Disappointed long term shareholder
I have been a long term shareholder of NML and until recently I have been optimistic about the future of NML (a little bit to optimstic unfortunately). Following the release of the FS, I had a few questions so I sent them to NML for clarification. The answers I received back were less than encouraging.
I don't post very often, but I wanted to share this information with the board. My questions were answered via a phone call otherwise I would simply post the response for everyone to see.
Question 1 - Am I correct to assume that the ~$3B in infrastructure CAPEX associated with the FS is assumed to be funded through a lease arrangement and is therefore treated as OPEX rather than CAPEX? Is there a presedence for this?
Answer 1 - ~$3B of the CAPEX (infrastructure component) is assumed to be a lease arrangement rather than CAPEX. This was an idea presented by the CFO of TATA corp. because he felt that financing was "challenged" for this project at $8B. There is no precedence for this in iron ore but there is in other industries.
Question 2 - Given this is a rather large assumption around financing the project, have you gone to the market to test the appetite for a deal structure like this?
Answer 2 - Not yet, but pension funds usually like arrangements like this.
Question 3 - Now that the FS is released, is the 4 month clock running on TATA? Given the wording of the press release it made me feel as though there was more work to be done and TATA would not be on the clock just yet.
Answer 3 - We should have worded the press release more clearly. The techno-economic portion of the FS has been released but there is still a lot of work to do. We need 1-2 more partners, environmental permits (which haven't been applied for), and we need a single scenario for the project. We can't submit the enviro application without a single project scenario. We also really need TATA for the market they bring and they would have a hard time committing to this project today. They have the DSO being built, a mine in India being built and Corus isn't doing very well economically right now. A decision will not occur in the next 4 months and it will not occur in 2014.
Side note: This environmental permit vs. single project scenario is a circular argument that will allow TATA to not have to make a decision until the decide to. (which comes first, the chicken or the egg?)
Question 4 - How is the partner search proceeding?
Answer 4 - It is really just beginning now as we needed a FS to get people to sign a CA. We have several people signing CAs and are off to the Middle East shortly to meet with potential partners. The binding heads of agreement does not address bringing in other partners (just one line about it) so a new BHOA may need to be written. TATA will want to keep 50+% and NML cannot fund anything beyond a free carry.
Side note: This to me signals NML having to reduce its carry to <20%. A pie can only be split so many ways.
Question 5 - Even if the project was sanctioned today, NML would have to come up with capital to fund it's 20% share of the capital beyond the initial carry. In any scenario, that amount is greater than NML's current market cap. Given the DSO is at the mercy of TSMC, what other sources of income do you have? You have several multi-billion tonne assets, have you considered selling one of them? Are there a government participation option? Could you sell down your port commitments to TATA or others (you are carrying a disproportionate amount right now).
Answer 5 - We do not control the timing of dividends from the DSO. There will not be a dividend from the DSO in 2014 or in 2015. The contract says that debt must be serviced and working capital in good standing but beyond that, it leaves it up to TSMC. We have not considered selling any of our assets but we made a point of getting them to be NI31-101 compliant. We are spending <$1million/month and have ~$30 million so we have some time. We will be approaching the port about getting out of our commitments. Others have already been successful in getting out of their commitments. The port doesn't want to bankrupt the industry that it is dependent upon. TATA could potentially buy some of our capacity if they need more for the DSO (TATA already has 5 tonnes of capacity for the DSO).
Other discussion that I didn't ask about:
- NL gov has put NML on the backburner due to turnover in the gov. Approval to pelletize NL iron ore in Quebec has not been granted and although NML has submitted everything they can, the gov is not making a decision. "This will be a process that isn't measured in months."
Side note: This is the same issue they were trying to address with Danny Williams 8 years ago at the first AGM I attended.
Bottom line:
- "Creative accounting" a big assumption in the FS economics ($3B lease arrangement)
- Will not be a decision in 2014 on Taconites
- Additional partners means NML may have to reduce its carry to <20% if project goes ahead
- Partner search just begining
- No dividends from DSO for next 2 years at least.
- Enough money to stay afloat for 2-3 years
- Port commitments will need to be re-negotiated
Wish I had better news.