Matt Gibson: We have started to see positive trends in the iron ore space. Chinese port inventories have started to tick down, while capacity utilization globally and in the U.S. has started to tick up for steel companies. Iron ore prices have rebounded from lows of $86/metric ton (Mt) to the $118–120 Mt level.
MG: Near term, I believe prices found a floor in the $110–120/Mt level. That's pretty much where most estimate the average cost of production to be in China.
That being said, the upside or potential price increases will be limited by growth in China and economic growth in Western Europe.
TGR: Would you say your view of global economic growth is reasonably bullish?
MG: There are some positive indications and I am optimistic that 2013 will be a better year than 2012, and that will be good for the iron ore sector.
TGR: The company you cover is New Millennium Iron Ore. It is developing the Direct Ship Ore (DSO) project in Northern Québec. Tata Steel Ltd. (TTST:LSE; TATLY:OTC) has already agreed to take 100% of the ore produced, correct?
MG: Yes. The DSO Project is under construction. In 2012, it produced around 300,000 tons of sellable product, and will probably do about 2–2.5 Mt in 2013.
TGR: The total resource at DSO is 125 Mt. How does that compare to other companies of similar size in this space?
MG: The DSO resource base is similar to Labrador Iron Mines Holdings Ltd.'s (LIM:TSX) resource located nearby. Labrador Iron is more of a seasonal operator and delivers its product through Iron Ore Company of Canada.
New Millennium will operate year round in an enclosed structure and sell its product initially through port facilities owned by a local aluminum plant in Sept-Îles and later through the multiuser port that the Port of Sept-Îles is now building. That facility should be completed at the end of 2013 or early 2014.
TGR: Do you consider it an advantage that 100% of the offtake at DSO has been secured by Tata Steel?
MG: I suppose one could see that as a potential risk. But at the end of the day, Tata is the lead operator of the DSO project and New Millennium has a free carry into production. Unless Tata's view of the Corus steel manufacturing facility in the U.K. changes, this offtake should be fairly secure and on typical commercial terms priced on international benchmarks.
TGR: Do you think New Millennium is secure enough in exchange for that 100% offtake agreement?
MG: The offtake agreement gets New Millennium to the point of generating cash flow; making that transaction positive for any junior.
Whether it is a fair deal or not, getting DSO up and running was really just an entry point for Tata Steel into the Labrador Trough. The strategic value of that will really be reflected when New Millennium starts developing and getting the larger taconite projects into production. That will require further investment decisions by Tata. The cash-flow implications for New Millennium from getting the larger, taconite projects up and running could be a real game changer.
TGR: What is taconite?
MG: Taconite is a colloquial term used to describe banded iron formations.
The investment decision required for the larger taconite project will be predicated on the definitive feasibility study that should be published in the next few months. We expect the investment decision in mid-2013.
TGR: How big an issue is transportation for New Millennium at both DSO and the taconite projects? Does it need a rail agreement to induce Tata to sign on to those taconite projects?
MG: The taconite project requires a slurry pipeline from the processing facility in the north down to a pelletizing facility in Sept-Îles.
There's potential for New Millennium to sign an agreement with a consortium of the Canadian National Railway and the Caisse de Dépôt that is contemplating building a new rail line to where this project is going to be located. Canadian National Rail will head up construction and the Caisse de Dépôt will provide financial backing.
It signed a rail agreement for DSO with Québec North Shore and Labrador Railway in January 2012.
TGR: What is your target price on New Millennium?
MG: It is $4.30, almost triple where it is right now, based on a discounted cash flow model.
Lately in the Labrador Trough, a lot of players have been painted with the same brush as Cliffs and Labrador Iron Mines, and similar discounts have been applied across the board. But I think New Millennium is operating differently from other startups.
TGR: Is that due to its management team?
MG: Yes, it is due to a solid management team. This team understands how the business operates and the pitfalls of not owning your own infrastructure.
Matt Gibson joined CIBC's Equity Research Department in February 2009. He covers the junior base metal, rare earth, uranium and iron ore spaces. His more macro focus and financial acumen have helped to support commodity-related calls and augment the wealth of technical expertise on the mining research team. Gibson holds a Master of Business Administration from McMaster University, where he focused on financial markets and business valuation, and a bachelor's degree (Honors) in economics from McMaster University.
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