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6 International Exhibition of Mining, Coal and Construction Industries

5-7 October 2021 • Ukraine • Zaporizhia • Kozak-Palace Exhibition Center

Matt Simpson: “We would like to start construction by the end of 2021”

News
CEO of Black Iron on the company’s 10-year history of activities in Ukraine and project prospects
Matt Simpson: “We would like to start construction by the end of 2021”
Black Iron, a Canadian iron ore exploration and development company, is close to agreeing terms with the government of Ukraine on the acquisition of a parcel of land for building a processing plant, tailings and waste rock stockpiles near Kryvyi Rih. Ten years earlier, the company purchased a Cypriot company with licenses for the development of Shymanivske and Zelenivske ore deposits in Dnipropetrovsk region from EastOne group of Ukrainian businessman Viktor Pinchuk for USD13 million.
All the while, Black Iron was wandering the corridors of power, trying to negotiate with Ukrainian authorities. The company only needed to obtain a land plot used by the Ministry of Defence and another one which was part of the Forest Fund of Ukraine.  In addition, it was necessary to move a small micro-district in Krivyi Rih.

As of today, the company has enlisted the support of the President’s Office, the State Service of Geology and Mineral Resources and the Governor of Dnipropetrovsk region. Moreover, it has received an investment support manager from the state. Now there is hope that things will move faster for Black Iron. GMK Center asked Black Iron CEO Matt Simpson about the project’s prospects, the state of the global market for metallurgical raw materials and the investment attractiveness of Ukraine.

What has been holding back the project all these years?

– In 2014, Black Iron was ready to start construction work on the project. At that time, we had signed a joint venture agreement with Metinvest. They were ready to cover 49% of the construction costs and were very close to signing an offtake agreement for an additional USD 280 million.

Thus, we had USD 800 million on hand for a project that was estimated to cost USD 1.1 billion. However, a war broke out in the East of Ukraine. We had to suspend the project because it would have been too risky to make such a large investment at that time. We lost at least 4-5 years because of the war.

Now we are starting the project again, because our shareholders and I are convinced that the situation in the east of the country is much more stable. An important factor for this decision was the fact that iron ore prices have recovered to a favourable level. This made it possible to return investors to the project.

Now, you are considering investors in equity on offtake conditions. What are the features of such a tool?

– We are currently negotiating with several steel mills, as well as with global trading houses, including Glencore. I do not have permission to disclose all of their names. We are discussing the possibility of concluding an agreement, according to which they will have the right to buy out the first 4 million tons of our products at the market price in exchange for initial investments in the project’s construction. In the case of the mine, this is a very successful scheme for attracting the necessary amount of investment, since it implies a benefit to steel mills in the form of a price discount on raw materials.

So the benefit is only a price discount? You’re not talking about equity?

– In most cases, we are talking about the offtake group also taking an ownership of a stake in a company, sometimes involving ownership directly in a project level, other times at the trading level. It is also possible to participate simultaneously on both levels. Thus, most partners will benefit in the form of ownership and price discounts.

What is the approximate range of possible discounts?

– We are in the process of negotiations. Unfortunately, I cannot give the exact amount as this is commercially sensitive. Typically, in such cases, the discount is single digit.

The investment model you have chosen involves negotiating with steel companies. Are there any specifics of negotiations with such partners?

-We turned to steel companies because they are potentially interested in purchasing the first 4 million tons of our products. We are looking for the best option in which we could receive the largest investment in exchange for the lowest price discount and ownership level in the project. Actually, we have a number of different steel mills and traders that are competing. We are using a two-phase process. For the first phase, which closed on 9 October, candidates submitted a preliminary, non-binding investment proposal. For the second phase, which has not yet been completed, a much narrower pool of potential partners was selected. Based on the results of negotiations, we intend to sign an investment agreement with one of them next year.

So it looks like the main problem will be solved in the near future?

In terms of investment, the prospects are very positive. In addition to investments in exchange for products, which we have just discussed, we are also in advanced discussions with a very highly regarded United States family office that is interested in investing in our project in exchange for future royalties. In addition, we are in the process of negotiating a preliminary agreement with two construction companies that are ready to invest USD 65 million. We are observing an active interest in our project. However, in order to directly start construction, we need to acquire a suitable land plot in Ukraine from the Central government for location of the processing plant, waste rock and tailings.

It turns out that the financial sector is no longer interested in commodity projects?

– Raw materials are of great interest, especially iron ore. It is important to note that this year the largest price increase has been recorded for iron ore. And this is against the background of the fact that the price of gold at one point exceeded USD 2,000 per ounce. This is an important signal that not everyone takes into account. The situation on the iron ore market looks very positive. All over the world, there is a reorientation of demand from sinter to pellets and raw materials for their production. Moreover, it is this product (pellet feed) that we are going to produce. That is, we will have products for which there is objective demand, and a favorable location due to the close proximity to both the Middle East and European steel facilities. This is a very successful combination.

