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Kogi Iron Ltd: THE INVESTMENT CASE
INVESTMENT OVERVIEW

Kogi Iron plans to become Nigeria’s first domestically-sourced producing steel company and could generate billions of dollars’ worth of business

Kogi's plans to become an integrated steel producer will allow it to tap into a ready market
Kogi Iron plans to become Nigeria’s first domestically-sourced producing steel company and could generate billions of dollars’ worth of business
INVESTMENT OVERVIEW: KFE The Big Picture
Nigeria is Africa's leading economy and has significant demand for steel

The Nigerians pay around US$650 per tonne for delivered steel scrap. That’s the salient fact to bear in mind when it comes to reckoning up the opportunity offered by Kogi Iron Ltd (ASX:KFE).

The Nigerians have no primary steel production of their own, and can only serve around a third of the estimated US$6.8bn of domestic demand from in-country recycling. The rest of the supply is made up by Chinese imports of scrap steel, with the corresponding drawback that end users tie up their working capital for around three months.

But it won’t be long before there is an alternative, one that could turn the Nigerian steel market on its head, or at the very least give it a radical shake up.

That at least is the aspiration of Kogi Iron, and its new chief executive Martin Wood.

Kogi plans to build an integrated cast steel plant in the neighbourhood of its Agbaja iron ore deposit in south central Nigeria, owned directly through the company’s subsidiary KCM Nigeria.

It will be the first of its kind in Nigeria, and as such is likely to attract a lot of support both from those who want the immediate benefits of employment and regional economic stimulus and from those who see the strategic and international economic benefits.

It’s a compelling vision, given that for some years Agbaja was regarded merely as just one more iron ore asset stranded a little too far away from the coast.

Now, all thoughts of stranded assets are banished, as too are thoughts that Kogi itself is still leveraged to the iron ore price.

Instead, it’s all about steel and cutting a nice slice of that US$6.8bn demand for the company.

In some respects, it’s early days - precise details of potential capital and operating costs will have to wait for the results of a definitive feasibility study, which is underway.

Nevertheless, recent testwork undertaken by mining and metallurgical consultant Tenova has confirmed that the Agbaja ore is amenable to the production of a beneficiated iron ore concentrate suitable for the production of pig iron, as well as a refined metal suitable for the production of billet.

It’s enough to set Kogi firmly on the road to becoming a steel producer.

“This is the key proof of the whole project,” says Martin Wood. “It indicates that the iron ore that we own can be economically turned into a cast steel product that can be sold for more than it costs to make. Our internal numbers show this is a very valuable project.”

Metal Bulletin have now been commissioned to assess the precise size of the market which the Agbaja product will be able to address, and although it will be some time before those numbers are in, it’s likely to be substantial.

After all, there are a dozen or so rolling mills in the country, all to a greater or lesser extent having to settle for that US$650 per tonne price commanded by the Chinese imports. They will likely scramble for new sources that can supply for less.

“We think the definitive feasibility will show we can produce steel for around US$300 per tonne,” says Wood.

And plenty of it too.

“The entire market for scrap is around 2.5mln tonnes, and we have hundreds of years’ worth of ore.”

That’s assuming that the company mines at around one million tonnes a year, of course. It could go much higher, and rapidly too, since current Nigerian demand is unlikely to remain static. Nigeria is, after all, the largest economy in Africa.

So, it will be interesting to see the results of the definitive feasibility study when it comes out, in six to twelve months’ time, to see just exactly the size of the opportunity that Kogi is addressing.

Purely on a back-of-the-envelope basis, Wood reckons that to construct the cast steel plant won’t cost any more than US$500mln. It’s still quite an ask for a company that’s worth only around 20% of that, but when the final figure is delivered, Wood, an experienced banker with contacts right across the City of London, reckons he’ll be able to lay hands on the cash.

A significant portion will be equity, of course, and that’s likely to be raised in conjunction with a listing on the London exchange. But lenders too will be found, and it’s all thanks to the recent sampling work undertaken by Tenova.

“This bulk sample has changed us as a company,” says Wood.

“We’ve gone from being a company that was really only attractive to retail to opening ourselves up to a whole new universe of investors.”

For the proof of this, it’s only necessary to glance at the Kogi share price graph. There have been no significant re-ratings, true, but what there’s been instead has been a series of incremental gains as the company has gradually de-risked the project and highlighted to investors just exactly what its plans are.

Expect those incremental gains to accelerate significantly from here on in, though, as the numbers involved begin to become apparent, and the wider market begins to wake up to the opportunity that Kogi offers.

 

 

 

 

 

 

 

 

 

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Kogi Iron Ltd Timeline

Newswire
September 07 2018

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