The Big Picture

Truckless mining has been used for almost a century in brown coal mines in Germany and more recently in Victoria, Australia. The geological, mineralogical and geometrical characteristics of the Braemar Iron Formation deposits allow for exactly the same approach, with in-pit crushing and conveying (IPCC).

The Savage River slurry pipeline has been operating since 1967 and iron ore pipelines have been operating in Brazil since 1976. There are also several successful iron ore pipelines in India. Other minerals transported by pipeline include coal in the USA and bauxite in Brazil. In Australia, this includes the slurry of zinc concentrate to the coast from the Century Mine in Queensland. Operating costs per unit are an order of magnitude (ten times) lower than railroads. The flow regime is such that pipe wear is almost zero. The Savage River and Brazilian pipelines are still using the original pipes.

FPSO's (Floating Production Storage and Offloading) facilities are being used for complete “floating” gas processing plants in the Oil & Gas industry (see Woodside Browse Basin offshore gas projects). There is absolutely nothing new being done here. They are capable of withstanding class 5 storms. Little or no onshore facilities are needed, and hence the footprint at the shoreline is minimal and very environmentally friendly. Capital costs are hugely reduced. Floating ports already exist for both iron ore (Venezuela, India and New Zealand) and coal (Venezuela and Indonesia). Additionally, the use of a FPSO for the port means we will have a sailing draft of 23 meters at any state of tide - i.e. we can handle the largest bulk carriers currently available and achieve per tonne freight costs to China lower than the Pilbara and much lower than Brazilian producers. This is of great interest to the Chinese steel mills able to take delivery by Chinamax or Valemax vessels.

1  Based on Lodestone Equity Group Conceptual Feasibility Studies

2  ASX announcement 27th November 2013

All value add points are potential liquidity events or exit points, e.g. after drilling out significantly more JORC Resource; completing a DFS; or securing significant sales arrangements; reaching agreement with a joint venture partner; arranging finance to proceed with construction etc.

There are several key competitive advantages the Mawson Iron Province has over other magnetite (and DSO) projects;

Access to existing infrastructure
Our operations are within easy driving distance of major urban areas (e.g. 280km by car to Adelaide, the state capital of South Australia). We will not have the expense of either company towns, or fly in - fly out. We should also be able to get materials and supplies delivered at a significantly lower cost than in remote areas. The driving distance from Adelaide to Wallaroo, the base for our off shore floating port, is only 156 km. The driving distance from Perth, the capital of Western Australia, to Port Hedland, the largest iron ore port in the Pilbara is 1,648 km.

Our access to electricity is also a competitor advantage. Electric power on the Yorke Peninsula and Mid North of South Australia costs about one sixth the cost of power in the Pilbara. The Mawson Iron Province is not far (~100Km) from the Eastern Australian power network. Major high voltage supply lines cross the proposed infrastructure corridor near Burra.

Good Geology
Studies1,2 have shown that the geometry and simplicity of our orebodies are such that we can use very low cost bulk mining methods (i.e. Fully Mobile In Pit Crushers and Conveyors), rather than higher polluting and expensive diesel trucks. With or without drivers, trucks are still polluting and expensive.

Metallurgical and geotechnical studies at Razorback Deposit 1,2, have shown the rock is soft and relatively non-abrasive when compared to other magnetite projects, which contributes to very cheap mining and very low comminution (crushing and grinding) costs.

Transport of Material
From previous iron ore projects in Australia, Brazil and India, it is known that slurry transportation is an order of magnitude cheaper than railroad transportation. Conceptual studies1 have determined that the slurry pipeline is lower in capital cost than a railroad even before adding on the cost of the train sets necessary to carry the ore or concentrates.

From the time the ore is excavated at the mine face, the product does not stop moving and is never stockpiled until it reaches the floating port facility, where it can be directly loaded in ships from the filter plant or stored in bunkers in the floating port. Whereas in conventional rail and port, every time an ore or concentrate is put into a storage bin or placed on the ground in a stockpile it costs from 2 to 5 AUD per tonne. Our plan is to eliminate this issue. The fewer handling steps, surge bins and stockpiles in the flow sheet from orebody to ship, the lower the cost - both capital and operating.

Steel makers with whom we are in discussion, have grasped the essential importance of this concept. It is much more cost effective and sustainable, to design-in such low capital cost and low operating cost concepts at the earliest stage of project development, than to attempt half hearted retro-fits later, which has been the issue of many marginal producers.

