African Minerals’ Tonkolili iron ore project in Sierra Leone is set to become the largest contributor to the country’s GDP
Transforming an ore body into a revenue-generating mine in three years, particularly in a developing country, is no mean feat. But that’s exactly what London-headquartered exploration and development company African Minerals (LSE: AMI) accomplished with its Tonkolili iron ore mine in Sierra Leone, West Africa.
The company discovered the Tonkolili ore body – which turned out to be the world’s largest magnetite deposit defined, with a significant hematite cap – in March 2008 and, having received all the necessary leases and licences, was exporting its first direct shipping ore (DSO) in November 2011. Eighteen months on, the company has signed a landmark deal with China’s fourth-largest steel maker, Shandong Iron and Steel Group (SISG), and is within days of bumping up its production to 20 million tonnes per annum (Mtpa).
The past year of ramping up production was also chief executive Keith Calder’s first year working at African Minerals. Inevitably, the year following Calder’s appointment on July 4 has been a whirlwind of development; however, with approximately 35 years in the business and much of it spent at the top of mining majors and in emerging markets, he was well prepared.
Succeeding in a challenging year
Calder says the first big milestone he oversaw was the commissioning of the 1B process plant in September 2012 – later than originally planned. The delay was the root of several operational difficulties stemming from a severe wet season, explains Calder. “If 1B had been commissioned before the wet season, we’d have been producing significant amounts of lump material, which would have meant the wet season would not have been so problematic for us in 2012; but it was only commissioned afterwards,” he says.
As a result, African Minerals had to suspend shipping between August and October 2012 and, although 5.3Mt were produced overall, only 4.3Mt were exported.
“This year, we’re getting around that completely by only planning to ship Group C cargoes [which are neither chemically hazardous nor capable of liquefaction] through the wet season,” Calder adds.
Once 1B’s commissioning was complete, the path was clear for the completion of the expanded port infrastructure and the commencement of African Minerals’ major production build up to its 20Mtpa target. “The last bottleneck in that process was the completion of the large 6,000 tonnes-per-hour dumper, which tripled capacity at the port, and its accompanying rail loop infrastructure,” Calder explains. “That was successfully completed on 29 April, giving us the equipment capacity across the board for the first time to properly support the 20Mtpa run rate.”
However, boosting production rates requires more than just physical capacity, he adds. “We also upgraded the management significantly, with the appointment of several very high-class general managers at rail, port and mine. Equipment capacity is one thing, but the management capability to utilise that capacity is another, and we’re very fortunate to now be within just a matter of days and weeks of demonstrating that sustainable 20Mtpa target.”
Optimising the expansion plan
Last year also saw a major change to African Minerals’ original expansion plan for Tonkolili. Originally, the company was to expand production capacity to 35Mtpa by building a new port at Tagrin Point – a deep-water harbour that would eliminate the need for transhipping and thus reduce African Minerals’ shipping costs by about $5 per tonne. However, after conducting a scoping level review of its expansion options, the company decided it would be wiser to expand its existing infrastructure at Pepel Port instead.
“The biggest issues with doing a new greenfield development at Tagrin Point were the permitting issues and the risk of slippage,” explains Calder. “Eliminating the need for transhipping would save us several tens of millions of dollars a year, but delaying the project, if there was a slippage of six, 12, 18 months, could lead to opportunity losses of several billion a year. This risk outweighed any other considerations.”
The alternative, to invest further in Pepel Port and do a brownfields expansion there within African Minerals’ existing footprint – “requiring no further environmental permitting or relocation of villages, and doing something we’ve already got the skills and demonstrated capacity to do,” says Calder – carried a far lesser chance of slippage. Seeing that this option was lower-risk, saved around $1 billion capex and gave superior equity returns, African Minerals confirmed the Pepel 35Mtpa Expansion in December 2012.
The Pepel expansion, formerly defined as Phase 2, will comprise the extraction of saprolite hematite to produce a high-grade concentrate, a premium 64 per cent product that is likely to command a $20/t premium to the equivalent DSO product: expanded production at expanded margins.
