as reported by news agency RBC - Ukraine on July 26Black Iron CEO Matt Simpson
told news agency RBC-Ukraine on July 26 that, “The most important question is whether we will be able to implement the project on clear, permanent, predictable terms.” Regarding taxes and concession payments, or royalties to the state, he said, “We need to be able to calculate how and under what terms we will be able to repay the loans, reach break-even point and start paying dividends to our shareholders.”
RBK-Ukraine News in Ukrainian → Kyiv, Monday 26 July 2021 09:00
Black Iron CEO Matt Simpson: Investors Need Law Stability and Government Response
Almost two years ago, in July 2019, during his first visit to Canada, President Volodymyr Zelenskyy, addressing representatives of Canadian business, announced his full support for investors from this country. Among others, he noted the Black Iron company, which plans to invest up to $ 1.1 billion in the construction of a mining and processing plant in Krivoy Rog. The project will create about 3,500 new jobs directly at the enterprise and in related sectors. At the moment, the company has accumulated funds necessary for the construction of the project from large international investors, including Cargill. Matt Simpson, CEO of Black Iron, tells RBC-Ukraine at what stage the project is now and what assessment can be given to the investment climate in Ukraine. - They have been talking about the new GOK in Krivoy Rog for at least ten years. With the outbreak of the war in Donbass, the company froze the project in 2014 just before construction began, then reopened it at the end of 2017. Now it is already 2021, we still have not heard about the start of construction work.
What is happening with the Black Iron project in Ukraine today?
The construction of the GOK at the Shimanovskoye iron ore deposit, which Black Iron will develop, really should have begun in 2014. It was planned that the facility will be commissioned in early 2017. However, despite significant funds for construction, the war prevented the implementation of our plans, since investors did not want to invest just over $ 1 billion if there was no stability in Ukraine. Thanks to the gradual restoration of such stability in Ukraine and the rise in iron ore prices since the end of 2017, we are again in an active phase of project development. We have spent the last three years reconfiguring the project. Initially, it was planned that this would immediately be a project for 10 million tons of annual production. Then it was reformatted into two phases of phased development, starting from 4 million tons per year with a gradual increase to 8 million tons. This reduces the required upfront costs from investors, and therefore reduces their financial risks. The main problem to be solved before the start of construction is the transfer of the basic land plot to the company from the Ministry of Defense. While we are negotiating with this agency, Black Iron is engaged in other pre-construction work, including the completion of a feasibility study and an assessment of the project's environmental and social impacts on the region. In order for construction to begin in 2022, as is planned today, we need to sign the relevant documents on the transfer of land with the Ministry of Defense, without delaying until the end of this year.
What is the total volume of planned investments, who has already been attracted as an investor, what part of the funds is the company's own money, and what part is borrowed?
The total volume of investments during the life cycle of the project will be about $ 1.1 billion, of which $ 92 million has already been financed. The first stage, the cost of which is estimated at $ 452 million, will be built with funds from large foreign investors and loans. The second phase is expected to be primarily funded from domestic cash flows. Among the main shareholders of the company are the British investment fund RAB Capital, the investment company Killik & Company, also from the UK, and the Mexican Invecture Group. We also selected the international corporation Cargill in a competitive tender as a co-investor of the project with the right to purchase the first 4 million tons of raw materials per year during the first 10 years of the project. We will receive $ 75 million in funding from Cargill. An additional $ 100 million will be provided by the family office of one of America's richest men in royalties. In addition, leading European banks will provide $ 300 million in debt financing, backed by a guarantee from a major export credit agency.
How will this project differ from similar mining and processing plants located in the neighborhood?
First, it is a premium quality end product with 68% iron and a low silica content of 4.5%, making the product suitable for steel mills in the Middle East and Europe. This product will be similar to the iron concentrate produced by Ferrexpo for the production of high purity pellets. The demand for premium iron is growing steadily as everyone wants to reduce CO2 emissions, and our product cuts those emissions by about 30% compared to the typically consumed 62% iron ore fines. For each additional percentage of metal content, buyers are willing to pay a reasonable premium, which can range from $ 18 to $ 72 per tonne, in line with historical market prices. Secondly, since we are the first GOK to be built from scratch since Ukraine gained independence, we plan to use many innovative technologies that were not used in Soviet-built factories. For example, most businesses around our mine still use 110-120 tonne dump trucks, while modern iron ore mines have long used more energy efficient 240-320 tonne dump trucks. In addition, the project is designed in such a way as to minimize its impact on the environment. For example, we plan to reduce dust emissions by using electronic detonators with precise microsecond control in the mine
At what stage is the process of obtaining permits? What else needs to be done before starting the construction itself?
We have already received the required mining allotments and mining permits. In addition, exploratory drilling was carried out back in 2012 - based on research data from the days of the Soviet Union. In November 2019, we signed a Memorandum of Understanding with the Ministry of Defense of Ukraine on the transfer of the main land for the construction of a future mining and processing plant, tailings and waste rock dumps. We held negotiations with the residents of the village of Rudnichnoye, as they will need to be relocated to a safe distance from mining operations. The most problematic issue today is the time required to conclude a legally binding agreement with the Ministry of Defense on the transfer of land required for the project. We believe that the planned agreement is very beneficial for both parties. Black Iron plans to build new apartments for military personnel and remodel the military training ground in accordance with modern NATO standards. However, it is now the middle of summer of 2021, more than a year and a half have passed since the signing of the Memorandum, and we still do not have a legally binding agreement on the transfer of land. This slow decision making to secure key land rights worries both our investors and us. Today, due to the increasing demand for iron ore around the world and the sky-high prices for it, the interest of investors who invest in the extraction of raw materials is relatively high. But when they see the lack of dynamic government support for significant private investment projects, they gradually lose this interest.
