NevGold Corp T.NAU

Iron nugget - pricing prospects

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Iron nugget is expected to be a high quality product with quality at least on par with the merchant pig iron, and achive a price per Fe-unit at least on par with pig iron. Because of higher iron content (and less carbon) in iron nugget, this may imply 3 – 4 % premium per tonne.

The world's first iron nugget plant in commercial production, Mesabi Nugget in the U.S. with 0.5 million tonne of annual capacity (97% Fe), came into operation at the end of the 2009. Mesabi Nugget is a part of Steel Dynamics Group (SDI). SDI also is a manufacturer of steel in mini mills (i.e. EAF based steel production). SDI owns 81% and Kobe Steel 19% of the Mesabi Nugget. SDI says iron nuggets are comparable in quality to pig iron, and they will use iron nuggets as a feedstock for the production of flat-rolled steel in mini mills - this as a replacement for pig iron which has been imported from Brazil.

Medio January SDI said that the "floor" for the price of pig iron was at the price level then, which was approximately USD 350/tonne FOB Brasil. The price today is about USD 400/tonne FOB Brazil. Brazilian pig iron producers have cash cost of approx. USD 350/tonne. To cover all the costs they have to achieve sales price of perhaps USD 375/tonne. Capacity utilization for Brazilian pig iron producers are only 30% now, but today they aren’t willing to sell pig iron FOB Brazil for less than USD 400/tonne. The price FOB Black Sea also is USD 400/tonne today for pig iron producers that supply via ports there. The worst economic downturn in the global economy since the 1930s, that we've just behind us, led to exceptionally large stocks of pig iron with steel producers. Therefore the trade with merchant pig iron almost stopped for a period, and the price of the traded pig iron for a period fell to below cash cost for the pig iron producers. I don’t know if the pig iron stocks with the steel plants have come down to normal levels so that the trade of pig iron has reached a normal level now. If this is not the case, this partly can be the reason for the low capacity utilization among Brazilian pig iron producers.

Several companies in North America and Australia have plans to start production of iron nuggets. I have seen some of them in the first half of 2009 using USD 350/tonne as estimate for long term price in their DCF-calculations. In their Preliminar Economic Assessment (PEA) from June 2009 the Canadian company Advanced Explorations Inc used USD 500/tonne FOB as long term average real price in their DCF calculation. They plan start up in 2013 and production of 1 million tonne of iron nuggets per year. Cash cost per tonne in production of iron nuggets is substantially lower than for pig iron.

I consider a base case long term realprice FOB Kotka in the range USD 400 – 450/tonne as soberly in valuing the NAU iron nugget project. Maybe USD 450/tonne is realistic as an expectation for long term average price if the world's steel production going ahead will be driven by moderate growth in the global economy driven by stronger growth in emerging economies. I think 2009 benchmark prices for iron ore is reflected in todays pig iron price FOB Brazil of USD 400/tonne. This week it is said that pig iron producers in Brazil have got notice from Vale about a price increase of 47 % in March for iron ore, and they are waiting for the official notice before closing new export deals. A producer is referred on this statement: ”For each 1% lift in iron ore prices, pig iron export prices will raise about USD 1 per tonne.”