8th Oct 2008 07:00
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Press Release |
8 October 2008 |
Aricom plc ("Aricom", "the Company", or "the Group")
Completion of Feasibility Study for the K&S and Garinskoye Projects
Aricom plc (LSE: ORE, OREW), the Anglo-Russian developer of mineral resources, is pleased to announce the completion of the feasibility study and ancillary documents.
The key findings of these studies can be highlighted as follows:
An executive summary of the study and certain related review documentation will be available on the Aricom plc website following the release of this announcement.
Commenting on this announcement, Jay Hambro, Chief Executive, said:
"Aricom has succeeded in proving the viability of K&S and Garinskoye in a number of scenarios and has also had the analysis independently reviewed. The step forward from initial feasibility study to bankable feasibility study is often a time when value is eroded through detailed analysis and the application of current economic conditions. Furthermore Aricom's design group has managed to optimise the design to keep aggregate capital costs broadly constant in a global industry which has seen significant capital cost inflation.
The funding process now begins in earnest as we progress discussions to the next step with the banks, contractors and other partners. In this capital constrained market the importance of Aricom's freight advantage remains valuable however the presence of a transport network with the ability to ship bulk commodities is perhaps more important. We have had a number of preliminary finance discussions and I believe that, with our bankable feasibility studies confirming the strength of these projects, we can move the financing process forward with confidence. In the short term, further solutions for reducing development plans in line with available capital are being considered.
Despite the global financial turmoil, I believe the outlook for iron ore remains robust. I believe that the mining companies that will flourish in this environment are those with a competitive advantage through geology and geography, particularly those benefitting from an existing infrastructure. Aricom has a good geological base that is located close to a growth market and a well established rail, road and energy network."
Conference Call
A conference call to discuss the announcement will be hosted by Aricom plc, on Wednesday 8 October 2008 at 14:00 UK time.
Details to access the conference call are as follows:
In advance of this call, participants should find the investor slide presentation on Aricom's website from 12:00pm UK time
For further information:
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Aricom plc |
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Charles Gordon, Investor Relations Officer |
Tel: +44 (0) 20 7201 8939 |
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www.aricom.plc.uk |
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Abchurch |
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Charlie Jack/ George Parker |
Tel: +44 (0) 20 7398 7700 |
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www.abchurch-group.com |
This release does not constitute, or form part of or contain any invitation of offer to any person to underwrite, subscribe for, otherwise acquire, or dispose of any shares in Aricom plc or advise persons to do so in any jurisdiction, nor shall it, or any part of it, form the basis of or be relied on in any connection with or act as an inducement to enter into any contract or commitment therefore.
This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.
By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, political and economic uncertainty. Save as required by law or applicable regulation, the Company is under no obligation to update the information contained in this release.
Summary Findings & Process Update
This release describes proposals set out in the feasibility study and related documentation regarding the development of the K&S and Garinskoye projects. The actual form which the development takes, and/or the economics thereof, could vary materially from these proposals.
K&S and Garinskoye Project Summary
Construction at K&S and Garinskoye is expected to commence in 2009. The study foresees two distinct mining operations: 10mtpa at K&S commencing in 2010 and 10mtpa at Garinskoye commencing in 2011. The product of the Garinskoye mine will be shipped to the K&S site where it will be treated alongside the K&S ore at an 18mtpa beneficiation plant. The process plant at K&S is planned to commence production in 2012. The product of this plant will be 8.2mtpa of 65% iron ore concentrate which will initially be sold in this form.
In 2015, it is planned to commission a direct reduced iron facility at the K&S project site. This plant would eventually use 3.75 mtpa of concentrate from the K&S beneficiation plant, as from 2016. The plant is expected to use the Kobe Steel Ltd owned "ITmk3" technology which uses a coal based rotary hearth furnace to form iron nuggets. At full production this plant should produce 2.5 mtpa of iron nuggets which will be sold in this form.
Independent Review
As part of Aricom's work with its financial advisers, all key project documentation has been independently reviewed by industry experts. This work has mainly been commissioned by Morgan Stanley for the potential lending group ("Lenders") to ensure the independence of the analysis.
