Iron nugget value estimateIRON NUGGET (KOTKA)
DCF YE09 Iron Nugget (base case): USDm 386
Assumptions in general:
* Prices and expenses are expressed in the value of money at Dec. 31, 2009
* Real discount rate of 8 % p.a. when calculating DCF
* Long term rate of general inflation 2 % p.a., i.e. nominal discount rate of 10 % p.a.
* DCF: discounted cash flow (or net present value)
* YE: year end
* USDm: million USD
* CapEx: Capital Expenditure
* WorkCapEx: Working capital
* Resource base: Buying 1,371 mill. tonnes of iron ore concentrate per year from Hannukainen over 35 years from Jan. 1, 2016, as input for making 1 mill. tonne per year of iron nuggets. This is a mathematical model simplification compared to what can be the actual production profile. 70 % Fe in iron concentrate and 96 % Fe in iron nugget means 0,96 mill. tonne pure iron in annual production of nuggets. To get 0,96 mill. tonne pure iron, and if no iron is lost in the production process, the iron nugget plant needs 1,371 mill. tonne iron concentrate which has 70 % Fe * 1,371 = 0,96 mill. tonn pure iron in iron ore concentrate..
* k: 1000
* mtpy: million tonnes per year
* dmtu: dry metric tonne units
* Tax rate: 26 %
* Depreciation: 25 years linear (in nominal values) of CapEx (this is my assumption as I haven’t succeeded in getting exact information about taxable depreciation for the Finnish mining industry)
* PEA: Preliminar Economic Assessment is expected in April 2010, and more reliable estimates for expenses, CapEx and time for startup of production will be available then
* Other assumptions and calculations presented below
1) EBITDA: DCF YE09: USDm 1.070
* Long term real price assumptions:
- USD 435/tonne iron nugget (96 % Fe in iron nugget)
* Cash operating expenses:
I have seen cost estimates for several companies planning to start production of iron nugget using the Kobe Steel (Midrex Industries) ITmk3 patented iron process. These estimates are from 2009 or earlier. My estimate is higher than those estimates, partly because I apply higher prices of some crucial input factors in production, and also because I apply market price for iron ore concentrate bought from Hannukainen. My estimate for long term real prices (incl. freight to Kotka) for those input factors are reflected in my estimat for cash operating expenses per tonne in the production of iron nuggets. As an illustration of deriving the estimated expenses I look to a calculation made by Hares Engineering in 2009 which I modify it a bit, ref. page 7 in the presentation in this link:
https://www.docstoc.com/docs/16141137/New-Business-Horizon-with-ITmk3?-Producing-the-Pig-Iron-from-the-
USD per tonne iron nugget:
+ 124,90 iron ore concentrate: consumption coefficient 1,371 * (iron ore concentrate USD 86,10/tonne + freight Kemi-Kotka USD 5/tonne)
+ 58,10 fuel: consumption coefficient 6,6 * USD 8,8/mmbtu (which corresponds to USD 320/m3 for Russian natural gas)
+ 33,30 reductant coal: consumption coefficient 0,37 * USD 90/tonne of thermal coal
+ 14,00 electricity: consumption coefficient 200 * USD 0,07/kwh
+ 29,00 consumption of other input factors in production (binder, fluxes, hearth material, chemicals etc)
+ 5,00 royalty to Kobe Steel for use of the ITmk3 technology
+ 5,00 maintenance
+ 2,50 labour and management
+ 17,40 sales commision 4 % of sales price of USD 435/tonne iron nugget as it is anticipated NAU will not build it’s own sales- and market organization
= 289,20 cash operating expenses per tonne sold of iron nugget
* Gross revenue per year: USD 435/tonne * 1 mtpy = USDm 435
* Cash operating expenses per year: USD 289,20/tonne * 1 mtpy = USDm 289,2
* EBITDA per year: Gross revenue USDm 435 – cash expenses USDm 289,2 = USDm 145,8
* Multiplicator: 11,65 (as a result of a fixed amount EBITDA annually over 35 years discounted by 8% p.a.)
* Discounting back from start of production (YE15) to YE09, i.e. 6 years: 1/1,08^6= 0,63
* DCF YE09 of EBITDA: annual EBITDA USDm 145,8 * multiplicator 11,65 * discounting back from YE15 to YE09: 0,63 = USDm 1.070
2) CapEx initially: DCF YE09: USDm - 409
* CapEx initially: USDm 600
* Discounting back from the mid-point timing of CapEx exposure (YE14) to YE09, i.e. 5 years: 1/1,08^5= 0,681
* DCF YE09 of initial CapEx: USDm 600 * discounting back from YE14 to YE09 0,681 = USDm - 409
3) WorkCapEx: DCF YE09: USDm - 32
* Assumed to 1/8 of annual gross revenue: USDm 435/8 = USDm 54
* Discounting back from start of production (YE15) to YE09, i.e. 6 years: 1/1,08^6= 0,63
* Investment in working capital: DCF YE09: 54 * 0,63 = - USDm 34
* WorkCapEx freed at the end of the project (35 years from start up YE15), i.e. discounting back 41 years (35+6) to YE09: 1/1,08^41 = 0,043
* DCF YE09 of freed WorkCapEx: 54 * 0,043 = USDm 2
* DCF YE09 of WorkCapEx net: 2 - 34 = USDm -32
4) Tax implications: DCF YE09: USDm - 243
* Multiplicator: 9 when using 10% p.a. nominal discount rate over 25 years
* Discounting back from start of production (YE15) to YE09, i.e. 6 years: 1/1,08^6= 0,63
* DCF YE09 caused by taxable depreciation of initial CapEx USDm 600/ 25 years * multiplicator 9 * tax rate 26 % * discounting back from YE15 to YE09: 0,63 = USDm 35
* DCF YE09 caused by taxation of EBITDA: DCF of EBITDA: USDm 1.070 * tax rate 26 % = USDm - 278
* DCF of tax implications: 35 - 278 = USDm - 243
5) DCF YE09 of Hannukainen: 1.070 – 409 – 32 – 243 = USDm 386