Ocean Equities’ updateBelow is an extract of Ocean Equities’ update this week:
Our conclusion, and the general consensus of the group, from the trip is that the Kaunisvaara project remains on track in terms of budget and time and is a low risk, high quality product project relative to the majority of Northland's iron ore development peers. Whilst a number of key milestones are expected to be achieved in 3Q'11 (finalisation/funding of the proposed infrastructure/logistics JV and execution of Northland's debt financing) the site visit highlighted that there are no show stoppers and the biggest risk is construction execution risk - ie delivery of the project on time and budget.
To this end, the trip again reiterated to us the support and unique operating environment Northland enjoys from key local Nordic government/municipality stakeholders, including existing infrastructure providers, and the relationships in place with key third partners which helps mitigate this execution risk. The Company continues to deliver on its stated targets and the site visit reinforces our confidence that Northland is on schedule to enter initial production in late 2012 with first exports from Kaunisvaara in early 2013.
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Unlike a number of other better-known iron ore development companies Northland, in typical Nordic style, is busy focusing on project execution rather than selling the dream to the market.
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The market is currently applying a significant discount to the Kaunisvaara project with no value whatsoever for Hannukainen and other exploration potential. We expect this discount to reduce in 2011 as the mine construction and Hannukainen development progresses.
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Unlike the majority of other iron ore development plays, particularly in Africa, we do not see logistics as a major risk to the investment case nor requiring significant capital for new facilities.
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Furthermore, we understand that the STA (Swedish Transport Administration) has been granted funding, and feasibility studies will take place analysing the potential to expand the current rail network from Svappavarra close to Kaunisvaara, most likely along part of Northland's trucking route, under the proposed Northern East West Freight corridor expansion which if approved in the medium to longer term could result in Northland no longer needing a trucking operation and increasing the potential scale of its rail haulage.
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Discussions with Tata Steel, the Raw Materials Group (RMG) and Swerea Mefos reiterated the industry trend towards needing increased high quality ore, in effect a sweetening product to mix with the declining quality of traditionally sourced ore(..) and more transparent pricing systems with particular recognition of product quality (iron units, size distribution, moisture etc) and deleterious impurity levels.
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My (delta_no) comment:
A key take away and new learning for me from the DFS update is that RMG estimates a sharp increase in the premium per 1 % Fe Differential when the iron ore concentrate has above, say, 65 % Fe compared to material below that threshold. The reason is lack of such high grade material worldwide, and RMG also predicts this to continue in the long term as RMG also expects average grade declining. For that reason I have increased my long term price estimate for NAU for the 1 % Fe Differential from USD 4.25 per dmt to USD 5.25 per dmt for the difference between the 62 % Fe Standard Material and NAU’s 69 % Fe concentrate. According to the DFS update RMG estimates the 1 % Fe Differential for NAU to USD 7 per dmt in the long term.