Iron Ore, Brazil, & Vale: This Junior Has All Three
ANALYSIS—ProspectingJournal.com—As Brazil powers through the global financial downturn, investors are eager to take advantage of its reputation as one of the world’s top iron ore producers. And of the country’s various geological hotspots, the renowned Iron Quadrilateral in the state of Minas Gerais is attracting an abundance of miners.
Among the juniors with strategic projects in the region, Hilltown Resources [HLT – CNSX] has emerged as a company with considerable potential. Having spent two years searching for the right project, Hilltown believes it has found the ideal mix with the recent JV production deal at Vale’s Capanema Iron Mine. “Basically, this deal is as risk-free as you can get in this business,” claims Kent Ausburn, President & COO. “We are smack-dab in the middle of the Quadrilateral. There is iron ore all over the place and we have a very strong local partner—who has extensive experience mining iron ore in Brazil and working with Vale.”
The almost “risk-free” factor that Ausburn mentions comes down to one simple point: Vale, the largest iron ore producer and exporter in the world, owns Capanema. Vale operated the mine from 1982 to 2003 in a joint venture with a Japanese consortium. During this time, the mine produced 190 million tonnes of ore at an approximate grade of 64% Fe.
Now, Hilltown is in the unique position to restart the mine with the help of a strong local partner, while selling the ore to Vale. HLT’s contract with Vale will be met through its 50-50 joint venture with Mineracao Siderurgia Socoimex Ltda (“Socoimex”). The partnership will divide a capital expenditure of US$52 million for the production of the mine between the two companies. Hilltown will contribute US$30 million for building a 4,000,000 tonne a year capacity crushing-classification plant and a 2-km long ground level conveyor belt to Vale’s nearby Timbopeba facility. Socoimex will arrange for US$22 million by underwriting third-party financing between the two companies, while handling all additional costs of mining equipment and sub-contractors—as well as operating the mine.
Socoimex has well-established ties to Vale and iron ore projects. Socoimex, privately held by the Bethonico family, has over sixty years of production and over 150 million tonnes of iron ore under its belt. The Company has recently expressed its desire to re-enter the iron ore sector after a ten-year hiatus and thus brings considerable ambition and forward-looking plans to the project.
According to the production contract with Vale, the mine will extract at least 20 million tonnes of ore, at an average grade of 62% Fe, over 13 years. Three of these years will be used for the development and implementation of the mine. The remaining 10 years will be extraction.
The mine’s resource will also need to be made NI 43-101 compliant*; however, most of the difficult stages of this process have already been completed. As Ausburn points out, “Vale has already done the work. The grade and tonnage is pre-calculated, 6 pits are identified, and a mine plan has been developed.”
For shareholders, a huge factor will be the guaranteed price that Vale will pay for the ore. According to the agreement, Vale will purchase 95% of the ore from the mine, with a guaranteed minimum hedge of approximately US$58 per tonne, adjusted annually for inflation. Vale will also be paid a royalty of $32.88 per tonne. The remaining 5% of annual production (approximately 100,000 tonnes) may be sold to a third party at market prices. With a railway nearby and the possibility of rising ore prices, which now sit at about $140 per tonne, the 5% could give Hilltown a substantial boost to its profit.
The transportation of the ore will be fairly painless. Trucks will haul the crushed ore from Capanema for approximately 10km, after which it will be loaded onto a two-kilometre conveyor belt and taken to Vale’s large Timbopeba mine. “The logistics are very simple,” says Ausburn, “Capanema is next to Timbopeba, which is where the ore will go. Transporting the ore won’t be an issue.”
Vale may also increase the two-million tonne output from Capanema shortly after starting because it recently missed its iron contract by 30 million tonnes. With the planned Capanema plant and conveyor belt capable of processing and delivering 4 million tonnes per year, yet currently contracted to produce only 2 million, this offers considerable upside potential for Hillside.
And** in addition to the 20 Mt of 62% Fe ore currently contracted for production, there is approximately 16 Mt of high grade (64% Fe) ore currently stockpiled on site that can potentially be added to the production contract.
But what about all the lower-grade Fe in the ground? Capanema’s remaining resource (Non NI 43-101) is approximately 1.16 billion tonnes of ore at an average grade of 51.9%. Almost 1 billion tonnes of lower grading ore presents an opportunity to extend the contract with Vale. Deposits that are lower than 62% Fe, as Ausburn points out, can either be concentrated up or blended with higher-grade ore. The Timbopeda mine can do this, which is a good thing for Vale as the mine “only has about 40 million tonnes of ore left,” says Ausburn. “Timbopeba will soon need more ore, the Capanema mine is in the perfect location to provide it, and we will own and operate the facilities to produce and deliver it.”
As Hilltown’s goal is to become a mid-tier producer, the Capanema mine is a solid fit for the Company’s opportunistic business model. This model, which focuses on acquiring small to medium-sized deposits, allows Hilltown to pursue projects that are too small for majors. The Iron Quadrilateral’s infrastructure is completely set up for iron ore mining, with Vale’s muscle providing a no-hassles hedge and nearby production facility. And Socoimex’s presence gives Hilltown the needed expertise to quickly put the Capanema mine into production, possibly 1 year ahead of schedule.
With Capanema underway, and the likelihood of incurring significant annual cash-flow within 2-3 years, there’s already talk of many other deposits that Hilltown can develop for Vale through a Socoimex partnership. Management is currently negotiating the sole acquisition of two Fe deposits in Brazil outside of the Vale deal, which will be self-explored and developed with potential future mine operations run by partner Socoimex. Thus, Hilltown is aiming for an ambitious growth strategy, seeking high-quality Fe ore ventures while advancing current projects. This approach coincides nicely with HLT’s plans to list on the TSX or TSXV in two years and get its first mine into production. Vale, Brazil, and guaranteed iron ore production—not bad for a junior currently trading under 20 cents.
*An independent qualified person (QP) has not done sufficient work to classify the historic resource stated herein as a current NI 43-101 compliant resource. Therefore, Hilltown is not treating the historical estimate as a current NI 43-101 compliant mineral resource, and the historical estimate should not be relied upon. Further, a NI 43-101 compliant feasibility study has not been completed and there is no certainty that the proposed operation will be economically viable.
**The Company has not yet completed a formal agreement with Sociomex.
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