Developing mineral resources in Mozambique

Baobab Resources plc is a Mozambican-focused explorer with a large landholding in the central north of the country. The company’s flagship project is the Tete pig iron deposit.

Tete

Tete: Iron | Steel | Ferro-Vanadium | Titanium

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PROJECT OVERVIEW

Baobab Resources' principle asset is the Tete pig iron and ferro-vanadium project, which it is developing in partnership with IFC (International Finance Corporation) who hold a 12.9% participatory interest. The Project is located in the Tete province of Mozambique, one of the region's fastest growing mining and industrial centres. Exploration activities commenced in 2008 and included more than 80,000m of drilling which culminated in the estimation of a global iron ore resource of 759Mt (JORC inferred, indicated and measured).

Due to the Project's strategic access to core iron and steel making commodities of iron ore, coal power and water, Baobab has been pursuing an unique opportunity to add real value in country through the development of a vertically integrated ‘mine-mouth' smelting operation producing pig iron and ferro-vanadium. Pig iron is used along side scrap iron in electric arc furnaces (‘EAFs') to produce steel products. EAFs account for roughly 30% of global steel production; 100% in regions such as the Middle East.

Baobab's resource base is sufficient to underpin production scenarios that would rank the Tete asset amongst the largest long life operations world wide, and at first quartile production costs.

The Company has completed a Pre-Feasibility Study (‘PFS') that underlined a compelling commercial case for the development of a 1Mtpa pig iron operation and has embarked on a Bankable Feasibility Study (‘BFS').

In response to the challenges faced by a rapidly shifting global raw materials sector and risk averse capital markets, the Company has been investigating reduced production scenarios with smaller capital requirements and has engaged with leading Chinese EPC contractors to further reduce capital costs and fast-track project execution. As part of these investigations the Company, alongside potential EPC contractors, has been assessing the viability of full vertical integration beyond pig iron and into production of high demand steel products such as billets and construction stocks (reinforcing bars (“Rebar”) and wire rods) for growing domestic and regional markets. This would involve the addition of a basic oxygen furnace, ladle furnace, continuous casting machine and rolling mill to the current pig iron flow sheet.

The Company believes this would potentially provide the opportunity to become the sole supplier to a rapid growth domestic steel market in Mozambique entirely dependent on imports, to access substantially larger regional markets with less complex pricing structures and to mitigate port and rail requirements as all production would be sold at the gate. 

FIGURE 1: Tete location plan

PRE-FEASIBILITY STUDY HIGHLIGHTS

The results of the PFS were released in March 2013 and confirmed the Tete Project as a strategic asset of global significance based on:

  • Long-term mine life: 1Mtpa pig iron production for 37 years exploits just 15% of the current global resource. The large resource therefore provides the potential of a 100 + operation and the economic and ancillary development associated with heavy steel industries.
  • Production of high-demand, low-impurity commodities at lowest quartile operating costs, maximising the Project’s unique access to low-cost raw materials.
  • Modular ability to ramp up production beyond 1Mtpa mitigates financial exposure and allows project scaling.


The base case scenario of 1Mtpa pig iron production estimated a capital expenditure of US$1.14bn and delivered strong project economics, with a pre-tax NPV10 of US$1.3bn, pre-tax IRR of 22% and a payback period of 4-5 years. A 2Mtpa was also modelled in the PFS, which further improved the underlying fundamentals (pre-tax NPV10 of US$2.4bn, pre-tax IRR of 26% and capital expenditure of US$1.98bn) and demonstrated the scalability of the project.

An FOB operating cost of US$225 was estimated in the PFS, which is in the lowest quartile for pig iron production globally.

Key drivers to the low cost of production include: access to captive iron ore, with mining strip ratios averaging just 0.4 over the first 22 years of operation; and very low cost coal being produced in the immediate vicinity as a wash by-product and, due to infrastructure and market constraints, currently being reburied as waste at considerable cost to mitigate environmental concerns.

This compares favourably to an estimated FOB cost of production of c.US$385/t in Brazil, one of the world’s largest suppliers of merchant pig iron. At Baobab’s cost of production, the Company will be able to deliver a tonne of pig iron to a north China port for around US$250/t where domestic operating costs are estimated to be close to US$400/t. This margin will enable Tete pig iron to compete across the global sea-borne pig iron market and will also open up new markets where merchant pig iron has simply not been competitive in the past, particularly in neighbouring regions such as the Middle East.

BANKABLE FEASIBILITY STUDY

With the PFS successfully concluded, Baobab has embarked on a Bankable Feasibility Study (‘BFS’). Areas of key perceived risk have been prioritised for completion, including:

  • Definition of a measured resource;
  • Bench and pilot scale reduction and smelting test work;
  • environmental and community studies;
  • submission of mining and industrial licence applications;
  • opening a dialogue with various government ministries on the project’s fiscal regime; and
  • the formalising the project’s port, rail and power requirements.