We will be able to load the largest bulk carriers afloat and will therefore have the cheapest delivered freight cost per tonne of any operation delivering to China. We will take advantage of Chinamax and Valemax vessels which can carry about 400,000 dry metric tonnes. This is because the planned position of the Filter and Loading Vessel will be in water depths of >23 metres at Mean low, low water. There are no ports able to load such vessels anywhere else in Australia. Additionally, there are no disruptive cyclones in Spencer Gulf. The Gulf constitutes a huge natural harbour ideally suited to an offshore floating iron ore port.

Superior Product
Metallurgical studies2 show our product will potentially be 67 to 69% Fe, versus the 58% Fe of much of the production from the Pilbara. This gives us a natural cost advantage in cost per contained iron unit delivered to the customers’ steel mills. It also significantly reduces the cost of steel making, and reduces the pollution liabilities. Although that benefit accrues to the steel maker and not us, it makes our concentrates very attractive.

1  Based on Lodestone Equity Group Conceptual Feasibility Studies

2  ASX announcement 27th November 2013

We believe the sector of the global steel industry that is dependent on ocean borne iron ore supply has reached the limits of tolerance for iron ore with declining grades, declining quality, increasing slag rates and hence increasing coke rates and increasing costs (i.e. The Pilbara and Minas Gerais).

A major source of iron units to off-set these negative trends is required. It is going to be high grade, high quality magnetite concentrates. Braemar concentrate has the potential to:

Displace the high cost and/or low quality ores in the ocean borne mix of iron ores; and
Replace depleting orebodies (e.g. Chinese domestically produced concentrates); and
Meet any increased demand for high “value in use” iron ore.

The nature of all Pilbara operations is such that operating costs will escalate at a much greater rate than Braemar operating costs. Ship size in the Pilbara is limited by a sailing draft of just over 18 metres (at high tide). Our planned1 offshore port development in Spencer Gulf will allow for a sailing draft of 23 metres regardless of tide. This mean the potential to use bigger ships at lower cost.

1  Based on Lodestone Equity Group Conceptual Feasibility Studies

We will be evolving multiple funding plans, e.g. build own and transfer (BOT) for mining; build own and transfer (BOT) for floating production storage offloading port or facility (FPSO); possible similar arrangements for concentrators since the pipeline will be interesting to contractors who build linear infrastructure; and to utilities that operate linear infrastructure/ water supply/ desalination. Other possible sources of funding are export credit funding (Ex-Im); off-take pre-pay finance; strategic investor equity finance; etc. We are currently talking with several parties about the provision of funding to complete a comprehensive DFS. Additionally, we are discussing conditional sales contracts with a number of steel mills. Such contracts could be used to back conventional bond financing.

To a very large extent the costs, both capital and operating, are cemented in at the earliest conceptual configuration and specification stage of planning, engineering, construction and operation. This has not been done well in several iron ore projects in Australia in the past. No amount of subsequent attention to detail or management attention can make a “high cost” concept or configuration a “low cost” construction job or “low cost” operation. Similarly, the specifications of the materials of construction have to be set at the earliest possible time. This is particularly relevant in our case given the use of sea water in the concentrator.

One of the primary contributors to such recent blow-outs have been the employment of prime contractors totally unfamiliar with Australian laws, labour and conditions. Often such ill-advised decisions are driven by the providers of finance, but these finance people know even less about building projects to the lowest effective cost and on schedule than the inappropriate service provider upon whom they insist. Often there are financial “ties” between the insistent partner or finance provider, and the inappropriate prime contractor insisted upon. Use of an inexperienced and/or inappropriate prime contractor will double the capital cost – guaranteed (personal experience GT).

When building a major project at the peak of the cycle, everything gets more expensive, and the best people are often satisfyingly employed elsewhere, or their services are very expensive to secure.

Often the original cost estimates were simply not realistic because insufficient detail was developed in the configuration stage to produce reliable preliminary estimates.

One critical management factor is that scope and configuration creep must not be allowed. i.e. “nice to have” add-ons must not be allowed to creep in as the design engineering progresses. Only cost reducing changes or changes absolutely necessary to the effective and efficient operation of the project should be allowed and then only after the most intense scrutiny.

“Stick by Stick” construction is another major cost increaser. Off-site completion of the largest possible modules reduces both cost and time schedules on-site. The ultimate example of a module in our case is the float port (FPSO) which will be built and commissioned in a Chinese or Korean shipyard, and then delivered to its moorings in Spencer Gulf as a fully operating module.

Very. South Australia is the best jurisdiction on earth in which to develop a major resource project. The South Australian Government has conferred "major project" status on the “Braemar Infrastructure” and have appointed a task force of senior department heads to work with us to facilitate and expedite the development. We are similarly seeking “Project of National Significance” status at the Federal level.

