North Atlantic Iron Corporation (NAIC)

Projects

Projects

Projects   NAIC was initially established in 2010 to develop a vertically-integrated business based on its significant iron sands deposit in Goose Bay, Labrador, in Canada.

In 2013 NAIC decided to forgo vertical integration and buy raw materials on the open market, considering the decline in the price and surfeit of raw material supply.

A clear strategy emerged – to make NAIC a pig iron manufacturing company and become the dominant supplier of merchant pig iron (MPI) to the Western Hemisphere’s electric arc furnace (EAF) steel making industry.

NAIC has financed the development of a process to produce MPI using low-cost raw materials, in particular offspec iron ore and high-volatile lower-grade thermal coal. It has focused on plant design producing 810,000 to 915,000 mtpa of MPI per annum (depending on feed grade) for the United States and Western European markets, which have little internal MPI production capacity.

75% of MPI currently supplied to the US is imported from Brazil or Russia. Russia and the Ukraine supply most of MPI to Western Europe. The US imports 4-5 million tonnes per year of MPI from Brazil and Russia. Europe consumes 12 million tonnes per year of MPI, mainly from Russia.

NAIC‘s focus has always been high value, not high volume, and to utilize inherent advantages such as low-cost production inputs of iron ore, energy, and coal.

NAIC has also sought to harness its significant shipping cost advantage to the US and Western Europe compared to Brazilian and Russian exporters.

The past year’s work at NAIC has yielded exciting developments, driven in particular by extremely difficult market conditions facing all commodities.

The adverse conditions facing the global steel industry required the NAIC team to:

Focus on optimising the business model through an extensive two-year site selection programme aiming to yield the optimal economics at the first NAIC plant
To run four different production scenarios to fine tune capex and opex
To reconsider and analyse the MPI market in its entirety, and to focus on the production of nodular grade pig, which has a 35% price premium over MPI

Based on its extensive evaluation, NAIC has made the decision to proceed with a production scenario of 425ktpa using an EAF smelter to be located in the Canadian province of Quebec or the US state of Ohio.

This will place NAIC in the bottom 25% of the cost curve with lower capex requirements.

TECHNICAL STUDIES AND DEVELOPMENT OF THE OPTIMUM PROCESS

The first technical plant study was begun by Tenova Core in 2012. It simply costed the main equipment and estimated operating costs for a plant to smelt iron sands concentrate from Goose Bay
Hatch was hired in 2013 to review Tenova’s work, comment on the testing that had been completed by NAIC with Midrex and at the smelters in Easton, and to provide a Preliminary Economic Assessment report (PEA)
 
This was completed, assuming both Goose Bay iron sands and Platts IODEX as feedstock for smelting
The PEA was issued in April 2014 and Hatch was hired again to complete a Pre-Feasibility Study to +20% accuracy for a site specific plant

NAIC timeline

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NAIC timeline

NAIC

WHAT WE LEARNED THROUGH TESTING

Since 2010, numerous pilot melt tests were undertaken at NAIC’S multi-million dollar smelting test facility in Easton, Pennsylvania. We learned that:

Off-spec iron ores, not just iron sands, can be utilised if downstream processing to MPI is undertaken
Impurities in the iron concentrate are separated to liquid slag during the smelting process
Briquetting allows for the use of small particle size concentrates, eliminating the need for pelletizing or sintering
No pelletizing or sintering results in lower cost and lower emissions
Multiple reductants were successfully used in the smelting process, ranging in quality from low grade steam coal to coke
No coking coal requirement results in cost savings
Electric smelting, in certain jurisdictions, is low cost and environmentally friendly
Electricity is plentiful and cheap in significant portions of the United States and Canada
If electricity comes from hydro there is a significant CO2 reduction

In May 2015 Tenova was contracted to complete a two-phase feasibility study:

Phase I - equipment costing (report complete September 2015 )
 
Including final process design, mechanical and electrical engineering, operating costs and staffing
Phase II - installation and construction
 
Including civil engineering, piping, electrical and capex for construction, materials, labour etc

PRODUCTION SCENARIOS: GETTING THE RIGHT ANSWER IN THE CURRENT ECONOMIC ENVIRONMENT

Four production cases were designed and reviewed by Tenova and NAIC

Two production levels – 425ktpa and 850ktpa
Two smelting furnaces – electric arc furnace (EAF) and submerged arc furnace (SAF)
All cases include pre-reduction in a rotary hearth furnace (RHF)
A mass and energy balance was calculated for each case ensuring accurate consumables, energy and natural gas usage
In each case, all required equipment was budgeted for and costed, enabling an accurate comparison
It is assumed the 425ktpa of production will be of foundry grade MPI.
 
In the 850ktpa cases, the remaining production is assumed to be basic grade MPI and sold to steel mills at a price below the foundry grade
NAIC has made the decision to proceed with a production scenario of 425ktpa using an EAF smelter

FINANCIAL ANALYSIS AND VALUATION COMMENTARY

Total capital required: $313 million
NPV of the project (Plant 1 only): $144 million (management estimate)
Ungeared project IRR: 15%
70% geared project IRR 21%
Payback period: five years

We are currently testing the market with a number of funding structures.

WHY 425KPTA?

