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Iron Road Ltd


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Investment Memo: Iron Road Ltd (ASX:IRD) - LIVE

Opened: 01-Jul-2022

Shares Held at Open: 1,402,907

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?

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 did we invest in IRD?

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 do we expect IRD to deliver?

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.

Disclosure: The authors of this article and owners of Wise-Owl, S3 Consortium Pty Ltd, and associated entities, own 1,402,907 IRD shares at the time of publication. S3 Consortium Pty Ltd has been engaged by IRD to share our commentary and opinion on the progress of our investment in IRD over time.

Investment Milestones for IRD

Initial Investment: @ 21.5c
Top Slice
🔲 Free Carry
🔲 Take Profit
🔲 Price increases 300% from initial entry
🔲 Price increases 500% from initial entry
🔲 Price increases 1000% from initial entry
12 Month Capital Gain Discount
🔲 Hold remaining Position for next 2+ years

$25M grant for proposed Cape Hardy port development stands


Oct 25, 2022


Investment Memo: IRD IM-2022
Risk 1 : Project Funding risk

Funding to progress big projects remains a key hurdle for developers, so we are encouraged that our long-term Wise-Owl iron ore Investment Iron Road (ASX:IRD) has received support from the Australian government.

IRD fully owns a 1,200 hectare greenfield site at Cape Hardy on the Eyre Peninsula of South Australia, which it plans to develop into a multi-commodity export facility at a cost of ~$250M (CAPEX).

IRD today announced that the Australian government has maintained its commitment to fund $25M to assist financing and development of the proposed Cape Hardy port. Cape Hardy also has strong support from the South Australian Government and Infrastructure Australia.

This development would benefit several key local industries including agriculture, mining, renewable hydrogen, green manufacturing and First Nations businesses, via the creation of a manufacturing and export hub.

For IRD, Cape Hardy is the logical logistical channel for its flagship asset, the Central Eyre Iron Project (CEIP). The development ready project hosts Australia’s largest undeveloped magnetite deposit, with a 3.7 billion tonne Ore Reserve, capable of producing 589Mt of high-grade magnetite (66.7% Fe) over the life of the mine.

Next up we’re keen to see commercial arrangements progress with parties interested in co-developing Cape Hardy as a green hydrogen hub/ industrial precinct, likely towards the end of this year.

Critical minerals quickly becoming a priority in the EU

Sep 20, 2022

Macro: Commodities

Readers who follow our Investment Portfolios will know that we have been making strategic Investments in commodities that have made critical minerals lists for the EU, USA, Japan, India and Australia.

These minerals are considered critical to the digitisation and decarbonisation macro thematic and include lithium, graphite, cobalt, nickel and PGE’s, to name a few.

Over the weekend, the following speech from the president of the European Commission, Ursula von der Leyen, gave a speech announcing that the EU would look to pass a “European Critical Minerals Act”.

The aim is to avoid the position Europe finds itself in with oil and gas, where it relies on a single trading partner like Russia.

The act would see the EU put in place:

  1. Agreements with partners like Chile, New Zealand, Mexico, India and Australia for the supply of critical minerals.
  2. Identification of strategic projects across all along the supply chain from mine sites to processing/refining projects.
  3. The act would also see the setting up of strategic reserves of these critical minerals.

All of this bodes well for our Investments across commodities identified as “critical minerals” giving these projects strategic importance on the world stage.

To see a list of all the critical minerals in the Australian Critical Minerals strategy document, check out the following link.

Here is a snippet from that speech:

IRD launches Cape Hardy Green Hydrogen bid process


Sep 13, 2022


Investment Memo: IRD IM-2022
Objective 2 : Greenlight Cape Hardy Port Development

Earlier today, our Wise-Owl long-term iron ore investment Iron Road (ASX:IRD) announced that it had launched the bid process for development of its Cape Hardy site as a green hydrogen hub/ industrial precinct in South Australia.

IRD fully owns the 1,200 hectare greenfield site at Cape Hardy.

Fourteen green hydrogen proponents -primarily comprising globally significant players in the power generation and emerging energy transition sectors - are expected to participate, up from the shortlist of 10 parties expressing interest in July.

The launch follows re-registration of an amended multi-commodity Indigenous Land Use Agreement (ILUA) with Australia’s National Native Title Tribunal. This essentially incorporates green hydrogen and green ammonia to the previous agreement, which focused on iron ore and other mineral exports. This provides certainty to long-term broadened commercial terms for the green hydrogen proponents, paving the launch of the competitive Expressions of Interest process now underway.