Do you think that vertical integration, including, for example, acquisition of a stake in Black Iron, is an attractive business model for Ukrainian investors? Is it necessary for steel companies to resort to vertical integration?

– I don’t believe that vertical integration is necessary. However, I do think that it is helpful for them to ensure security of supply. Much depends on production goals and location. Take the Middle East, for example. There are companies such as Bahrain Steel. Their production capacity allows the production of 9.5 million tons of pellets, but they are not always 100% used. Obviously, this is not because the company doesn’t want to use them. There is simply not enough direct iron reduction pellet feed capacity to meet the desired demand. On the other hand, there are companies like Tosyali, a Turkish manufacturer which has built a pelletizing plant in Algeria. Where do they get raw materials for this plant? After all, they cannot use regular ore – they need ore that is suitable for direct reduction. Answering your question, I think that for some steel mills such a model is quite appropriate, since it guarantees reliable supplies. If it is possible to use a wider range of raw materials, vertical integration is likely to be less appealing.

Is the Memorandum of Understanding between Black Iron and Glencore still valid?

– Yes. A non-binding memorandum of understanding has been signed with Glencore. This means that Glencore has expressed an interest in investing in the Black Iron project in exchange for a guaranteed purchase of future products. Nevertheless, the memorandum does not create any specific commitments. Therefore, the first 4 million tons of product are currently being offered to all candidates, including Glencore.

Let’s talk about the market. CRU estimates that Black Iron’s greenfield project will offer the lowest prices in the global market. However, the field, which Black Iron intends to develop, is surrounded by other factories that can hardly be called world leaders. So what’s your secret?

– There is no real secret. The other plants do offer very cheap products. However, it is important to understand that this is because 62% iron products are delivered to China. We plan to manufacture products with 68% and 70% iron, for which the markup is currently about USD 4 per 1%. This compares to the benchmark price of a 62% iron product. This surcharge can range from USD 2 to USD 9 per 1%. It is important to make adjustments.

It should also be kept in mind that despite the fact that we have ore of a similar quality to neighboring mines, those enterprises were constructed there more than 50 years ago. Undoubtedly, at that time, their technology was advanced. However, this is not the case now. For example, most of the mines around our field still use haul trucks with a capacity of 110-120 tons, while modern mines have long been using haul trucks with a capacity of 240-320 tons.

In terms of processing capacity, after crushing the ore, most of the old mines use so-called autogenous mills, while their modern competitors use high-pressure grinding rolls. This is a much more efficient technology. In short, modern technology allows you to reduce the cost of production by increasing productivity.

Some consulting companies are talking about a long-term decline in demand for iron ore due to the reduction in converter steel production. What do you think about this?

– I do believe that this market has not yet fully revealed its potential in terms of development and industrialization. Another thing is important: we are seeing a shift in demand from agglomerate towards pellets. This is due to environmental considerations. Take China, for example. Pellet production in China is projected to increase substantially over the next three years. The fact is that in winter, China uses large volumes of thermal coal to heat homes. Because of this, the Chinese government is imposing limits on steel production in order to reduce emissions. This is how they try to solve the problem of air pollution. Accordingly, the steel mills have a choice: to cut production, while losing profit, or to make a shift towards pellets, which will allow them to operate with greater energy efficiency and lower emissions. Therefore, they are developing the pellet segment.

According to CRU forecasts, over the next 15 years a shortage of pellets of 133 million tons is expected. Of these, 40 million tons will fall on the direct reduced iron segment, which is quite widely represented in the Middle East, i.e. in close proximity to Ukraine.

You raised an interesting question about the redistribution of demand between agglomerate and pellets. Your main product is iron ore concentrate, that is used for sinter production. However, sinter production results in higher СО2 emissions compared to pellets. How do you assess the role of your company in decarbonisation and the prospects for your products in this context?

– To answer your question, it is necessary to delve into the details of the production process. Our technology differs from that one used by other mines of iron ore concentrate in the region. Our final product size is 32 microns, which is ideal for pelletizing, but not well suited for agglomeration. In the latter case, the particle size is typically more than 200 microns.

Is it true that Black Iron has focused on concentrate production, as it would have cost too much to build a pelletizing plant?

– Yes, and in the future we can build our own pelletizing plant. However, it should be taken into account that in the Middle East and China, such plants are being built next to steel plants.

