Strike Resources closes in on production as iron ore price stays high
Special Report: Strike Resources could not have timed its approach towards production any better, with iron ore prices holding strong at just under $US100 a tonne and a distinct lack of new production coming on.
Iron ore has shrugged off the COVID-19 impact to remain remarkably resilient thanks to several factors that led to declining supply prior to the pandemic. And with demand again ramping up and supply substantially diminished, those mines already on the road to production have a clear advantage.
There are very few ASX-listed companies trying to conquer the iron ore market, thanks to prices hitting rock bottom in late 2015 – which prompted a mass exodus from the market.
But the grades and the production capacity of these heavyweights is on the decline at the same time supply continues to be cut from the market, following events like the most recent tailings dam failure in Brazil, cyclones in Western Australia and mines reaching the end of their lives.
“I think there are a number of factors that are pointing towards the iron ore price remaining strong for quite some time, particularly the expected economic stimulus that’s going to happen in China,” William Johnson, managing director of Strike Resources (ASX:SRK), told Stockhead.
“The Chinese government is pumping money into the economy to keep it going, creating new infrastructure projects which will keep the demand for steel strong for some time to come.”
Paul Bartholomew, head of metals news and insight, Asia-Pacific for S&P Global Platts, told Stockhead in May he believed Chinese crude steel production could still recover from any coronavirus impact and grow by 1-2 per cent to reach 1 billion tonnes this year.
Meanwhile, on the supply side Brazil in particular has been hit hard.
“One of the main suppliers of iron ore to China, being Brazil, has had some big issues there with tailings dams and COVID-19 over the last year or so,” Johnson said.
“There’s been some severe restrictions on their ability to supply iron ore and those restrictions are probably likely to be sustained for a while.
“So there’s strong demand and reductions in global supply, which has pushed the price up in the short term, and there’s a number of market commentators expecting those strong iron ore prices are going to remain in place for quite some time.”
This is where emerging producers like Strike come into their own, and investors are starting to sit up and take notice.
In the past three months the company’s share price has more than doubled, reaching a high point of 5.8c at the start of June after it completed a $1.8m capital raising.
Indicating exactly just how much investors are interested in Strike, the recent placement to professional and sophisticated investors was substantially oversubscribed and had to be scaled back.
The reason for the interest is Strike’s Paulsens East project in the iron ore-rich Pilbara region of Western Australia.
That’s because of its status as a low-risk, near-term development opportunity that requires only a relatively low capital investment of around $8m.
“The deposit itself is very easy to mine in that it’s basically a ridge of iron ore that’s sticking out of the ground,” Johnson explained.
“In the first two years of production, basically we’re just taking the top of this outcropping ridge, there’s virtually no overburden, and the strip ratios are very, very low.”
Paulsens East is being developed as a direct shipping ore (DSO) project. DSO refers to minerals that require only minimal processing such as crushing before they are exported, which keeps costs low.
The mine would produce 1.5 million tonnes each year of DSO lump and fines.
Metallurgical work has indicated that Paulsens will produce a premium high-grade “lump” product with low levels of harmful minerals such as sulphur, and low degradation during transport.
At least 75 per cent of the iron ore produced is expected to be a lump iron ore product grading 61% Fe, which typically attracts a price premium compared to iron ore fines of the same grade.
“Even though it’s a relatively small resource in the scheme of things — we have a resource of about 10 million tonnes of iron ore — it’s exceptionally high grade and most of it is going to be lump direct shipping ore material, which will attract a significant premium on the marketplace,” Johnson said.
“So whilst the iron prices are high, we expect to get really good prices from our customers for the product we can produce because of its high grade and lump characteristics.”
A recently revised scoping study indicated Paulsens East could deliver an extremely rapid payback of the initial $8m capex in just three months followed by $150m in free cash flow (before tax) over the initial four-year mine life.
The attractive metrics have prompted Strike to fast track the development of the mine.
A feasibility study is currently in progress and the company is very close to locking in a native title agreement for Paulsens East.
Once Strike has finalised the native title agreement, the next step is securing a mining permit.
“We’re also working in parallel to secure the other permits and approvals necessary to get this project up and running as quickly as we can to take advantage of those high iron ore prices,” Johnson said.
Strike has already had substantial interest from potential customers.
“Because of the high grade nature of the iron ore and the fact that we’re likely to produce a very high proportion of lump product, it’s a type of product that’s in high demand, and so we have been approached by a number of parties who are keen to act as offtake partners for us,” Johnson said.
“We’re currently in discussions with a number of parties and are confident that given the nature of the product we’re going to be producing, we shouldn’t have any difficulty locking good partners and securing good prices for our products.”
Right now, Paulsens East has a resource 9.6 million tonnes at 61.1 per cent iron ore, but Strike has identified other opportunities to grow that further.
The resource is hosted within a 3km-long outcropping high-grade hematite iron ore ridge, located about 140km west of Tom Price.
But previous drilling and sampling returned high-grade (+60 per cent) mineralisation about 1.6km along strike from the eastern end of the outcropping hematite ridge, which could extend the mine life further.
Strike has also pointed to the potential for active grade control to deliver higher iron ore grades, which would fetch higher prices, where surface sampling has indicated grades of 64 to 66 per cent.