We anticipate that the close for the expressions of interest phase will occur during 4Q 2022, with commercial terms and partners likely determined in 1H2023.

We primarily invested in IRD for its Central Eyre Iron Project (CEIP) - among the few development ready, substantial high-grade iron ore projects globally - with Cape Hardy as the logical logistical channel for export. That said, we like that the company also has this port opportunity within its asset base, with an active pathway to commercialisation.

We consider that Cape Hardy has strong government backing, noting that the Federal Government has tipped in a $25m grant commitment to assist with development.

As per our Investment Memo, the next key milestone we’d like to see IRD deliver remains securing a partner to greenlight development.

IRD advancing potential green hydrogen port opportunity


Jul 27, 2022


Investment Memo: IRD IM-2022
Objective 2 : Greenlight Cape Hardy Port Development

This morning, our Wise-Owl long-term iron ore investment Iron Road (ASX:IRD) announced that it had completed its market sounding process to discern commercial interest in the longer-term development of its Cape Hardy site as a green hydrogen hub/ industrial precinct.

A shortlist of 10 green hydrogen proponents - primarily comprising globally significant players in the power generation and emerging energy transition sectors - have expressed formal interest in developing Cape Hardy.

Location map
Location map

IRD will now enter discussions with these parties, with a view to enter commercial arrangements following the close of the expressions of interest phase during 4Q 2022.

The project also has strong government support. The South Australian Government recognises the opportunity, and the Federal Government has provided a $25m grant commitment to assist with development.

IRD fully owns the 1,200 hectare greenfield site at Cape Hardy, and has primary development approval for a high-grade iron concentrate and multi-commodity export facility. Besides the green hydrogen opportunity, Cape Hardy provides the logical logistical channel for IRD’s flagship asset, the Central Eyre Iron Project (CEIP).

IRD has been progressing the CEIP since 2008 through to DFS, having spent approximately $180M in the process. The project hosts Australia’s largest undeveloped magnetite deposit, with a 3.7 billion tonne Ore Reserve, capable of producing 589Mt of high-grade magnetite (66.7% Fe) over the life of the mine. As it typically takes decades to progress significant iron ore projects to development, we believe IRD’s flagship represents one of the next significant iron ore projects globally to next transition into production.

The next key milestone we are keen to see IRD deliver remains securing a partner to greenlight development.

Noosa Mining Investor Conference round-up

Jul 22, 2022

Macro: Commodities

Spanning three days on the pristine Sunshine Coast of Queensland, the Noosa Mining Investor Conference kicked off its 12th year on Wednesday. Attracting a diverse and large spread of corporates, brokers, retail and institutional investors, this year’s event featured over 60 companies presenting and over 1,000 people in attendance, all hosted within the coastal town's Peppers Resort.

At the event, we caught up with a number of executives from our Investment companies (including AKN, AOU, BPM and PFE) as well as companies of interest, either as potential additions to one of our Portfolios, or to gain expert insight to macro and regional headwinds impacting the markets.

The conference is held in the ideal location to mix work with pleasure, and meet a host of CEOs of ASX juniors. Each day ends with a short ‘business at the bar’ session that quickly morphs into talking tactics about where to eat and drink. On Thursday and Friday nights, many head to the Noosa Surf Club for its networking sessions, enjoying its glassed indoor area and open deck to the beach.

We look forward to providing updates on companies we met with down the road.

China considering US$1.1 trillion infrastructure stimulus

Jul 15, 2022

Macro: Commodities

China plans to make up to US$1.1 trillion in financing available for infrastructure spending, which we think will increase commodity demand. Read the following Bloomberg article for details.

Read the full article here.

Below are our key takeaways:

  • China is making 7.2 trillion yuan ($1.1 trillion) in funds available for infrastructure spending.
  • According to Citigroup, infrastructure investment in 2022 is likely to rise by 7.7% versus 2021.
  • President Xi Jinping has called for an “all out” effort to increase infrastructure spending this year to fuel economic growth and meet a GDP growth target of around 5.5%.

The Bloomberg article touches on the impacts of China’s COVID induced lockdowns on the domestic economy.

With economic growth tipped to slow, the Chinese government is getting ready to lean on fiscal stimulus through infrastructure investment to spur economic growth.

We think this type of fiscal stimulus is likely to become a common theme in China and the West, with macro themes like decarbonisation requiring massive CAPEX.

This infrastructure spending forms part of our “commodities supercycle” investment thesis, where we see increased fiscal stimulus and CAPEX investment spurring higher demand for commodities already facing supply shortages.

