START­ING FRESH

The re­build at Koolan Is­land is now 90 per cent com­plete and on track for com­ple­tion in March next year, less than five years after Mount Gib­son Iron was forced to close it fol­low­ing ex­ten­sive flood­ing. Amy Blom spoke with in­com­ing Mount Gib­son Iron chief

The Australian Mining Review - - MOUNT GIBSON IRON -

Q. WA’s Koolan Is­land closed in 2014 fol­low­ing ex­ten­sive flood­ing. What led to the de­ci­sion to re­build the sea­wall?

Mount Gib­son ap­proved the re­build of the sea­wall in April 2017 after two years of com­pre­hen­sive fea­si­bil­ity as­sess­ment which iden­ti­fied a safe and vi­able en­gi­neer­ing de­sign for the sea­wall and con­firmed very com­pelling eco­nomic fun­da­men­tals us­ing con­ser­va­tive base case as­sump­tions.

Since that time, the eco­nom­ics have con­tin­ued to im­prove. In April this year we in­creased to­tal ore re­serves by more than 60 per cent to 21 mil­lion tonnes (mt) grad­ing 65.5 per cent iron.

Koolan will be Aus­tralia’s high­est grade di­rect ship­ping hematite iron ore op­er­a­tion when sales com­mence next March.

Mean­while, there has been a fun­da­men­tal shift in the pric­ing dif­fer­en­tial for low and high grade iron ores over the last cou­ple of years – with 65 per cent iron ma­te­rial at­tract­ing a pre­mium and cur­rently worth at least 25 per cent more than ma­te­rial grad­ing 62 per cent iron.

At our con­ser­va­tive base case as­sump­tions – 62 per cent iron price of $US55 per dry met­ric tonne (/dmt) cost and freight (CFR), AUD:USD of 0.75, and high grade pre­mium of 10 per cent – the project has an es­ti­mated pre tax net present value (NPV) of $250 mil­lion and in­ter­nal rate of re­turn of 37 per cent.

Those es­ti­mates are in­clu­sive of to­tal in­vest­ment costs of about $175 mil­lion prior to the start of sales – com­pris­ing $100 mil­lion in restart cap­i­tal and $75 mil­lion on pre-pro­duc­tion ac­tiv­i­ties such as mine pre-strip­ping – and also in­clude es­ti­mated even­tual clo­sure costs of circa $28 mil­lion, which would have to be spent whether we re­opened the mine or not.

If you use re­cent spot pric­ing (62 per cent iron of US$75/dmt, AUD:USD of 0.71, and high grade pre­mium of 25 per cent), the project would have a pre-tax NPV of over $900 mil­lion and in­ter­nal rate of re­turn (IRR) of over 90 per cent.

So it re­ally is a unique op­por­tu­nity for Mount Gib­son.

Q. Can you de­tail what the re­build in­volved and how far along the project is now?

The first step was the com­ple­tion of the fea­si­bil­ity study work to con­firm the en­gi­neer­ing, tech­ni­cal and eco­nomic vi­a­bil­ity of the project.

Once we’d com­pleted this work and ap­proved de­vel­op­ment, the next step was to re­build the sea­wall em­bank­ment by fill­ing the breach with waste rock.

This was com­pleted in Au­gust 2017, after which we were able to com­mence con­struc­tion of the im­per­me­able sea­wall bar­rier within the em­bank­ment.

The bar­rier is a ce­ment “cur­tain” 1.2m wide, 470m long and up to 44m deep which sits within the sea­wall em­bank­ment.

This was the long­est and most com­plex task, and was com­pleted in mid-July 2018, and re­quired en­gag­ing a spe­cial­ist con­tract­ing firm ex­pe­ri­enced in this type of con­struc­tion.

The bar­rier is made up of about 190 pan­els, each ex­ca­vated sep­a­rately in an al­ter­nat­ing pat­tern, and filled with a ce­ment ben­tonite mix.

Ahead of panel ex­ca­va­tion, holes were also drilled ei­ther side for the in­jec­tion of a ce­ment grout to re­duce the seep­age of wet ce­ment into the rock-fill.

We have also in­stalled nu­mer­ous sen­sors and mon­i­tor­ing in­stru­ments that al­low us to mon­i­tor any move­ment in real time.

The ce­ment seep­age bar­rier, which ex­tends down to bedrock, is the key dif­fer­ence be­tween this new sea­wall and the one that was orig­i­nally in­stalled, which in­stead had a core of dense clay as the main wa­ter bar­rier and which didn’t ex­tend all the way down to bedrock.