Wardell Armstrong International ("WAI") in its capacity as Independent Expert, for the Lenders, has completed a full review of all the key study documentation including; a reserve and resource analysis; the mining, processing and engineering methods; an environmental and social impact analysis; an analysis of appropriate transport and infrastructure requirements; and an economic analysis of capital and operating costs. WAI has confirmed that it believes there are no fundamental flaws to the studies and is supportive of the conclusions. WAI will be presenting their independent experts report to the banking group shortly. Wardell Armstrong LLP is a major environmental and engineering consultancy that owns Wardell Armstrong International Ltd, the international mining, mineral and alternative energy consultancy based in Truro, Cornwall.
The Hatch Group has reviewed the direct reduced iron project from a technical and economic perspective. Hatch's initial conceptual analysis carried out in 2007/2008 found that the project is viable and recommended that the ITmk3 process be used for the proposed 2.5mtpa plant. Hatch has subsequently updated its analysis in a report for the banking markets and has used the CRU pricing forecasts. The Hatch Group provides process and detail engineering, technologies, business consulting and project and construction management services to the Mining & Metals, Energy and Infrastructure sectors. Hares Engineering are in the process of providing Aricom with a detailed engineering study on the project.
CRU has carried out an analysis of Aricom's product qualities and the market for this product in order to provide estimated pricing scenarios for economic modelling. For the purpose of this analysis, CRU has provided various pricing scenarios. CRU is a leading authority for the world of metals and mining, power and cables, fertilizers and chemicals. CRU offers independent, authoritative and knowledgeable services to investors, companies, governments and NGOs.
Marsh has carried out a detailed analysis of Aricom's project documentation and an extensive site visit in order to provide the banking group with an assessment of Aricom's insurance requirements.
Aricom's legal counsel, Norton Rose LLP, has been working with counsel appointed on behalf of the Lenders to complete a legal review of Aricom's relevant assets and corporate documentation.
Aggregate Project Economics
The optimisation of the project has had significant effects on both value and return estimates but has also focussed on reducing the capital burden in this high inflationary and uncertain credit environment.
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NPV* US$m |
IRR |
CapEx** US$m |
Maximum External Funding*** |
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CRU Base Case |
2,091 |
21% |
2,304 |
1,030 |
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CRU Alternative Case |
3,607 |
32% |
2,304 |
926 |
* NPV is calculated at 10% discount rate
**A 10% contingency has been added to all capital expenditure estimates for the construction process and capital expenditure is stated in current prices
***Maximum External Funding is the Maximum Capital requirement net of Aricom forecast cash balance as at 31st December, 2008, being US$254 million
The capital expenditure is required for 4 main areas and can then be subdivided again by product type:
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To Concentrate |
On to DRI |
Total |
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US$m |
K&S |
Garinskoye |
K&S |
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Design & Other |
29 |
37 |
88 |
154 |
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Infrastructure |
157 |
549 |
7 |
713 |
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Mining |
74 |
47 |
n/a |
121 |
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Beneficiation |
276 |
69 |
971 |
1,316 |
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TOTAL |
536 |
702 |
1,066 |
2,304 |
The majority of these estimates are based on actual quotations received. For the purpose of this analysis all capital expenditure totals are shown as pre-production and so do not include ongoing sustaining capital expenditure which is expected to be on average US$10m per annum.
Mineable Reserve Analysis
Aricom has used a Russian contractor to construct detailed mine plans for both the K&S and Garinskoye projects using both historical geological data as used in the GKZ reserve and resource data and the more recent confirmation drilling that Aricom has undertaken. The following table sets out this information and highlights the good correlation between the historical mineable reserves to what has been redrilled and independently audited recently:
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GKZ Resource Estimate |
GKZ Mineable Reserve Estimate*** |
JORC Mineable Reserve Estimate**** |
Estimated Mine Life ***** |
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Garinskoye |
388.8mt at 41.3%** |
223mt at 38.5%** |
220.2mt at 37.9%* |
25 years |
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K&S |
564.5mt at 33.7%* |
539.6mt at 33.7%* |
404.7mt at 31.1%* |
40 years |
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TOTAL |
953.3mt at 36.7% |
762.6mt at 35.1% |
624.9mt at 33.5% |
40 years |
* - confrmed by GKZ in 1956 for Kimkan deposit and calculated, but not confirmed, for the Sutara deposit
** - confirmed by GKZ in 1956
*** - Mineable reserve estimated as GKZ A + B + C1 categories
**** - JORC estimate as independently reviewed by WAI
***** - Mine life as estimated by Aricom studies at forecast annual mining capacity and based on reserves before the addition of resources and halo areas.
