Hunter Hillcoat and Marc Elliott, Investec analysts, have produced a report on the Cameroon-Congo-Gabon region, which they say “is often likened to the Pilbara, given the significant expanse of iron ore mineralisation, including the potential for meaningful direct shipping ore (DSO) volumes. It offers one of the few opportunities globally for a substantial iron ore production base outside of that controlled by the top three, yet it remains a long way from production. We speculate whether the possible increased involvement of Glencore could be the start.

“There are a multitude of hurdles facing development of the projects in the Cameroon – Republic of Congo (ROC) – Gabon region, although none are insurmountable, in our view. The key issues include the almost complete lack of infrastructure and the vast amount of capital required to install it, the relatively small sizes of the companies involved, the high sovereign risks (exacerbated by multiple borders), demanding operating conditions, assorted ownerships and generally lower ore quality (relative to other product available on the seaborne market).

“Each of the companies involved in the region lacks the critical mass in its own right to justify the capital risk involved in developing its respective asset. However, there should be compelling support for development of the combined asset base. What the region needs, in our view, is a champion in the mould of Andrew Forrest (founder of Fortescue Metals), or a major, who can bring together all players in the region, including the companies, governments, financiers (both private and quasi-government) and end-users.”

Last week’s announcement that Sundance Resources is reportedly in discussions with Glencore about selling its iron ore projects in Cameroon and ROC potentially has significant ramifications for the region. Sundance is in a trading halt and talks are reportedly taking place amid fears that China’s Hanlong Mining may not be able to complete the A$1.38 billion takeover of Sundance.

“Glencore is already a shareholder and off-take partner in Core Mining, which owns the Avima project in ROC, close to the Sundance projects. Consolidation of the assets could provide the critical mass to stimulate a development decision by Glencore, which could generate substantial (+50 Mt/y) DSO production and place Glencore firmly on the iron ore producer map.

“This would also potentially have a positive read-through to companies with projects close to the proposed rail line from Sundance’s project to the coast, which is to allow third-party access. It could then potentially have a negative read-through for the Zanaga JV with Xstrata in southern ROC.

“We bear in mind, however, that any action by Glencore would potentially contradict its recent statements that it was not interested in greenfield projects.

Hanlong Mining of China (Hanlong), controlled by Sichuan-based billionaire Liu Han, has been in the process of taking over Sundance since July 2011, when it proposed a scheme of arrangement at 50c a share. The Sundance board rejected the bid as inadequate but in October 2011 recommended an increased offer of 57c a share.

Since then delays in obtaining approvals from various parties, notably the Chinese National Development Reform Commission (NDRC), have forced the completion date to be extended several times, while the interim fall in iron ore prices forced the bid to be lowered to 45c per share, reducing the bid value from $1.65 to $1.38 billion.

Cameroon and Congo government approvals have been obtained but Hanlong has yet been unable to obtain final approvals from the NDRC and there are concerns that it will not meet its next deadline: credit approved term sheets from its financiers by March 26.

Hanlong had received provisional approval (ending July 2013) for the acquisition from the NDRC, with the provision being that Hanlong engage with a “large Chinese partner”, presumably with the financial backing to support development of the $5 billion Mbalam-Nabeba project.

So long as Hanlong holds provisional approval from the NDRC it is highly unlikely that any other China-based entity will get involved, even given that the agreement lacks exclusivity. No other party had emerged either, until the recent Glencore-related announcement.

Hanlong, currently a 14.1% shareholder of Sundance, has agreed to provide a convertible note facility for up to A$15 million to Sundance for working capital purposes. The first A$5 million tranche has been drawn.

“A takeover of Sundance, or acquisition of its assets, would represent a significant step for Glencore, which has thus far only skirted around the edges of African iron ore production. This has been mainly in the form of nominal pre-payment and/or off-take agreements with some of the existing producers, including Bellzone in Guinea and London Mining in Sierra Leone. It has also made a direct investment in Core Mining, but in return for off-take from initial volumes from Core’s Avima project in the northern ROC. As a private company, the terms with Core were not disclosed, but Glencore paid London Mining $27 million for access to 1.8 Mt/y of output over five years from its Marampa project and is to pay Bellzone $15 million for life of mine off-take from its Forecariah operation.

“Glencore does not produce any iron ore directly, but instead markets product sourced from various operations globally. In 2012 it marketed 19.8 Mt of iron ore, up from 10.3 Mt in 2011.

