SOURCE: Metalinvestmentnews.com. Iron ore prices have surged 24% in November to $147.40 per metric ton. Despite fears of a “hard landing” in China, Morgan Stanley estimates Chinese infrastructure spending for 2012 to be around $1 trillion. By 2017 it will be $1.8 trillion – an 80% increase.
China’s domestic iron ore deposits are famously low grade. It is no secret that the Chinese are scouring the world for high grade-low cost-assets. Some analysts predict the Chinese will invest $25 billion in the next five years - and most of that in Africa.
BHP Billiton (BHP-NYSE), Rio Tinto (RIO-NYSE) and Xstrata (XTA-L) produce most of the world’s iron ore and all have active projects in West Africa.
But the Chinese are likely to want a bigger stake in something they can develop.
Transportation costs are deal killers for iron ore projects. Fortesque Metals is spending $2.5 billion to construct a 280 kilometer rail line from its Cloud Break Mine to the nearest port.
So the list of likely Chinese targets can be filtered by looking at assets close to a deep sea port.
One company that is drilling aggressively, hitting high grade holes, and is only 40 kilometers from a deep sea port is West African Iron Ore (WAI-TSX.V).
WAI has a world-class iron ore asset in Guinea, West Africa with substantial growth potential. The resource target for the Forécariah permit estimated by SRK Consulting is between 2.9 to 5.1Bt @ an average of 36% Fe.
There is a Potential for Direct Shipping Ore (DSO) on the Sambalama prospect. DSO is the Holy Grail for iron ore projects. It denotes premium grades that can be shipped without milling.
Another significant development is the planned railroad going through both WAI’S properties, and, as of October 30, 2011 they have $8 million in the bank – sufficient cash to complete their first resource report which is expected Q1 2012.
Phase one drill results released November 22, 2011 confirm substantial intersections of near surface and sub-surface high-grade iron ore mineralisation.
These latest set of results indicate that mineralisation starts at surface and is continuous over the length of the drill hole. Maximum hole depth is 130 meters.
“Further exploration and analyses are expected to confirm Direct Shipping Ore potential,” states CEO Guy Duport, “Not only on our Sambalama prospect, but also within 10 identified target zones covering a combined 45km strike magnetite anomalies over our Forécariah permit.”
WAI is focussing its efforts along a 9,000 metre magnetic anomaly and plans to complete an aggressive 8,000 metre RC drill program by the end of the next quarter.
The TSX Venture Exchange has fallen 37% in the last year, from 2,400 to 1,500, as investors become increasingly “risk adverse”. WAI is now trading at .10 and has a market cap of $16 million.
To give an idea of how much upside there is at these levels, look at Champion Minerals (CHM-TSX.V) an iron ore development company, operating in Quebec, Canada with a current market cap of $110 million.
A 2011 PEA study for CHM produced a Net Present Value of $4 billion at a discounted cash flow rate of 8% with an Internal Rate of Return (“IRR”) of 41.5% and a capital payback period of 2.3 years.
China’s iron or demand grew about 20% in 2011.
The Chinese currently spend $80 billion a year importing iron ore.
Guy Duport, the CEO of WAI speaks fluent Chinese and has a long history of deal making in China.
With the latest drill results confirming the potential for a company-making deposit, West African Iron Ore merits further investigation.