Chinese Infrastructure Giant XY-Group Will Commit Hundreds Of Millions Of Dollars To Develop Petropavlovsk's Iron Ore Assets
By Alastair Ford
minesite.com
Some things change, but other things stay the same. As top man at Aricom, Jay Hambro ran the company’s iron ore assets. And as chief investment officer inside Petropavlovsk he’s still running the same assets, just under the umbrella of a larger organization. A much larger organization, in fact – one with aspirations of an eventual place in the FTSE 100, and which has just been given a considerable vote of confidence in recent research from respected Russian broker Troika, research that was helpfully titled: “The Right Way to do Things in Russia”. Troika’s £11.86 target price isn’t quite as aggressive as London broker Fairfax’s £18.00 target, but its buy recommendation is probably more influential.
But even with gold comfortably above the US$1,000 mark, Troika still gives real prominence to the Petropavlovsk iron ore portfolio, and with good reason. Iron ore has come back strongly this year. Jay Hambro argues that further strength is likely. Chinese intentions, he says, are fairly clear, but there’s still a lot of uncertainty elsewhere as steel makers wait to see what kind of orders they receive over the next six to 12 months.
There’s been no such reticence on the part of the Xuan Yuan Industrial Development Company, however, a privately held Chinese group which boasts the mantle of being the biggest Chinese investor in Russia. XY-Group, as it’s known, has just signed up to a cooperation agreement with Petropavlovsk on the likely development of the K&S iron ore project in the Jewish Autonomous Region of Russia.
Although this agreement doesn’t set the trucks rolling down the roads and get the concrete pouring quite yet, it is, according to Jay Hambro, “great news”. Under the agreement the two companies propose a US$375 million capital commitment for the development of phase one at K&S, 70 per cent of which money would be provided for in the form of a loan from XY-Group at Libor plus five per cent. It’s also envisaged that XY-Group would come in at a project level, thus reducing the equity component of the funding that Petropavlovsk would have to find too.
Jay Hambro says that for its part, Petropavlovsk always has three key boxes it wants to tick on deals such as this - funding, development, and off-take. “This agreement”, he says, “ticks all of those boxes in one transaction”. The precise details of how it’s all going to work will be thrashed out over the coming months, but the idea is that XY-Group will take all of the off-take from the initial 3.2 million tonnes per year operation, on the basis of the Western Australian benchmark price, plus a transport premium.
The partners will then look at developing stage two of the project, which involves bringing production from the nearby Garinksoye project on stream, and stage three, which involves the manufacture of a DRI product, which is essentially, as Jay explains, a metallised nugget.
With all that still to come, it’s perhaps as well that work is already underway at K&S, albeit in a preparatory way. An area at site has been cleared, work on accessing water and power is well advanced, and the permitting process is also well underway. So once the nitty gritty of the cooperation agreement is worked out, the two partners will be able to hit the ground running when it comes to full scale production.
Broker Troika likes all that, and it notes, too, the supportive noises coming out of the Russian government, the recent decision to set up a gold fund with well established Russian group Leader, and the possibility that a government funded road might be built between Garinskoye and the Trans-Siberian railway. That should help things along nicely.
Meanwhile, Petropavlovsk’s gold production is ticking along nicely, with third quarter results due out within the next couple of weeks. Costs are likely to come in at the lower end of the quartile, as usual, while the high gold price makes for smiles all round. “Life is as positive as I’ve seen it looking for a while”, says Jay. “The gold price is good. The iron ore price is good”. What more could you want? |