“Glencore is currently in a merger process with Xstrata, which is still awaiting regulatory approval from Chinese authorities. Xstrata has no significant iron ore production in its own right, although it had a stated intention of producing 100 Mt/y by the end of the decade. As part of this process it has acquired an 88% stake in Sphere Minerals, which has iron projects based in Mauritania, and has a JV in the Zanaga project in southern ROC, together with Zanaga Iron Ore. While Xstrata is currently sole funding the circa $350-500 million Zanaga prefeasibility study (PFS), in order to earns its 50% plus one share interest in the project, it is also seeking a strategic partner to assist in financing the estimated circa $7.4 billion (100%) capital development.

“One could speculate that Glencore’s current involvement with Sundance will simply follow its track record, i.e., that it will make a nominal investment in return for some form of marketing. An issue with such an arrangement would be that (a) it would not benefit either party since it would not assist in opening up the region for development, and (b) it could actually stymie the development of the SDL assets, since other parties would then be reluctant to contribute to the capital costs.

“There is certainly argument against Glencore bidding outright for Sundance. The Glencore CEO and imminent leader of the merged group, Ivan Glasenberg, has certainly not signalled any enthusiasm for the Xstrata iron ore investments, while also stating recently that the company was focusing on brownfield growth and was not interested in greenfield projects.

“However, the Sundance opportunity may be one that is too good to miss, especially if Glencore can secure a strategic partner from within its extensive customer base, one that is willing to share the development risk, particularly since the combined asset base of Sundance and Core contains sufficient direct shipping ore to generate meaningful production volumes. The entry of a major player such as Glencore in the region, and the infrastructure it would initiate, could then provide the impetus to kick-start development of the region as a whole.”

Sundance’s Mbalm-Nabeba project is the most advanced of the iron ore projects in the region, with a substantial reserve base, including DSO, a definitive feasibility study (DFS) and mining permits. The project is made up of two deposits on either side of the Cameroon-ROC border, with the 4,000 Mt resource base including 775 Mt of higher-grade resources grading 57.2% Fe. The high‐grade reserve includes 436 Mt at 62.6% Fe, comfortably supporting the Stage 1 plans of 35 Mt/y of DSO for a minimum of 10 years. Stage 1 capex is estimated at $4.7 billion, some 75% of which is related to installing the required infrastructure.

Since Core is a private company, there is still only limited information available on its Avima project. The current higher-grade resource base stands at 690 Mt at 58% Fe, or 580 Mt at 60.0% Fe (using a higher 49% Fe cutoff). Through strike extensions, the company has identified potential for an additional 200-240 Mt of high grade DSO grading 55-62% Fe.

Core has a memorandum of understanding (MOU) in place with Sundance for access to the proposed rail corridor and is currently targeting 20 Mt/y of DSO production from 2016. Hillcoat and Elliott imagine “capital costs to be broadly in line with those of Sundance, bearing in mind that circa 75% of Sundance’s capital requirement was infrastructure costs, which could be shared. Glencore in April 2011 acquired an undisclosed stake in Core, with associated marketing rights to initial production. Glencore has also reportedly secured ground holdings to the west of the Avima deposit.”

Afferro Mining’s most advanced project is Nkout in Cameroon, which is located adjacent to the planned rail corridor from Sundance’s projects to the coast. The project contains a 2,500 Mt resource grading 32% Fe, including 36 Mt of higher grade (56% Fe) resource. Nkout has had a preliminary economic assessment (PEA) completed on it, which had highlighted a $2.5-3.9 billion funding requirement (based on shared infrastructure) for a 15-35 Mt/y operation. The current development plan envisages an initial lower capex, DSO-type production, followed by later-stage, higher-capex sinter feed production.

Afferro recently signed a non-binding and non-exclusive MOU with POSCO Africa, aimed at negotiating a definitive agreement in terms of developing its projects.

The Badondo project in the Republic of Congo (ROC) is 100% owned by Equatorial Resources. Airborne geophysics identified a 22 km magnetic anomaly which, when backed up with sampling, has led equatorial to target a resource of between 1.3-2.2 billion t of iron ore at grades of 30%-65% Fe. Geological mapping revealed an extensive enriched haematite blanket in excess of 10 km strike and Equatorial is targeting a resource for this material of 200-300 Mt at a grade of 40%-65% Fe. A 14-hole scout drilling program was completed in December 2012, aimed at assessing the thickness, grade and extent of the haematite mineralisation. The first two holes returned 42 m at 62.9% Fe from surface and 49 m at 64.2% Fe from 44 m. Given these very encouraging, high-grade results, the company is now resolving access issues to enable resource drilling of the project to commence.