Financial Planning Process
In May 2008, the Group appointed Morgan Stanley as financial adviser for the funding of construction and development of the K&S and Garinskoye projects. The Morgan Stanley team is mandated to provide advice on financing from a variety of possible sources including traditional project finance, access to debt capital markets, equipment and/or technology partner finance and the possibility for the involvement of a long term strategic project partner.
Morgan Stanley's debt advisory team is assisting Aricom with the progression of the project studies on K&S and Garinskoye to bankable feasibility studies. Morgan Stanley is also aiding with the appointment of and negotiations with potential EPC contractors, offtakers and other independent consultants associated with the development of the projects. It is intended that an information memorandum will be delivered to various banking groups with a request for indicative offers for providing a credit facility to meet Aricom's budget requirements.
Aricom maintains a strong balance sheet with a substantial cash balance deposited with a number of leading banks. The current cash balance supports Aricom's budget requirements for at least a further twelve months. The Board believes that it will be better placed to review ongoing expenditure commitments following detailed bank, contractor, equipment suppliers and potential strategic partner briefings later in 2008. There are a number of alternative development programmes with the Group's portfolio of assets that are being considered. However, the Board remains comfortable with the results of these studies as a long term investment.
Construction Contracts
Aricom is conducting a tender process for the award of construction contracts. The current working assumption is that Aricom manages a number of subcontractors for the construction and development of the necessary infrastructure and initial mining operations. Separately, Aricom is in discussions with an international contractor for a full engineering, procurement and construction ("EPC") contract for the beneficiation plant. The aim of these negotiations is to conclude a fixed-price and turn-key contract with end product quality guarantees as appropriate. The lead contractor in these negotiations has also discussed the possibility of providing project finance for this plant. The DRI plant will be the subject of a separate contract and Aricom has received a proposal from an international contractor.
Offtake Agreements
Aricom has discussed a number of offtake proposals which would suit both the feed of concentrate and metallised nuggets. Whilst the process of talking to potential strategic partners is ongoing, the Board of Aricom has decided to refrain from committing to any one party due to the inherent value in control of the product.
Infrastructure
The K&S project is located close to the Trans-Siberian railway and the road and energy network. The study proposes that Aricom will construct a small section of railway connection and loading/unloading facilities. The main area of infrastructure required is a camp for c.1,100 people and relevant heating, water and a set of electricity substations.
The Garinskoye project is located approximately equidistant between the Trans-Siberian and BAM railways. The optimised study has looked at the local area in detail in order to reduce the original cost of constructing a railway connection to Garinskoye from one of the national networks. Aricom has received a study from a European contractor for the construction of a 124km cable belt conveyor connecting Garinskoye to a spur from the Trans-Siberian railway at Shimanovsk where Aricom would build a storage area and loading facilities. The second main area of infrastructure required is a camp for c.500 people and relevant heating, water and a set of electricity substations.
Environmental
Both Garinskoye and K&S have been designed so as to cause the minimum environmental impact upon the region and local inhabitants. The management plans for the protection of environment, health and safety provides measures for reduction and control over the critical risks. The monitoring and control of the critical risks will be conducted throughout all stages of the life of each of the projects. In order to reduce the impact on the environment after project closure a programme of recultivation and ecological monitoring of territory has been planned.
Kuranakh update
As previously reported, Kuranakh made its first shipment of pre-concentrate in June 2008 and is scheduled to commence regular shipments later this month. Work on the mining and both the crushing and screening and beneficiation plants is progressing well and the Board continues to believe that 2008 production will be in line with the most recently published forecast.
Aricom has managed to secure a c.22% increase in the sales price of the pre-concentrate that it will be shipping later this month versus the price attained for the June product which was of a similar quality.
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