Once the seep­age bar­rier was com­pleted in July 2018, we in­stalled heavy duty de­wa­ter­ing pumps and in early Au­gust com­menced de­wa­ter­ing at a rate of about 1500 litres per se­cond, or about one Olympic-sized pool ev­ery half hour or so, to re­move the 21 mil­lion cu­bic me­tres of wa­ter in the pit.

As we re­ported in the quar­terly, by mid-Oc­to­ber the project was just un­der 90 per cent com­plete, with over 8.5 mil­lion cu­bic me­tres of wa­ter hav­ing been re­moved from the main pit, in line with our sched­ule to start min­ing by the end of the year and to com­mence ore sales by the end of March 2019.

In tan­dem with the de­wa­ter­ing, we are also re­fur­bish­ing the main pit foot­wall (the “in­land” side of the pit) by us­ing a barge-mounted shotcret­ing ma­chine to cover ar­eas where re­quired, and in­stalling avalanche mesh to catch any loose de­bris.

Ac­tiv­i­ties are cur­rently run­ning to our sched­ule and the wall is per­form­ing as ex­pected.

Q. What were some of the chal­lenges in­volved in the re­build and how were they over­come?

Get­ting the right de­sign, by a group of lead­ing ex­pert en­gi­neer­ing firms, was the first task which re­quired a de­tailed un­der­stand­ing of how and why the orig­i­nal sea­wall failed.

Three groups of tech­ni­cal en­gi­neer­ing ex­perts were se­lected, each with de­fined scopes and re­view roles.

We also needed to en­gage a con­trac­tor able to in­stall the seep­age bar­rier, which is a rel­a­tively com­mon method for recla­ma­tions and re­fur­bish­ing old earthen dams.

More gen­er­ally, work­ing in a re­mote is­land lo­ca­tion such as Koolan also rep­re­sents its own chal­lenges as vir­tu­ally ev­ery­thing has to be trucked to Derby and then barged 140km to the is­land. Ce­ment was de­liv­ered di­rect by ship. Work­ing in a re­mote trop­i­cal lo­ca­tion can also be chal­leng­ing for those who aren’t pre­pared, es­pe­cially dur­ing the hu­mid wet sea­son from Novem­ber through to March.

The chal­lenges of work­ing at Koolan Is­land are some­thing we’re well ac­cus­tomed to manag­ing, given we mined and ex­ported over 20mt of ore from the op­er­a­tion in the seven years we op­er­ated the mine prior to the main pit flood­ing in late 2014.

In ad­di­tion, our ded­i­cated care and main­te­nance crews did an out­stand­ing job lead­ing up to our restart de­ci­sion, en­sur­ing that the ex­ist­ing in­fra­struc­ture and mo­bile min­ing fleet re­mained in good con­di­tion.

Q. Koolan mine is ex­pected to restart as iron ore prices con­tinue to climb. How con­fi­dent are you in the iron ore mar­ket at the mo­ment and Koolan Is­land’s abil­ity to de­liver a pre­dicted rise in de­mand?

We are very con­fi­dent in the out­look for Koolan’s unique high grade prod­ucts, given the changes ap­par­ent within China, no­tably with re­gard to ra­tio­nal­i­sa­tion of the steel in­dus­try into big­ger, more prof­itable steel pro­duc­ers, and the Chi­nese Gov­ern­ment’s ef­forts to re­duce pol­lu­tion.

These fac­tors have been cen­tral to what we see as a struc­tural change in pric­ing for high and lower grade iron ores.

While we ex­pect the price dif­fer­en­tial be­tween dif­fer­ent grades of iron ore to pinch and swell over time, we don’t ex­pect them to re­turn to his­tor­i­cal lev­els when high grade ores re­ceived lit­tle pre­mium, and dis­counts on lower grade ores were rel­a­tively mod­est.

Re­gard­less, Koolan does not de­pend on cur­rent pric­ing to be a com­pelling in­vest­ment.

As I noted, even us­ing our con­ser­va­tive base case as­sump­tions – an av­er­age Platts 62 per cent iron price of $US55 per tonne, a high grade pre­mium of 10 per cent and an AUD:USD ex­change rate of 0.75 (ver­sus cur­rent price of $US75 per tonne, pre­mium of 25 per cent and ex­change rate of 0.71), Koolan prom­ises ex­cel­lent re­turns.