The Belinga project in Gabon was previously held by China’s China National Machinery and Equipment Import and Export Corp (CMEC), which had secured the rights in 2007. However, it was recently seized by the Gabon government, following concerns over the environmental impact of the project and doubt over CMEC’s ability to deliver the project. BHP Billiton had been rumoured to be awarded the project but the Gabon government is now undertaking additional evaluation of the deposit, which could take until 2014, before inviting other groups to work with it. According to Equatorial data, the target resource for Belinga is 566 Mt at 62% Fe. The deposit lies within the Ivindo national park, close to the ROC border.

“Acquisition of Sundance, and a subsequent start to development of the required infrastructure, would be pivotal to reviving investor confidence in the region, in our view. Sundance is proposing developing a 510 km heavy-gauge railway line from Mbarga to the Cameroon coast, with a 70 km extension south of Mbarga to Nabeba. The rail line is planned to extend to a new port south of the existing multi-user facility at Kribi, which is expected to be able to accommodate 300,000 t cape-size vessels. The capacity of both rail and port can be expanded as required, for example incorporating additional rail loops, rail unloaders and ship loaders. The Cameroon government appears insistent on ensuring that the infrastructure has multi-user access.

“A new port is to be constructed at Lolabe, a natural deep-water port, capable of accommodating large vessels, with an initial single berth capacity for up to 45 Mt/y. China Harbour Engineering Co (CHEC), a subsidiary of China Communications Construction Co (CCCC, China’s second-largest state-owned construction enterprise), signed an MOU in September 2010 to scope the port’s development and cost, and to negotiate an EPC contract for its construction. It has since submitted a tender submission that is under review.

“Sundance’s planned 510 km, 32 t axle-load-limit rail line from Mbalam to Lolabe traverses dense rainforest, but across relatively flat terrain, other than a step down towards the coastal plain, which sees a 600 m decent over 60 km (a 1% gradient). Seven bridges are currently planned. China-Africa-Construction signed an MOU in September 2010 to scope the rail development and required rolling stock, together with the terms of an EPC contract.

“Supporting the government of Cameroon’s assurances that the rail and port facilities will be made available for third-party access, Sundance has signed MoUs with Equatorial, Core and Legend Mining with respect to sharing infrastructure. These agreements encompass intentions to share in the development and/or usage of the planned 90-100 Mt/y iron ore export facilities.

“Arguably, one of the greater risks in opening up the region as an iron ore producer is the necessity to work across multiple borders, particularly between Cameroon and Congo. Thus far, there have been no major political issues between the two countries and both have worked towards progressing Sundance’s development plans, which does require cross-border collaboration. The writer has visited Avima and can attest that this is currently only a border in a loose sense of the word. While the injection of capital and flow of product would likely change that, Sundance’s development plans do require product from both sides of the border in order to produce a suitably blended product to meet export specifications. Blending of the separate products is to be undertaken at the port.

“Therefore, while most of the infrastructure is to be built in Cameroon and the Cameroon government might prefer that it is used solely to export ore from Cameroon, the reality is that it will almost certainly require product from other countries, such as ROC, in order to make its own product marketable.

“In addition, the capital required to develop the line warrants maximisation of throughput, and the current Cameroon projects are not currently capable of supporting what could be a 90-100 Mt/y line. If the infrastructure is to be built by a third-party company, in association with the Cameroon government, then the third party would clearly seek to maximise throughput in order to improve its returns.

In November Sundance signed the Mbalam Convention, outlining the fiscal and legal terms and conditions for development of the Mbalam project. It is the final step before a Mining Permit. The Convention included the following key points:

• 10% free carry for the Cameroon government, with a further 5% interest by way of a loan participation for future equity calls
• 25-year term for the initial mining permit and a 25-year concession to infrastructure, with SDL having first right of refusal on operation and tariff protection beyond the 25-year timeframe
• A minimum five-year tax holiday followed by a maximum tax rate of 25% and a maximum 5% tax on dividends
• 2.5% royalty.

The Nabeba Mining Permit was approved by the Republic of Congo in December 2012. It was more straightforward than the Mbalam Convention, given that it only covered the Nabeba mine, not any infrastructure.