West Perth-based explorer Northern Iron has signed an initial five-year offtake deal with a subsidiary of the Tata Steel Group over its Sydvaranger iron project in Norway.
West Perth-based explorer Northern Iron has signed an initial five-year offtake deal with a subsidiary of the Tata Steel Group over its Sydvaranger iron project in Norway.
Under the deal, Corus will purchase 6 million tonnes of concentrate from the project over five years, representing some 45 per cent of the planned base case production.
The agreement provides for the sale of up to an additional 2.25mt of concentrate at the mutual option of both parties.
Pricing for the concentrate will be based on Brazilian iron ore company Vale's benchmark for similar products delivered into Europe on a free on board bases.
The announcement is below:
OFFTAKE AGREEMENT WITH CORUS AND OPERATIONAL UPDATE
- 5 year offtake agreement signed with Corus to sell 6Mt of concentrate with a mutual option to sell an additional 2.25Mt of concentrate over the contract period
- MOU signed with another party for the remainder of the base case concentrate production
- Project development on schedule and within budget
- Company to move towards DR concentrate production using existing equipment - Inaugural Starter pit Probable Reserve of 21Mt grading 32% Fe (total) for Kjellmannsåsen and Hyttemalmen deposits
- Mineral Inventory in addition to Reserves totals 206Mt grading 32% Fe (total) - Resource category upgrade work in progress with the bulk of the work to be completed by the end of January
- Expansion Study completed and indicates a robust project. Capital cost estimated at A$200 million, payback of around one year and operating cost reduction of 10%
- Work on the Expansion Project to be deferred
- Northern Iron remains well placed to be a long term supplier of quality magnetite concentrate to European and Middle Eastern pellet plants
OFFTAKE AGREEMENT WITH CORUS AND THIRD PARTY MOU
The Corus offtake is for an initial term of 5 years from 1 July 2009 with contracted sales of 6Mt of concentrate representing approximately 45% of the planned base case production over the contract term. The contract provides for sales of up to an additional 2.25Mt of concentrate at the mutual option of both parties. Pricing for the concentrate is to be based on the Vale benchmark for similar products delivered into Europe on a Free on Board (FOB) basis.
The Company is pleased to be entering into a long term supply agreement with a partner with the financial backing of Corus. Corus is a subsidiary of Tata Steel Group, which was established in 1907 as Asia's first integrated private sector steel company. Tata Steel Group (including Corus) is the world's sixth largest steel producer with a crude steel capacity of over 28 million tonnes. It is now the world's second most geographically diversified steel producer, with operations in 26 countries and a commercial presence in over 50 countries. Corus, which manufactured over 20 million tonnes of steel in 2007, has operations in the UK, the Netherlands, Germany, France, Norway and Belgium.
The Company has also entered into a Memorandum of Understanding (MOU) with a third party to sell the remainder of the planned base case production. Negotiations are continuing to convert the MOU to a formal offtake contract.
The Company's plan is to complete all offtake arrangements by the end of January.
The Company's marketing strategy is to enter into long term FOB sales agreements directly with pellet producers in Europe and the Middle East. The base product planned to be produced is expected to grade between 2.5% and 3% SiO2, with low levels of deleterious elements (P, Ti, V, Al2O3, S, As, Hg). In the current iron ore market, the Company believes that producing the highest quality product is the best strategy for ensuring the ability to sell 100% of the mine production. The Company intends (subject to minor amendments to approvals) to move towards the production of a lower silica product suitable for DR pellet production (Fe -71%, SiO2-1.5% and 2%). The Sydvaranger mine has historically produced a range of products that are well known throughout the European steel market and can, if required, produce a product grading 0.5% SiO2 through the use of existing equipment on site.
Schedule and Finance
The project remains on schedule for commissioning in June 2009 with commercial production in July 2009. The critical path item is now the fabrication and shipping of the primary grinding mill shell. The mill supplier has commenced daily inspections of the work on this item to ensure on time delivery.