Another example is Vale, the largest iron ore producer in Brazil. Just recently, they completed the construction of an ore regrinding plant with a capacity of 4 million tons per year. Thus, Vale produces a small fraction, which is mostly suitable for agglomeration, and ships it to China. They then regrind the ore and sell it to pellet manufacturers. We offer suitable feed for a pellet plant without the need to regrind.

According to your assessment, are the main markets for Black Iron China and the Middle East?

– Correct. Europe is a very attractive market, but their steel mills buy pellets directly. Therefore, in order to get to the European market, we would need to organize the pellets production.

Are your potential investors from the Middle East or China?

– As investors, we consider steel mills from regions of interest to us and global trading houses, including, for example, the European Glencore. With regard to markets, the Middle East and China are indeed our priorities.

Back to the technology issue, what kind of environmental mitigation measures do you plan to implement?

– We have provided a number of measures that will reduce the emission of harmful substances, in particular dust, at the Black Iron plant. These solutions have already proven their effectiveness and will distinguish our project from some other production facilities in the region. For example, we are going to use electronic detonation control technology. The traditional method involves drilling wells and placing explosives. The explosion creates a huge cloud of dust, and the impact of the explosion can affect the quality of the ore mined. Electronic detonators allow you to control the parameters of blasting operations and set the intervals between explosions with an accuracy of milliseconds. This significantly reduces not only the amount of dust generated by the explosion, but also waste.

In terms of processing facilities, we plan to install electrostatic filters, which are known to significantly reduce emissions into the atmosphere. In addition, we are considering using electric trolley assist for our diesel haul trucks on long roads. This will help to reduce our ecological footprint and reduce energy consumption.

What tailing storage technologies do you plan to use?

– Recently, the problem of waste storage has caused considerable concern, especially in the light of the accident in Brazil. The collapse of the Brazilian tailings dam was due to its design. The construction of such multi-tiered vertical dumps is, in principle, prohibited in many countries. In our case, we have provided an axial way of filling the dump. The reliability of this design has been proven in practice.

Do you plan to dispose of the dumps or slag?

– Waste mounds will be created near the mines during the production process. When the mine is depleted, these mounds will be levelled to a safe level and planted to form a fortifying layer of vegetation.

What are the main risks for the project now?

– I think the main risk at this stage is associated with the problem of acquiring a land plot for construction. The land issue must be resolved in a timely manner and at a reasonable price. There is a suitable land plot, which is owned by the Ukrainian state. It is currently used by the Ministry of Defense for training purposes. The Black Iron project requires about 1500 hectares. This area will make it possible to locate a processing plant, a tailing dump and waste rocks. To do this, it is necessary to move a small micro-district of Kryvyi Rih, and also get a small area for use, which is part of the forest fund of Ukraine. Thus, we have international investors who are ready to participate in the project, but there are no guarantees regarding the duration of the procedure for transferring the right of use or ownership of land. And international investors are not patient.

The transfer of land rights from the Ministry of Defense and the relocation of the micro-district are issues which need to be resolved at the highest level. This year Black Iron representatives met with the President and the Prime Minister of Ukraine. Were the meetings productive?

– Yes, of course, these meetings are important. We have enlisted the support of the President’s Office, the State Geological Survey and the Governor of Dnipropetrovsk region. However, the process is significantly slowed down by difficult negotiations with the Ministry of Defense. Therefore, we really do need more active intervention from the President’s Office and the Cabinet of Ministers to speed up the process. We signed a Memorandum of understanding with the Ministry of Defense almost one year ago. Nevertheless, we have not yet succeeded in signing a binding agreement on the land transfer.

The President announced an initiative to create a state body to solve bureaucratic obstacles to implementation of the large investment projects. This primarily concerned the Black Iron project. Even a responsible manager was appointed. Do you think such a tool would be useful?

– I believe that it is essential for investors who invest in Ukraine to have such official support. The law on “investment nannies” has been passed recently, and it will be signed by the President of Ukraine soon. I am convinced that this will help attract foreign investors to Ukraine. Ukraine is still a rather bureaucratic country. Therefore, it is very important for potential foreign investors to have a single contact person to whom one could turn for help in order to understand the confusing laws and structures of the state apparatus and to get the opportunity to promptly and competently eliminate any difficulties that arise. This is very important.

Does the investment manager take an active part in the project’s promotion?

– It really helps by coordinating our interaction with all responsible government structures. This facilitates effective coordination. It is also trying to speed up the process for us, and helping to make us aware of all applicable laws and regulations. It is important that we do not find ourselves in a situation where our project will be «stuck» in a body that is not there yet and which postpones its consideration indefinitely. It is essential to coordinate the work centrally in order to expedite it.

Are there any infrastructural risks for your project, such as access to port infrastructure?