TENGE/RUONI RESOURCE UPGRADE

Tenge/Ruoni is the easternmost prospect area of the Massamba Group, Tete Project. Mineralisation in the area has been synformally folded with the fold hinge plunging gently to the west-northwest. The northern and southern limbs of the fold comprise the Ruoni North and Ruoni South resource blocks, while the outcropping fold hinge comprises the Tenge resource block to the east. The buried central portion of the fold comprises the Ruoni Flats resource block.

SRK Consultants (South Africa) Pty Ltd (‘SRK’), has completed a review and update of the Tenge block resource estimate based on the results of the infill drilling campaign and large scale trenching completed during 2013. The estimation has been completed in accordance with the updated and improved 2012 Joint Ore Reserves Committee (JORC 2012) Code guidelines.

The 2013 infill drilling campaign was focused on converting the upper portions of the Tenge resource block, representing the first 10 to 15 years of a 1Mtpa pig iron operation, to a JORC compliant Measured category. Prior to the infill drilling campaign, the Tenge resource block was classified as 72.6Mt Indicated and 120.3Mt Inferred for a total tonnage of 192.9Mt (JORC 2004), please refer to RNS dated 21 February 2013 for details.

SRK’s remodelling identified an additional 29Mt, bringing the total Tenge resource to 222Mt and expanding the Tete Project global resource to 759Mt. The 222Mt has been classified as 156Mt Measured and 66Mt Indicated and divided into three categories: ‘Residual’, representing the thin, 2m to 3m, heavily oxidised surface layer; ‘Weathered’, representing the partially oxidised upper portions of the deposit and; ‘Fresh’, representing the non-oxidised lower portions of the deposit where no weathering has been detected. The Tenge resource estimate is summarised in Table 1 below along with and the previously published JORC 2004 Inferred and Indicated resources at Ruoni North, Ruoni South, Ruoni Flats, South Zone and Chitongue Grande.

SRK also estimated the resource contained within the Tenge starter pit shell, designed during the 2013 Pre-Feasibility Study to underpin the first 20+ years of operation at 1Mtpa pig iron production. All 62Mt of resource material contained within the pit shell has been classified as Measured and reports an average head grade of 39% Fe (Table 2). The improved head grade represents an overall enrichment of the upper zones of the deposit and is in line with initial reverse circulation (RC) drilling and trenching results reported in the RNS announcements of 20 December 2013 and 12 February 2014.

The pit shell will be revised and expanded to incorporate the Measured resource and additional, previously unclassified, resources during the next phase of pit optimisation, mine scheduling and Reserve classification. This next phase of work will commence during July 2014, once a limited programme of geotechnical and hydro-geological drilling has been completed.

SRK has estimated the expected average concentrate characteristics for the mineralised material for the combined Measured and Indicated Tenge resource block as: 59.4% Fe, 0.85% V2O5, 10.9% TiO2, 0.9% SiO2, 3.2% Al2O3, 0.001% P and 0.2% S at a Mass Recovery of 44.2%. It is anticipated that the concentrate will receive a JORC classification during the next phase of work.

The Mineral Resources have been estimated by Mark Wanless, a full time employee of SRK Consulting (South Africa) Pty Ltd, and an appropriately qualified Competent Person. Mr Wanless is a registered Professional Natural Scientist (“Pr.Sci.Nat”) (Registration Number 400178/05) with the South African Council for Natural Scientific Professionals (“SACNASP”). The exploration program, sampling, analyses and Quality Assurance and Quality Control (“QAQC”) results have been reviewed by Dr Hennie Theart. Dr Theart is a registered Pr.Sci.Nat (Registration Number 400069/88) with the SACNASP.

BENCH SCALE DIRECT REDUCTION & SMELTING TEST WORK: CSIRO

During the course of the 2012-2013 Tete Project PFS and subsequently in Q1 2014, the Company successfully completed a series of bench scale reduction and smelting test work programmes at the CSIRO laboratories in Australia. The test work trialled Baobab’s coarse, -6mm iron ore concentrate (both fresh and oxidised) with thermal coal products from the Rio Tinto, Vale and Minas Revuboe operations to test reduction/metallization and smelting behaviours.

The direct reduction trials returned consistently high metallization results and the smelting test work demonstrated that the titanium could be readily separated from the iron and vanadium, confirming the viability of the PFS flow sheet. Please refer to RNS dated 11 April 2014 for a detailed summary of the CSIRO test work.

BENCH & PILOT SCALE DIRECT REDUCTION TEST WORK: FLS & MINTEK

Following on from the successful trials at CSIRO, the Company entered into a second phase of more detailed test work. Two large trenches straddling the Tenge resource block were excavated to an average depth of two metres to enable the collection of a c.15 tonne bulk iron ore sample. A -8mm iron concentrate was generated from the bulk sample at the Mintek laboratories in South Africa and, along with local coal and carbonate samples, despatched to the FLS laboratory in the United States of America to complete bench and pilot scale direct reduction trials. Parallel bench scale test work was completed at Mintek for quality assurance and control.

