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
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.