Focus on the highest-value portion of the MPI market
NPI for the foundry industry cannot be substituted for and thus has more stable pricing
Requires only one RHF furnace
 
The 850ktpa production case requires 3 furnaces (2 RHFs and 1 EAF)
Starting up one less furnace will de-risk commissioning
Less capital required
 
Capital in the commodities space is currently at a premium
Limits the “quantum of funds” risk
Less competition
Few MPI producers make NPI
Given today’s prices, smaller production does not mean lower returns

OPERATING EXPENSE (OPEX)

The opex has been estimated to be $305/t MPI, assuming the use of 62% iron ore fines. This would make NAIC one of the lowest-cost producers on a delivered basis to North America. The key drivers in this process are the concentrate cost, coal quality and price, hydrated lime price, and power purchase price.

FE MARKET VERTICAL INTEGRATION

Iron ore prices have fallen from over $130/t in 2012 to below $60/t in 2015 for 62% fines CFR China
The major iron ore producers are expanding production at their low-cost mines, driving out smaller higher-cost producers
As production at the world class mega-mines increases, the cost curve lowers, bringing prices lower as well
Benefits of vertical integration for iron ore consumers to be re-evaluated given current raw material costs

KEY QUESTIONS FOR NAIC

Is there an economic return for an iron ore mine in Goose Bay, or does it make sense to purchase on the market?
 
No, the mine is a hedge, but current iron ore prices are an attractive buying opportunity
Is there a profitable market for pig iron in the U.S. & European market?
 
Yes the US and Europe imported a combined 9.4 million tonnes in 2014

Conclusion – NAIC will forgo vertical integration and purchase raw materials on the open market. It will then produce and sell MPI to the US and European markets.

MERCHANT PIG IRON – WHO ARE THE CUSTOMERS?

MPI comprises three main types:

Basic pig iron (BPI): used in both EAF steel making and iron foundries for less specialized iron castings
Foundry pig iron (FPI): used mainly in the manufacture of grey iron castings in cupola furnaces
Nodular pig iron (NPI): used by iron foundries in the manufacture of ductile iron castings

The difference between the three types of MPI is their chemistry and impurity levels.

SIZE OF THE MARKET FOR NODULAR PIG IRON (NPI)

The total world demand for NPI is currently estimated to be 1.2 to 1.5 million tonnes per year.

The major consuming areas are the US at approximately 400,000 tonnes per year and Europe at 500,000 tonnes per year.

SITE SELECTION HAS A SIGNIFICANT IMPACT ON THE PROJECT’S ECONOMICS

A comprehensive two-year site selection programme was undertaken to determine the optimum location for its first plant. The site selection encompassed a detailed study of 13 locations in Canada and the US.

The key inputs for site selection include the following:

Logistics – access to port within reasonable shipping distance for raw materials and end markets
Energy – gas and electricity availability and price
Permitting – timeline and local sensitivity
Government support – local, state and federal

UNLOCKING OF VALUE FOR PETMIN SHAREHOLDERS

We previously advised that Petmin would enter into a transaction in terms of which Petmin would exchange its shares in NAIC for shares in listed MMI and thereafter to distribute the MMI shares to Petmin shareholders by way of a proposed special dividend.

It remains the intention of both Petmin and Grand River Inc to ensure a single entry point for shareholders into the project through the consolidation of the legal entities and the ultimate unbundling thereof to shareholders. However, several factors mitigate against executing this strategy in the short term.

We are acutely aware of the global economic downturn, the concomitant collapse of commodity prices and the enormous pressure on all producers of basic materials.

In the current market environment, both Grand River Inc. and Petmin believe it will be prudent to continue to develop the project in its current form rather than overlay the additional cost of a separate listing when our key focus has been on cost containment.

We remain committed to commissioning the first plant and continue to work towards this goal as expeditiously as possible.

NAIC RESOURCES

Although NAIC does not currently plan to mine its iron sands, it does have an inferred resource which could be mined should the future cost of iron ore fines purchased from third parties become uneconomic. The concentrate produced from NAIC’s resources has been extensively tested and independently verified to be an effective feedstock for the production of merchant pig iron

NAIC currently has an inferred resource of 594m tonnes of iron sands at 9.53 wt %, of which 37.46% is FE2O3, from which NAIC produces a concentrate of approximately 54% Fe, a quality feed-stock for high-purity pig iron production.

A NI43-101 compliant statement published by SRK Consulting in February 2013 confirmed an indicated resource of 334m tonnes with a further 260m tonnes in the inferred category. The resource statement is based on just 3% of NAIC’s 450 square km claim.

The people who generated the mineral resource estimate were Mark Wanless and Livhuwani Maake. Mark Wanless is a geologist and is a registered as a Professional Natural Scientist with the South African Council for Natural Scientific Professionals Reg: 400178/05 and Livuwani Maake is a geologist and is registered as a Professional Natural Scientist with the South African Council for Natural Scientific Professionals Reg: 400437/11. The Qualified Person for this mineral resource estimate is Mr Don Hains, P.Geo who is a qualified person in terms of NI 43-101.

Classification Block Million tonnes Heavy Mineral Concentrate wt% Fe2O3 Equivalent %
Inferred Block 1 139.91 9.08 39.06
Total Block 1   139.91 9.08 39.06
Indicated Block 2 35.51 10.5 38.10
Inferred Block 2 39.20 9.88 37.44
Total Block 2   74.72 10.19 37.77
Indicated Block 3 298.65 9.50 36.87
Inferred Block 3 80.84 9.82 36.58
Total Block 3   379.49 9.57 36.81
Total resource   594.12 9.53 37.46
Petmin’s share (35%)   207.94 9.53 37.46