Trials achieved up to 65% metallisation, lower than the CSIRO test work, but in line with the benchmark Highveld Vanadium and Steel operation in South Africa and confirming the viability of the PFS flow sheet design, albeit at a slightly higher operating cost. Challenges were encountered with the quality and continuity of batch specification of the local coal products and it is apparent that some coal treatment (either partial charring or floatation) will need to be incorporated in final plant designs.

Optimisation trials testing the direct reduction characteristics of pelletised iron concentrate and local coal were also conducted at FLS and Mintek. The test work returned significantly improved results of 85% to 93% metallisation. Although the introduction of pelletising to the flow sheet would increase capital requirements, the consistent sizing and higher pellet grade (c.56% Fe as opposed to the 51% Fe of the coarse concentrate), coupled with the significantly higher metallisation achieved, would enhance kiln performance and furnace productivity, thereby improving operating costs.

PILOT SCALE SMETING TEST WORK: MINTEK

Pilot scale smelting trials were completed at Mintek laboratories in South Africa to investigate the behaviour of vanadium during smelting and subsequent oxidation treatment. The trials were designed to simulate a smelting operation where melting is achieved and a titanium slag generated and removed. The molten, vanadium bearing, hot metal is then refined to produce a vanadium rich slag and a pig iron.

Utilising a tilting furnace, c.45kg of pig iron product was successfully produced, clearly demonstrating at scale that the titanium can be readily separated from the iron as a primary slag. In this initial phase of titanium slag production, in excess of 85% of the total vanadium reported to the hot metal, which is in accordance with the bench scale test work completed at CSIRO.

Seven 200g samples of pig iron were then subjected to vanadium recovery test work using various additives and levels of oxygenation to determine optimised conditions for two larger (3kg and 0.5kg) tests to produce a sufficient amount of vanadium-rich slag for subsequent characterisation. This secondary vanadium slag recovery stage has also proven successful, with most samples recording in excess of 95% of the available vanadium reporting to the vanadium slag. These recovery results are in line with global benchmark operations in New Zealand and South Africa. A final slag of c.10% V2O5 was produced with additional optimisation test work required to achieve the targeted 15% V2O5.

Chemical analysis of the final refined pig iron alloy product returned an average grade of 99% Fe, with very low impurities, which is significantly higher than that of standard commercial pig iron specifications. Pig iron typically also contains a fixed amount of carbon which can be added to the hot metal at the end of the process to meet end user requirements. Assuming a final product containing 4% carbon, the test work results indicate that the total impurities would be less than 0.15% and the iron content of the pig iron would be about 95%.

ENVIRONMENT & COMMUNITY

Following on from the environmental impact scoping study completed during the PFS and successfully lodged with the relevant government authorities, wet and dry season environmental baseline studies have been completed. These studies, complemented by a blasting imact assessment and mine rehabilitation plan currently underway, will form the basis of the Environmental, Social and Health Impact Assessment (‘ESHIA’).

The table below shows the studies completed to date and others in progress.

The Resettlement Action Plan (‘RAP’), Social Development Plan and Skills Development Action Plan are all making progress and are scheduled for completion during the first quarter of 2015. As a refernece framework, the RAP utilises a combination of established laws and regulations as well as the guidelines from the main funding agencies for development, including the World Bank, African Development Bank and IFC.

An area encompasing a 5 km radius from the centre of operations and 70 meters either side of the haulage and power line transmission corridor was assessed during the socio-economic survey, in which and all houses, infrastructures, assets, farming plots and respective crops, trees and sacred places were carefully identified and geo-referenced.

PORT, RAIL AND POWER

In parallel to the technical and environmental/social programmes, Baobab is making significant advances in formalizing port, rail and power allocations on the existing and expanding infrastructure facilities. The Company has signed a memorandum of understanding (‘MoU’) with the Mozambique power utility company Electricidade de Moçambique (‘EDM’) and, in conjunction with EDM, has engaged Parsons Brinckerhoff to complete a study to identify and prioritise potential power sources and accurately estimate tariff rates. Leading power and automation technologies provider, ABB, has completed a detailed power transmission and reticulation study that will form the technical basis of an off-take term sheet currently being drafted with EDM.

Additionally, agreements are in advanced draft form with both private and public sector groups to secure access to port and rail facilities, with a focus on the Sena line/Beira port corridor, where capacity is currently being expanded to c.18Mtpa, and the c.22Mtpa Nacala corridor, which is on schedule for commissioning by Q1 2015.

MINING CONCESSION AND MINING CONTRACT

The Mining Concession application has been lodged with the National Directorate of Mines (‘DNM’) along with a preliminary draft of the Mining Contract. The documentation has been reviewed and technical clarification sessions have commenced. The Company hopes to conclude negotiations and be awarded the concession and contract by Q1 2015.