Iron Portfolios

Am I the only investor in the world doing cartwheels over iron? Ok, it’s boring, I’ll give you that. Not shiny like gold or hard like diamonds, not sexy at all. It is, however, much more useful – an essential ingredient in steel production.

The top producing companies and countries are the likes of Rio Tinto, BHP, Vale, China, Australia, Brazil, India, Russia, Ukraine, the U.S., South Africa, Canada, and Sweden.

Whoa, back up – Sweden you say?

Sweden is actually fourth from the bottom of the list of top iron producing nations. Yet its neighbors in the European Union comprise one of the world’s top consumers by region, with Britain, Belgium, Italy, France, and Germany ranking among the world’s top 10 countries. The E.U. imports almost all of its consumption according to the United Nations.

Isn’t it cheaper to buy iron from Sweden than ship it from Brazil? Northland Resources Inc. (NAU.TSX-V) believes it is, though I for one won’t be really sure until I see a contract.

Northland expects to complete a pre feasibility report on a pair of iron ore projects in Sweden and Finland in the next quarter, and one thing I’m very curious about is their proposal to build a rail network to bring the concentrate and various downstream products to market.

The Swedish government is presently developing a national transport plan to meet the country’s needs over the next 10 years, so the timing of that is fruitful. Northland wants to be part of it, to the extent of co-financing a rail line to its new mines. In fact, the company says its business plan hinges on whether or not they can reach an agreement on an overall rail infrastructure plan for northern Finland and Sweden.

Northland’s lead project is the Kaunisvaara in northern Sweden, which contains the Tapuli, Sahavaara and Pellivuoma magnetite iron ore deposits with aggregate NI43-101 compliant resources in the hundreds of millions of tonnes grading 23 to 27% Fe. A (very) preliminary pegs the net value at USD $393 million, estimates CAPEX of USD$617 million to get to 5Mt per year, and IRR of 21.1%. Northland wants to begin production in 2012 at 2Mt and get to 5 Mt by 2014.

Pricing for iron ore is controversial. There is a spot price but the industry takes its cue from yearly benchmarks set by the big producers based on supply and demand and sales volume. Consequently, pricing is subject to a lot of rumor and speculation.

The latest is a report in the Chinese media suggesting that five big steel mills there have reached an agreement with BHP Billiton, Rio Tinto and Vale (‘the gang of three’) for a 40% hike in the price of imported iron ore fines this year.

Northland has calculated a (very) preliminary average operating cost for its concentrate – not the fines from ore – of $38.64/t FOB delivered to the port of Kemi, Finland. I like those numbers, though it’s important to note that they are indeed very preliminary.

The company proposes to manufacture higher value products such as iron nuggets at another project, Hannukainen/Kuervitikko, in northern Finland. A resource statement and PEA (preliminary economic assessment) is also in the works for that one, a past producer. Meanwhile, preliminary discussions have commenced with Kobe Steel Ltd. of Japan and Midrex Technologies Inc. with a view to integrating their iron making technologies.

I like everything about this deal except the loose ends around the infrastructure – transport and power – and of course the lack of a definitive statement that goes beyond the economic viability of Kaunisvaara and nails down the return.

Northland also has some gold values up there, along with a handful of less advanced projects, so if they can make the rail line economics work I think they’ll have a company.

NAU shares are closing towards $2 Cdn on thin volume. The company has a market capitalization of some $183 million.

Kb