Investment Memo: IRD (ASX:IRD)
What we want to see from our investment in IRD during 2022
This investment memo is a short, high level summary of why we continue to hold IRD and what we expect the company to deliver in 2022. The purpose is to record our current thinking as a benchmark to assess the company’s performance against our expectations 12 months from now.
What does IRD do?
Iron Road Ltd (ASX: IRD) is advancing one of the world’s largest, development ready, high- product grade (>66% Fe) iron ore projects.
The company is also progressing a multi-commodity port that includes longer term potential to be part of South Australia’s primary green hydrogen export hub.
What is the macro theme behind IRD?
Nations across the globe have launched substantial stimulus packages to boost economies through and past the pandemic, typically by greenlighting significant construction and infrastructure projects.
As a key ingredient for steel, iron ore demand has been persistently strong over the past several years (i.e. pricing well above USD80/t), and is expected to remain so for the foreseeable future. In particular, demand for higher grade iron ore (Fe 65%+) is expected to enjoy greater premiums as the major importers (especially China) and customers seek to utilise cleaner inputs.
Why do we continue to hold into 2022?
- Attractive project economics. IRD fully owns its Iron Ore project, one of the few sizable, high product grade iron ore projects anywhere in the world today ready for development. PFS shows a 12Mtpa producer, 20 years mine life, NPV upwards of US$3BN.
- Substantial headstart: Large-scale iron ore projects take decades to go from inception to production. IRD has spent the past 14 years, and almost $180M, to progress its main project to be development ready – and well placed to attract a strategic partner(/s) to proceed to construction.
- Tight register: Sentient Equity Partners holds a 73% interest in IRD. Sentient has a history of backing their own due diligence, and will wait patiently to ensure a very healthy return on their investment. Last December Sentient announced the sale of its lithium project for US$825M (acquired for US $22.5M). We are hoping they can get a similar great result with IRD.
What we expect the company to deliver in 2022?
Objective #1: Attract a strategic partner/investor for its main project.
IRD’s project needs US$1.7 billion in CAPEX to be put into production. This will be difficult for IRD to finance on its own – so we want to see IRD bring in a strategic partner/investor that will de-risk a portion of this financing requirement.
Objective #2: Greenlight Cape Hardy Port Development
IRD needs a port to ship its product – Cape Hardy has been selected as a strategic location and IRD is proposing a staged approach where Phase 1 will involve a fast tracked grain export port that can later be expanded to iron ore. We want to see IRD get the approval to build the port.
What could go wrong?
Project Funding risk – the capital cost for IRD’s project is significantly more than IRD’s current market capitalisation, IRD needs a strategic partner to take a position in the project or on the register otherwise it is unlikely that IRD could raise the project financing via equity and/or debt, delaying commercialisation.
Operations Funding Risk until production occurs (thereby providing ongoing cashflow), IRD is heavily reliant on the capital markets to fund its operations. There is no guarantee that capital markets will be conducive to an IRD equity raise, which could provide poor terms and greater dilutionary impact down the track.
Market risk – there are relatively few big iron ore developments ready for delivery in the next few years, so we expect supply to remain tight. However demand could drop, particularly if new construction and infrastructure projects are delayed globally. This would negatively impact iron ore pricing, which directly affects the value and attractiveness of IRD to strategic partners and project financiers.
Port dynamics – development of the proposed port is subject to sufficient demand for its use – hence the need for other groups to commit to exporting through Cape Hardy. If there was insufficient demand, then this would harm the business case to proceed with the port.
What is our investment plan?
IRD is developing a later stage long term iron project, our plan is to hold a core position over the next 5 to 7 years.
We will look to increase our position in 2022 at around current prices. If the share price re-rates (hopefully off the back of objectives #1 and #2 being achieved) we will look to de-risk our position by selling about 20% of our holding.