Alderon is in “advanced” talks with Asian steelmakers and commodity-trading companies aimed at locking in the sale of 30 percent to 40 percent of the proposed mine’s annual iron-ore output, Morabito said in an interview at company headquarters in Vancouver. A deal, valued at a minimum of C$100 million to Alderon, may also include the sale of a stake in Kami, he said.
An agreement may be in place before October, followed within about three months by a comprehensive debt-financing package, Morabito said.
“The market by the end of the year will have full visibility on how this project is being financed and who is financing it,” he said, adding that negotiations have included some of Asia’s largest steel producers that aren’t government-controlled. “What people will see is that more money is coming in this year.”
Alderon is seeking a second partner after Hebei Iron & Steel Group, China’s largest steelmaker, signed onto the Kami project last year. Alderon’s latest talks have included steelmakers that are about the same size as Hebei, said Morabito, who declined to identify them because of confidentiality agreements.
It’s “likely” Alderon has held talks with many potential partners, including large non-state-controlled steelmakers such as Jiangsu Shagang Group Co. and Jianlong Steel Holdings Co., Dean Journeaux, chief executive officer of Calgary-based New Millennium Iron Corp. (NML), an Alderon competitor, said Aug. 8 in a telephone interview.
“All the Asian steelmakers -- the Chinese, the Indians, the Japanese -- want to have captive iron-ore supplies,” said Journeaux, adding he had no direct knowledge about Alderon’s negotiations.
Shen Wenrong, Jiangsu Shagang’s chairman, and Zhao Xin, an iron-ore import manager at Jianlong Steel, said last week by phone they weren’t aware of talks between Alderon and their companies.
Negotiations with potential partners indicate that foreign steelmakers are still trying to lock in supplies from iron-ore reserves in Canada, which has the world’s eighth-largest deposits, even amid predictions of plentiful global supplies, said Adam Low, a Toronto-based analyst at Raymond James Financial Inc.
“What Alderon has going for it is a strong existing partner, the actual iron-ore resource and its proximity to a railway,” Low, who rates the company the equivalent of a buy, said last month in a phone interview. “They stand a very good chance of getting another off-take deal done.”
Alderon rose 5.6 percent to C$1.13 at the close in Toronto, giving it a market value of C$147.1 million.
Hebei, China’s largest steelmaker, signed onto the Kami project in April 2012, paying C$182.2 million for 20 percent of the Canadian company and a 25 percent stake in the mine. Hebei is obligated under the pact to buy 60 percent of Kami’s annual output to a maximum of 4.8 million tons of the first 8 million tons of concentrate each year, according to a statement. Hebei also pledged to help Alderon arrange debt financing, including from Chinese banks.
Morabito has “done a great job getting one of the world’s largest steel companies to come and validate his project,” said Low, whose 12-month price target on the company’s shares is C$2.60. Low and nine other analysts have buy ratings on Alderon’s shares, while two have holds and none recommend selling.
In May, South Korea’s Posco and Taiwan’s China Steel Corp. led a group that paid $1.1 billion for a 15 percent stake in ArcelorMittal’s existing operations in the Labrador Trough. India’s Tata Steel Ltd. (TATA) is in a partnership with New Millennium to develop the DSO project in the region.
Prabhat Sharma, a Tata spokesman, declined to comment on whether India’s biggest steelmaker would be interested in joining up with Alderon. Kim Ji Young, a Posco spokeswoman, didn’t respond to an e-mail request for comment outside of normal business hours. Chung Le-Min, a spokesman for China Steel, wasn’t available for comment.
London-based Rio Tinto Group, through its 59 percent stake in Iron Ore Co. of Canada, and Cliffs Natural Resources Inc. (CLF), the largest U.S. iron-ore producer, are among companies already mining in the Labrador Trough.
The Trough is a geologic formation that overlaps parts of northern Quebec and the neighboring province of Newfoundland and Labrador. Alderon’s Kami mine project is between several existing iron-ore mines and is about 15 kilometers (9 miles) from the Quebec North Shore & Labrador Railway, a common carrier leading to export terminals at Sept.-Iles, Quebec, on the Gulf of Saint Lawrence.
Alderon’s shares dropped 39 percent this year through Aug. 9, which was still the best performance among six other peers identified by Daniel Greenspan, a Toronto-based analyst at Macquarie Group Ltd.
“Looking at the next generation of producers, we view Alderon Iron as the lowest-risk developer in the Labrador Trough, with the clearest path to first production,” Greenspan said in a June 18 note to clients. His list includes Toronto-based Champion Iron Mines Ltd. (CHM) and Cap-Ex Iron Ore Ltd. (CEV)
Katrina Chua, a Champion spokeswoman, declined to comment on the company’s share price or whether it has had talks with steelmakers. Cap-Ex didn’t respond to a request for comment.
Concentrated iron ore from the Labrador Trough is prized among steelmakers because of its low levels of impurities such as silica, phosphorous and alumina, Low said.
Alderon also is backed by “patient, stable” shareholders such as St. John’s, Newfoundland-based Altius Minerals Corp. (ALS) and Liberty Metals & Mining Holdings LLC, a subsidiary of Boston-based Liberty Mutual Holding Co., Low said.
“The top three -- Altius, Hebei and Liberty -- own about 60 percent of the company and they aren’t sellers,” he said.
Asian steel companies are seeking to secure long-term supplies to cut their reliance on imports from the largest producers such as BHP Billiton Ltd., Rio Tinto and Vale SA, Ken Hoffman, a Princeton, New Jersey-based analyst at Bloomberg Industries, said Aug. 7 in a phone interview.
“China wants to get a quarter to a third of its iron ore from non-big-three entities,” Hoffman said. “Right now, shipments from those producers amount to less than 10 percent of total imports.”
A deal between Alderon and another steelmaker will probably be similar to Hebei’s arrangement, Morabito said. It may include an agreement to sell a portion of future production, the sale of a stake in Kami and a commitment by the partner to contribute to construction costs, he said.
While Alderon isn’t planning to sell shares as part of the second off-take agreement, it may borrow funds from the new partner and repay the obligation with future iron-ore production, Morabito said.
Alderon isn’t likely to raise money through the stock market, Bloomberg Industries’ Hoffman said.
“Doing these types of off-take agreements is about the only way these things can get funded these days,” he said.
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