– No technical or infrastructural risks are foreseen for us. We signed a Memorandum of understanding with Ukrzaliznytsia to ensure sufficient throughput for the transportation of our products. Another memorandum was signed with Yuzhny port on providing the capacities necessary for the implementation of the first and second phases of our project.

How are you going to compete with other companies for personnel?

– Black Iron intends to hire as many workers as we can from local communities. Iron ore has been mined for generations in the area where we are planning to locate our facilities. Seven operating mines are located within 40 km of us. There are a lot of highly qualified workers in this area, and we are planning to recruit them.

When is construction work expected to start?

– Ideally, we would like to start construction by the end of 2021. Construction itself will take about two years, meaning that we will be able to launch in 2023 if everything goes according to plan. As I have already noted, we have investors who are ready to invest in construction. My great concern is whether we will be able to get the land and all the relevant permits on time.

Are the terms of solving the land issue comparable for similar projects in Canada and Ukraine?

– I must admit that in Canada, although there are also some bureaucratic nuances, this process would progress much more quickly. I think it is the biggest issue in Ukraine. Everything is taking too long and it’s even hard for me to understand why. This demotivates me personally and our investors a little. Yes, there is a certain process in Canada too. However, we understand that if everything is done according to the rules, the issue is resolved quickly enough.

How do you assess the efficiency of tax policy in Ukraine? After all, it is quite prone to change. For example, the rent rate has changed several times. In the last year alone, they were going to correct it several times. Does this affect your project?

– Undoubtedly, this is a problem for our project. After all, international investors want certainty. Before making investments, they assess the situation taking into account the exchange rate and tax rates. If these indicators change, investor confidence is lost. After all, if the rules of the game change once, where is the guarantee that they will not change again? Investors are beginning to doubt the advisability of their investments in terms of profit. Therefore, the factor of stability is very important, at least in the first 8-10 years of the project, when we expect to pay off our debt obligations related to construction.

In our case, the financing scheme involves attracting both equity investments and debts. Equity investments in the total project financing structure account for 40%. We will receive them from steel mills, traders in exchange for the right of priority purchase of products and royalties. This gives us access to public markets. 60% – debts, mainly from the largest banks, in particular on terms of buyback, under guarantees of export credit agencies, which, in fact, are government guarantees. Therefore, the stability of tax laws and rental rates is extremely important for the successful fulfillment of our debt obligations.

It is always interesting to find out the opinion of experts on the role and position of Ukraine in the global or regional steel market. How do you assess the prospects for Ukraine in this industry?

– Ukraine has an excellent geographic location to service the European and Middle Eastern steel mills. You have a great infrastructure: a developed railway network, power grid, deep ports, as well as highly educated and highly qualified specialists. Ukraine really has all the prerequisites for gaining high positions in the world market.

At the same time, in order to successfully enter the world market, Ukrainian steel and iron ore mills have to make some adjustments to their final product specifications, as Ferrexpo has done over the past 10 years. Earlier Ferrexpo produced roughly the same products as the majority of similar Ukrainian plants – with a high silicon content, about 7% to 9%. There is no demand for such products on the world market. Its sales market is limited to the countries of the former USSR and China. To enter the European market, the silicon content must be reduced to at most 4.5%. Ferrexpo solved this problem, among other things, by installing a tower mill at the end of the ore processing line to obtain a finer fraction. They also refocused on pellet production. I think it was a smart decision. This opened up new market prospects for them.

Personally, I see two parallel opportunities for Ukraine. The first is greenfield projects like Black Iron. This is an excellent opportunity to expand the market. The second is the modernization of existing plants. Yes, it is expensive, but it gives you the opportunity to attract new customers.

You touched on the role of the government in shaping the investment climate. However, you know better than we do that in the last 5-10 years, government policy has not been very favourable. What are the criteria for a successful investment policy from the perspective of investors like Black Iron?

– I think Ukraine needs a successful example to attract other investors. The rest will happen by itself. Business is cynical. It does not believe that the situation in the country is really changing for the better. Until someone shows by example that investing in Ukraine is profitable and safe, there will be no investment. Therefore, success story is a key factor in this regard.

Yes, Black Iron has government support, but concrete action is also needed. We cannot wait years. Otherwise, investors will turn their backs on us and invest in other projects. So, I will emphasize once again, the Ukrainian government should learn to resolve issues quickly if it really wants to make the country attractive to investors. Ukraine has enormous potential due to both rich resources and highly qualified hardworking specialists. However, you still need to be able to use this and learn how to quickly resolve issues.

In addition, an investment protection mechanism must be created. Raids and similar interventions are unacceptable for a healthy investment climate. If this situation is rectified, I am sure that Ukraine has bright prospects.
 
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