that comes out of fracking … so they understand the advantages of developing the gas-reduction technique,” Lavigne says.

KWG has had a patent application in progress on the technique for two years, and while KWG’s management is confident the company will eventually receive it, commercialization will cost a lot of money.

“That’s where the Chinese are interested in possibly being partners and helping us,” he says. “They see the whole picture and want to participate in all aspects of the project, not just the rail.”

Lavigne says KWG hopes to “get a stainless steel industry up and running in Canada.” The company aspires to build a chromite gas-reduction plant and ship its ferrochrome to Montreal, and use electric arc furnaces to blend its ferrochrome with other material and make custom stainless steel billets that can be shipped worldwide.

Another option is to use an existing steel mill in Sault Ste. Marie.

“We’re trying to set things up in Canada that will invite stainless steelmakers of the world to set up shop here, and we ourselves might become a stainless steelmaker,” he says. “None of that will happen until we have ways of getting chromite out of the Ring of Fire. That’s the start — the foundation — for everything else to happen.”