How tiny Vancouver co snatched European iron prize from under Glencore’s nose
Glencore and Xstrata’s blockbuster merger closed in May after more than a year of tough talks and horse trading.
Glencore Xstrata’s tie-up not only provided a fitting bookend to the last days of the supercycle – evident by the diminishing value of the deal over the course of the negotiations – but is also an example of just how distracting a takeover can be.
When management time and energy are going into boardroom squabbling and investor arm-twisting, it gives smaller players the chance to pick up opportunities.
Sometimes right under the noses of the majors.
One such example is Solid Resources.
The Vancouver-based explorer picked up a prime asset in Glencore Xstrata’s back yard. And it also happened to be the Swiss giant’s most sought after commodity.
Iron ore has long been a glaring omission in Glencore Xstrata’s portfolio.
While its peers Rio Tinto, BHP Billiton and Vale have raked in windfall profits thanks to the steelmaking raw material the past decade, Glencore Xstrata’s modest steps into iron ore have borne little fruit.
Solid Resources, which have been working in Spain for more than a decade, picked up the 62 concessions covering more than a 1,000ha for the Cehegin project in south-eastern Spain a year ago.
It’s probably the closest you can come to a turnkey project in the world of iron mining.
It’s part of an iron ore complex in the Murcia province that hosted Europe’s largest open pit. Solid Resource’s assets includes a mine that produced 4mtpa before closing in the 1990s.
All the roads, power and rail (bar 12km to the mine) infrastructure is in place and the deep-sea port of Cartagena, capable of handling the largest 400,000 tonne iron ore carriers is only 100km away.
Given all the sunk costs – including 38,000 meters of historical drilling on the Cehegin concessions which is now being analyzed – Solid believes it can restart operations at the Maria mine for a mere $60 million outlay and have a 1mtpa operation up and running within 2 – 3 years.
The deposit is high quality magnetite which Solid Resource says can be sold at a premium of $20 a tonne to European steel mills which require the 65%+ iron content with low impurities that Cehegin can provide. Solid Resource’s puts its FOB costs at $53 a tonne.
Solid Resources’ concession boast historical proven reserves of 27 million tonnes on only 5% of the property and the company has also taken applied for concession on another 6,600ha.
Solid Resources showed Glencore the project in February and a month later, they were on site and last week Glencore Xstrata bought 20% of the Cehegin Project.
The Swiss commodities trader and world’s fourth largest mining group also undertook to buy all future production as part of the exclusive co-operation deal.
Cehegin will be the first project the new combined Glencore Xstrata teams will be working and provides to Solid all the mine development, logistics and marketing they need.
A deal this size may not be a game-changer for the $72 billion Glencore Xstrata’s continued iron ore efforts.
Besides, an enterprise like Glencore Xstrata probably counts on the likes of a Solid Resources to bring them these deals rather than spend time chasing it themselves.
Nevertheless, it shows how a small nimble player can jump in while the big guns’ sights are trained elsewhere.