China considering US$220Bn in infrastructure stimulus

Jul 08, 2022

Macro: Commodities

The following Bloomberg article highlights China’s plan to spend up to US$220 billion to spur economic growth through infrastructure spending.

All of this new infrastructure will require more commodities.

Read the full article here.

Below are our key takeaways:

  • China’s Ministry of Finance is considering US$220 billion of infrastructure funding aimed at shoring up the country’s beleaguered economy.

  • The funding is to be brought forward from next year’s quota, marking the first time the issuance has been brought forward due to concerns around the dire state of the world’s second largest economy.

  • The funding would primarily be used on infrastructure spending to boost an economy hit by Covid lockdowns and a housing downturn.

  • Commodities rallied in European trading hours following the news, with copper moving 3.6% higher on the London Metal Exchange.

For over two years, we have been writing about an upcoming commodities supercycle brought about by infrastructure spending, following decades of underinvestment in the “real economy”.

All this investment in the “real economy” requires raw materials, which is why we think the macro backdrop for commodities over the next decade is strong.

The Bloomberg article highlights the readiness of the Chinese government to lean on fiscal stimulus to spur economic growth at a time when the Chinese economy is slowing down.

Generally, governments would try to respond to slowdowns in economic growth by cutting interest rates. With this tool exhausted after the COVID pandemic, we think infrastructure spending will become the new policy of choice for governments worldwide.

Again, this infrastructure spending will increase demand for commodities which we expect will take commodity prices higher.

VW CEO breaks down batteries and supply chain issues

Jul 08, 2022

Macro: Commodities

The following Bloomberg article showcases the moves major carmaker Volkswagen is making in the batteries industry.

Read the full article here.

Below are our key takeaways:

  • VW is pressing forward with investments along its battery supply chain, commencing construction at a new cell factory in Salzgitter, Germany, one of five facilities in Europe under the carmaker’s PowerCo subsidiary.
  • Salzgitter is home to VW’s main motor factory, and it is where the company last year opened an $80 million facility to research, develop and test EV batteries.
  • Roughly $2 billion will be invested in the new cell factory, where production is scheduled to begin in 2025.
  • VW expects its battery business to generate €20 billion in revenue by the end of this decade.
  • VW CEO Herbert Diess said, “We are invested in some startups and we are looking forward to a joint venture together with Bosch for the machine tools and equipment for those plants, so we’re really gearing up to become one of the bigger battery cell producers”.

The news is just another sign that downstream investment in battery supply chains is showing no signs of slowing down.

VW is one of the world's largest carmakers and is heavily investing in downstream production capacity. It expects this part of its business to generate over €20 billion in revenues by the end of the decade.

This is a situation where investment in midstream/downstream (manufacturing/battery industry) is far ahead of upstream investment (mining), this leads to the supply/demand imbalances for the raw materials required to produce batteries only becoming worse.

The imbalance comes from the timing of these mega projects. Building a downstream / midstream facility could take 1-4 years whereas it takes around 7 years on average to bring a new resource discovery into the production stage.

As a result, we think that raw materials prices will remain high for at least the next decade whilst the mining industry catches up to demand.

New ironore research underlines investment potential of flagship


Jun 07, 2022


Investment Memo: IRD 2022

General: Peer comparison

This morning, our Wise-Owl long-term iron ore investment Iron Road (ASX:IRD) provided a recent chart from global research consultancy Wood Mackenzie comparing global iron ore projects, including IRD’s flagship Central Eyre Iron Project (CEIP) in South Australia.

As you can see from the Wood Mackenzie chart below, CEIP rates among the highest projects globally for both expected product grade, and post-tax Internal Rate of Return (IRR) (i.e. generally, the more north-east the project, the better the investment case). The size of the circle represents the nameplate capacity (ie how much it will produce), and the solid circles represent development-ready projects (ie pass the DFS stage).

The research underlines the strong investment case for IRD’s flagship, and is among the reasons we like IRD as a long-term investment in the sector.

As it can take decades to progress significant iron ore projects to development, IRD has already done the hard yards at CEIP (advancing the project since 2008 through to DFS and beyond), spent the money (approximately $180M to date), and we think is now among the next cabs off the rank to transition to production.

IRD has grown the project into Australia’s largest undeveloped magnetite deposit with a whopping 3.7 billion tonne Ore Reserve that is capable of producing 589Mt of high-grade magnetite (66.7% Fe) over the life of the mine.

With its flagship so advanced, the next milestone we want to see IRD deliver is securing a partner to greenlight development.

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