Apart from the modernization of the military infrastructure, what other social obligations will the company have in connection with the implementation of the project?
There is also a small plot on the territory of Krivoy Rog, the village of Rudnichnoe, where it will be necessary to resettle 1200 residents in 400 houses. These people live very close to nearby active quarries and often face a lot of dust and shaking from their homes. Therefore, they are, in most cases, interested in moving. People will receive compensation and will be able to buy new housing. In addition, the city will also receive money for social infrastructure projects such as new hospitals, a new school, kindergartens and road repairs. This is in addition to our main social burden - the creation of about 700 jobs directly at the enterprise and up to 2,800 in related industries. In addition, about $ 2.2 billion in taxes will be paid to the budgets of all levels within 20 years. However, in order for this process to begin, we must first sign all the necessary documents on the transfer of land and promptly obtain the necessary permits to start construction.
After the land issue is resolved - how soon can construction be started?
After the signing of a binding agreement with the Ministry of Defense on the transfer of land, the activity in preparation for the start of construction work will increase significantly. Firstly, financing of the construction of the project from Cargill and European banks depends on the signing of land documents and obtaining the necessary permits. We are already well advanced in obtaining the necessary permits, including updating the feasibility study and environmental and social impact assessment.
Secondly, before starting construction, we will need to sign contracts with Ukrzaliznytsya, Yuzhny Port and electricity suppliers to ensure the logistics and infrastructure of the GOK. Memoranda of Understanding have already been signed with all of these major service providers, so it won't take long to sign binding contracts. We hope to enter the construction process in early 2022. At the same time, the processes of moving the military training ground and settlements, the purchase of equipment, etc. will begin.
How do you assess the new legislation on attracting investments, in particular on the abolition of income tax for new investments?
“We are pleased to see some progress on legislation that will allow investors such as Black Iron to gain access to government support under the new investment law. The sooner this support is provided, the sooner jobs will be created, and Black Iron will make a significant contribution to the Ukrainian economy as a major exporter of high quality iron ore. Overall, this legislation is very positive for Black Iron and other large foreign investors as it should provide stability of the law and some tax breaks to stimulate investment. Initially, when the document was being prepared for review, it included corporate tax incentives that would save us about $ 170 million during the first five years of operation to help pay off the initial investment debt. However, then the mining industry disappeared from the list of supported ones. We assume that there are political reasons for this, and we take it calmly, since the important main sections that relate to the predictability of the legislative field and the international protection of the rights of foreign investors, as well as incentives for the import of equipment necessary for implementation, remain in force. To implement the law on state support for investment projects with significant investments, several by-laws have already been adopted. They have a number of criteria for financial solvency that an investor must meet in order to qualify for such support. And that can be problematic. An investor must meet three criteria: having own funds of at least 20% of the planned investment amount; net operating cash flows of at least 20% of planned investments; and also, confirmation of the availability of funding sources to cover the planned investments. The last criterion, which proves that the investor has enough funds to implement the planned investments, is quite reasonable. But the first two may prove problematic for some investors. In particular, the second criterion, which requires investors to have operating cash flows, could potentially cut off a very large pool of investment capital from companies that are at the development stage, and could lead to a decrease in the interest of such investors in Ukraine. Thus, we see this new law as a very positive step forward to unblock some of the bureaucracy in Ukraine, but its success will depend on its implementation in real life.
How do you feel about the expected increase in the rent for the use of mineral resources?
Will the Black Iron project be economically viable with a significant rent increase?
The question is not so much how high taxes will rise. The more important question is whether we will be able to implement the project on clear, constant, predictable conditions of taxation and payment of royalties. Investors want tax and royalty amounts to be stable in order to provide confidence in the return on their investment. We need to calculate how and in what time frame we will be able to pay off loans, reach the break-even point and start paying dividends to our shareholders. And when, on the one hand, the state promises to protect investors, on the other, tax legislation changes unexpectedly every year, and investors begin to reconsider the prospects for investing in Ukraine. For Black Iron, this also adds up to the delay and difficulty in negotiating binding land transfer agreements. To be successful, we need the stability of the law, tax / royalty rates, and a responsive government response to requests.
Is there an option that the company will curtail investments in Ukraine and will not continue the project?
We would not like to consider such a scenario. As the largest greenfield mining project, we want to demonstrate our success in order to inspire other greenfield stories and attract other foreign investors to develop deposits in Ukraine. This will lead to the creation of better jobs and opportunities for the citizens of the country. Conversely, the lack of support for such projects now will mean that there will be fewer of them in the future. It would be a shame to have such a prospect for a country rich in minerals and highly qualified personnel in this industry. A lot of money, time and effort have already been invested in our project, a pool of first-class investors has been assembled, ready to finance the construction of this enterprise. The demand for iron ore in the global markets is growing and this trend is expected to continue in the next few years. Moreover, the demand for the high quality iron ore that our company will produce is also growing as people are more and more concerned about the environment. Using our product reduces emissions from steelmaking by about 30%. This could be an excellent contribution to the decarbonization of the Ukrainian and global industry. However, in order to realize these investments, it is important that we hear intelligible responses to our requests from the government in a much shorter time frame than is happening now. And the legislative field should become more predictable. The Shimanovskoye iron ore deposit is located near Krivoy Rog, the reserves of raw materials amount to 646 million tons. The license for the development of the deposit was first issued to the Shimanovskiy Metallurgical Plant, owned by Viktor Pinchuk's Geo Alliance, back in 2007. Black Iron acquired the license in 2010.