Iron ore is in oversupply due mainly to the big 3 producers deciding to continue increasing levels of production while prices were collapsing. A cut in the iron ore price hurts the national economy and our own superannuation, as many of us will have iron ore producers in our portfolios. Others seem even more critical, thinking of them as the 3 Stooges:

But this over supply is only temporary. The global steel industry needs a large new source of iron units with the carefully controlled and consistent quality and high iron content that can only be supplied by concentrates, and in particular from Braemar formation magnetite concentrates. Now is the time to be developing the Mawson Iron Province to meet this inevitable requirement for consistent quality and high iron content.

The demand/need is already creeping upon us. Chinese domestic production (circa 300 million tpy) of such concentrates is continually on the wane and underground production has become too expensive. Pilbara Direct Shipping Ore (DSO) quality has in recent years been in decline and this will continue. They are depleting all their better resources and reserves, with no new “World Class” deposits to replace them. Additionally, the Pilbara products cannot replace Chinese magnetite production without considerable disruption to the operation of Chinese blast furnaces, and a subsequent significant increase in hot metal costs. For steel makers, the simplest and cheapest way to reduce emissions from blast furnace steel making is to use the highest grade iron ore possible - Grade is King.

The demographics and development of India, SE Asia (other than China) and Africa (with a current combined population that exceeds 3 billion) have the potential to increase global steel demand by an amount at least equivalent to current Chinese steel demand - where is the iron ore supply for this demand?

For additional information see our presentation on “demographics and the steel industry

Also read - J. Barkes (Metalytics), “Perspective of the long term outlook of Iron Ore”, in AUSIMM Bulletin, October, 2015

One must remove the blinkers of what the iron ore price is today and rather look at the future demand on iron ore. One of the inherent problems with raising finance in the resources market is that money is often poured into projects when the commodity price is high. This is when project costs from drilling, to wages, consulting services and construction of mining equipment is high. Also, the lead time of iron ore projects can be 3 to 6 years, and by the time the project is up and running, we are in the low end of the cycle. For the start up of a mine, this is not the best time to commence production.

This is why Magnetite Mines is bucking the trend and continuing to develop the the Mawson Iron Project.

The approach is a seamless one from mine to ship-loading. Our conceptual studies1 of the planned mine will be an open pit in which we will use high intensity blasting to not only fragment the soft, non-abrasive ore but also achieve a very significant level of comminution to liberation size. Conveyor belts will transport the ore from the mine face to a mill and concentrator. The combined capital and operating cost for conveyors, on a life of mine basis, are suggested by our studies1 to be a minimum of 5 times cheaper than for trucks. The concentrator will employ well proven magnetic separation and hydro-separation technologies to make a very high grade, low impurity magnetite concentrate. The concentrate will be mixed with water to a desired thickness (slurry density) and pumped immediately as a slurry via a pipeline to a floating port moored about 5 nautical miles off shore from Wallaroo in South Australia’s Spencer Gulf. There will be no visible facilities at the shore line.

1 Based on Lodestone Equity Group Conceptual Feasibility Studies

The Mawson Iron Province of South Australia contains the Braemar Iron Formation, first discovered by Sir Douglas Mawson while mapping the geology of the Adelaide Geosyncline in the Barrier Ranges. Our studies1 have shown that this region has the capacity to supply over 100 million tonnes per year of high grade, high quality magnetite concentrate to the global steel industry for over 50 years. This is the largest undeveloped region of magnetite in the world, with Magnetite Mines being the dominant player.

We also believe from our conceptual studies1 that production costs are in the lowest quartile of all internationally traded iron ore. Metallurgical studies2 have proven that a concentrate can be produced with a grade of 67.4 % Fe or above (compared to much of the Pilbara production at circa 58% Fe), which will be desirable feed for sintering or pellet making prior to addition to blast furnaces. It also has the capacity to become desirable feed for direct reduction iron-making plants. We believe that in a world where emission reduction is vital, the simplest way to achieve this in steel making is to use very high grade iron ores and concentrates. Grade, delivered at a competitive cost, will be King.

The potential is huge. If this was all to be achieved, this would place Magnetite Mines the 5th largest producer of iron in the world.

1 Conceptual Feasibility Study has been completed by the Lodestone Group for the Braemar Iron Project, which shows that the proposed Infrastructure Solution can achieve a capacity of up to 100 mtpa. The Company advises that this conceptual feasibility study is based on Lodestone’s Braemar Iron Project.

2 ASX announcement 27th November 2013