While many iron ore miners are expanding their production capacities this year, few of them have guaranteed customers for their product 50 years from now.
This is where African Minerals is a step ahead of the pack. In March 2012 it closed a $1.5 billion transaction with SISG, in which the Chinese steel producer purchased a 25 per cent stake in Tonkolili Project companies and arranged a Discounted Off-Take Agreement for up to 10Mtpa for the life of Tonkolili Mine.
“The deal gives SISG access to about 18.5 million tonnes of material,” says Calder. “That gives them a great deal of independence from the international populace of the major three or four, and that’s very attractive to them. They also appreciate that this is an asset that will provide for them for generations to come.
“What’s attractive to us is that, first, we have a mark on the table for the value of the project – and certainly, the $1.5 billion allowed us to complete Phase 1 to a much higher tonnage than we had originally embarked upon. In addition, SISG have been absolutely instrumental to helping us with procurement, capital goods and other relationships with Chinese companies, including banking relationships.”
African Minerals also has a smaller 5Mtpa off-take deal with China Railway Materials Company Limited (CRM), and similar agreements with Standard Bank and Glencore. “[CRM and SISG] are very important stakeholders to us and we’re important to them as well, so we don’t expect to be exposed to the same sort of issues as occurred in 2008, where some of the major off-takers reneged on deals with junior miners,” Calder says. “It gives us a great deal of confidence to know that, no matter what downturns in the market, irrespective of price, those tonnages are able to be sold.”
The relationships African Minerals has developed in China are a significant advantage in the iron ore market, as is its demonstrated ability to fast-track project development. The company has good access to West African assets, guaranteed access to capital and, especially since last year’s management upgrade, senior management that is both experienced and entrepreneurial. “I believe that mix of Chinese support, entrepreneurial leadership and capability of senior management is pretty unique,” comments Calder.
Another strength is African Minerals’ attitude towards corporate social responsibility. Above all, it recognises the importance of sustainability in a project with a mine life exceeding 60 years.
“Irrespective of what licences the government gives you, to be able to run a multi-generation asset such as this, the people need to give you their support as well,” says Calder. “A company such as ours in an emerging market has several impacts: one is direct employment by the mine or by the businesses that move and accommodate our cargoes and people. Indirectly, our people need clothing, feeding and housing so there’s growth in industries such as clothing manufacture, brick making, formal agriculture and carpentry; and those skills are mobile and beneficial for the entire state.”
Sierra Leone’s civil war, running from 1991 to 2002, prevented African Minerals’ key demographic for skilled and semi-skilled workers from gaining a standard education. “So one of the biggest impacts we can have – and it’s essential rather than altruistic – is to develop and train these people, particularly in the traditional engineering trades, giving them recognised formal national and international qualifications. They then become mobile not only in Sierra Leone, but throughout the region.”
African Minerals’ immediate and only goals are to stabilise production at 20Mtpa and lower its operating costs down to $30/t, so that it may “maintain a good margin in any price scenario,” says Calder. “We want to get the definition of Pepel 35 locked down a bit tighter and get the financing package in place, or at least agreed, by the end of the year. Then we’ll have the management bandwidth to consider: What else can African Minerals do?”
While the company remains focused on Tonkolili, that question has no definitive answer. But Calder certainly has larger ambitions than can be fulfilled by Tonkolili alone. “I didn’t sign up to run just one mine,” he says. “I think that’s common for all of us – we all have an ambition to be a mid-tier, diversified miner centred in Africa.”
Future projects are likely to play into African Minerals’ strengths in infrastructure development and China, meaning bulk commodities and minerals associated with the steel cycle are good possibilities. Fuel commodities are attractive to the company also, due to the high cash flow they can provide. Whatever African Minerals decides to do next, its guaranteed cash flow from Tonkolili takes it out of competition with cash-poor juniors and gives it first pick of what else West Africa has to offer.