LONDON, Nov 30, 2011 (Dow Jones) -- U.K. listed, Australia-based mining company Baobab Resources Ltd. (BAO.LN) said Tuesday it has completed a scoping study that paves the way for eventual development of a pig iron project in Mozambique.
Only a handful of mining companies around the world, including Brazilian iron ore miner Vale SA (VALE, VALE5.BR), have invested in steel production capacity, as steel production is a capital intensive business, and often a lower margin venture than iron ore.
In the base-case or iron ore concentrate scenario, Baobab would produce 3 million metric tons of titano-magnetite concentrate and 0.5 million tons of ilmenite concentrate for export a year at an initial capital expenditure of $448 million.
Titano-magnetite contains both titanium and magnetite, the latter of which is a key iron ore ingredient used to produce carbon steel. Ilmenite is used to make titanium dioxide, a key ingredient used in paints.
In its pig iron scenario, the company would seek to capitalize on its access to lower tariff hydro-electic power generation and proximity to thermal coal reserves to add further value on site to its titano-magnetite and produce 1 million tons a year of pig iron at an initial capital expenditure of $690 million. Pig iron, a solidified form or liquid iron, is used in electric arc furnaces to make crude steel.
"The excellent scoping study results show very clearly the 'value add' from the plans for on-site smelting of pig iron and underlines the strategic advantages of the project's unique geography with respect to infrastructure and complementary resources," said Ben James, the company's managing director.
The independent scoping study attributed a net present value of $1.4 billion to the pig iron project and takes into account a minimum mine life of 25 years, annual cash flows net of capital expenditure of $275 million a year and an internal rate of return of 34%. The scoping study was modelled on an inferred iron ore resource base of 93 million tons.
"Producing a higher value, high demand product will not only broaden the market base, but also mitigate the requirement to compete for rail and port access," James added.
He said pig iron is currently selling at more than $500 a metric ton compared to iron ore at $150 a metric ton and one ton of pig iron costs less to transport than 3 tons of iron ore concentrate. Baobab expects to sell the pig iron not only to China, the world's largest steel producer, but the Middle East and Africa as well, he added.
Baobab expects to sell the pig iron not only to China, the world's largest steel producer, but the Middle East and Africa as well, James said.
"The effect of urbanization in Africa itself is going to be felt and the demand for crude steel products is going to be exponential over the next couple of decades," James said. "We may see in the future that we may not need to export" pig iron.
James said the company expects to complete a pre-feasibility study on the project by the end of 2012 and a feasibility study by the end of 2013 with a view to producing its first pig iron in 2015 or 2016.