The re­al­ity is this mine should gen­er­ate at­trac­tive op­er­at­ing mar­gins in all but the most pes­simistic pric­ing en­vi­ron­ments, given its es­ti­mated life of mine cash breakeven price, in­clud­ing de­vel­op­ment capex and clo­sure, of around $US40 per tonne CFR – Platts 62 per cent iron price.

Q. How will the restart of the Koolan Is­land mine ben­e­fit both Mount Gib­son Iron, and the com­mu­nity?

From a com­pany per­spec­tive, Koolan Is­land prom­ises an­other five to six years of ex­cel­lent cash-flow gen­er­a­tion that will fur­ther bol­ster our fi­nan­cial po­si­tion and our abil­ity to in­vest in new op­por­tu­ni­ties to cre­ate value for our share­hold­ers.

From the per­spec­tive of our em­ploy­ees and con­trac­tors, it also means sta­ble long-term em­ploy­ment for more than 300 peo­ple who will be needed at the is­land.

We are also very proud of our pos­i­tive long term re­la­tion­ship with the Dam­bi­man­gari Peo­ple, the tra­di­tional own­ers of Koolan Is­land, with whom we have al­ways worked closely, in­clud­ing op­por­tu­ni­ties for indige­nous train­ing and em­ploy­ment.

The restart of Koolan Is­land will also have a sig­nif­i­cant ben­e­fit to the econ­omy of the west Kim­ber­ley, es­pe­cially the Derby re­gion.

And the State Gov­ern­ment will no doubt ap­pre­ci­ate the sub­stan­tial min­eral roy­al­ties that Koolan’s high grade ore will gen­er­ate.

Q. Be­yond Koolan Is­land, what were some of the high­lights for Mount Gib­son Iron in the last quar­ter?

The solid per­for­mance of our mid- west busi­ness, from an op­er­at­ing, fi­nan­cial and safety per­spec­tive, was a high­light, es­pe­cially as it is now in the fi­nal stages of what has been very suc­cess­ful 15 year pres­ence for Mount Gib­son in the mid- west re­gion.

Our Ex­ten­sion Hill op­er­a­tion just passed five years with­out record­ing a lost time in­jury ( LTI), while our Ger­ald­ton port oper­a­tions re­cently passed nine years with­out an LTI.

This is a safety per­for­mance of which our teams can be very proud.

Mean­while, de­spite the con­tin­ued heavy dis­counts on ores grad­ing be­low 62 per cent iron – such as our mid- west prod­ucts – the busi­ness gen­er­ated pos­i­tive op­er­at­ing cash flow of $ 18 mil­lion in the quar­ter, while cash costs con­tin­ued to fall to $ 37 per tonne Free on Board ( FOB).

Q. What else is on the hori­zon for Mount Gib­son Iron?

Our im­me­di­ate fo­cus re­mains on com­plet­ing the Koolan restart project on sched­ule and re­sum­ing ore sales in March next year, and also suc­cess­fully com­plet­ing min­ing and sales from the mid-west, be­fore tran­si­tion­ing the Ex­ten­sion Hill site to clo­sure in the first quar­ter of 2019.

But we are also con­tin­u­ing to ac­tively seek and eval­u­ate po­ten­tial new re­sources in­vest­ment op­por­tu­ni­ties, both within and out­side the iron ore sec­tor, with a view to life after Koolan Is­land in six or so years from now.

Our strong bal­ance sheet and cash re­serves give us sig­nif­i­cant ca­pa­bil­ity in this re­gard, though it is im­por­tant that we re­main dis­ci­plined when it comes to as­sess­ing such op­por­tu­ni­ties.

Q. Any­thing else to add?

We firmly be­lieve that the re­sump­tion of sales from Koolan Is­land should en­able a sig­nif­i­cant mar­ket re-rat­ing of Mount Gib­son’s share value, which in our view con­tin­ues to trade at a sub­stan­tial dis­count to the com­pany’s un­der­ly­ing value.

Mount Gib­son is the only ASX-listed stock that of­fers in­vestors di­rect ex­po­sure to the mar­ket for pre­mium qual­ity di­rect ship hematite iron ore.

The com­pany is debt free, has sub­stan­tial cash re­serves for in­vest­ment, and has a record of pay­ing div­i­dends – since late 2011 Mount Gib­son has re­turned al­most $230 mil­lion in fully franked div­i­dends to share­hold­ers.

“Our im­me­di­ate fo­cus re­mains on com­plet­ing the Koolan restart project on sched­ule and re­sum­ing ore sales in March next year.”

Re-pro­fil­ing the cen­tral sec­tion of sea­wall.

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