Completion of the ship loader and the upgrade of the high voltage substation are both on schedule. The bulk of the new equipment will be delivered in the first quarter of 2009 with the mill scheduled for delivery on the second quarter. No material delays have been indicated by the suppliers at this stage.
A detailed review of the budget was completed in early December which indicated that the Company has sufficient funding to complete the construction of the project and to provide working capital until revenues from the sales of concentrate are received. Total cash at the end of November was A$89.4 million.
The Company continues to cover currency exposures through the purchase of NOK and Euro. At the end of November, the Company held the equivalent of A$33.5 million in NOK and A$3.3 million in Euro. A further A$3.5 million of NOK was purchased during December at rates above the budgeted exchange rate. Deposits continue to be split between three major Australian banks and the largest Norwegian bank.
Mining Progress
Pre stripping of the Hyttemalmen and Kjellmannsåsen pits has progressed well, with all vegetation and topsoil cleared. Drilling and blasting is planned for early in 2009 following the receipt of the blasting approvals in November.
Deliveries of mine fleet have commenced, with the first four 777 mine trucks and a tool carrier on site. Delivery times for fleet have shortened significantly over the past quarter, and no issues are expected with the planned fleet delivery schedule. Work has commenced on refurbishing the leased workshop facility which will provide a suitable facility for the assembly and servicing of the mine fleet.
DnB NOR Lease Facility
Draw downs on the NOK 350 million DnB NOR fleet lease facility continue to be made in accordance with the lease agreement, with a total of NOK63 million equivalent drawn down to date.
Process Plant
Work continues on the refurbishment of the concentrator and associated facilities. An extensive work program on the first primary crusher is close to completion, and the bulk of the rail line repairs have been carried out. Refurbished equipment is now being reinstalled in the concentrator and deliveries of new equipment have commenced. The secondary and tertiary crushers, tailings thickener, cyclones and the majority of the pumps required have been fabricated and are scheduled for delivery in the first half of January.
Fabrication of the primary grinding mill is well advanced, with the girth gear now cast and in the process of being machined slightly ahead of schedule. The mill shell is being fabricated in Perth and is in line with the schedule.
The refurbishment and upgrade of the ship loading facility by the Tschudi Group is well advanced and on schedule for commissioning in April and hand over in May 2009.
Recruitment
Recruitment of the senior management team has progressed over the last two months, with appointments made for the Manager Mining, Chief Geologist and a range of middle management positions. The bulk of the senior management team is now in place andrecruitment has commenced for the operational employee positions with strong interest from Norway and Scandinavia.
Expansion Study
The Expansion Study has been completed and has determined that the optimal production rate is a doubling of the current planned 7Mtpa rate to a 14Mtpa production rate. This would produce approximately 6Mtpa of concentrate, and based on the current open pit Reserve and Mineral Inventory, would give a mine life of 15 years. Inclusion of the
underground mine would add a further 2 years to the mine life. The estimated capital cost for the Expansion is A$200 million at a +-15% accuracy level, plus an additional US$21 million for the mine fleet which has assumed to be leased.
Operating costs per tonne of concentrate are reduced by 10% and the payback period for the Expansion capital is around one year.
Whilst the Expansion Project adds significant value to the Company, in light of the current economic climate the Company has elected to defer work on the Expansion. In the interim, the relevant applications for the modifications required for the environmental approvals are being lodged to enable the Company to implement the Expansion rapidly when required.
Summary
With construction of the base case project on schedule and within budget. The Company is well placed to be a long term supplier of quality magnetite concentrate with an operation in a politically stable country. The signing of the Corus offtake provides certainty with respect to product sales over the short to medium term for the base case
production. Negotiations are continuing to convert the MOU for the remainder of the offtake to a formal contract as soon as possible.
The focus of the Company remains the successful commissioning and operation of the Sydvaranger Iron Project to provide long term supply of a quality product to European and Middle East pellet producers. The results of the Expansion Study indicate that this remains a valuable path for organic growth for the Company in the medium term and the Company intends to progress this once the first phase of production has been delivered on.
