MetalQuest Mining, giant, high-purity, iron ore in Quebec

A company that continues to excite me is MetalQuest Mining (TSX-v: MQM) / (OTCQB: MQMIF). Founder/Dir./CEO Harry Barr has deep roots in Ontario (fourth-generation farming family since 1866). Mr. Barr holds ~28% of MetalQuest.

I agree with the management team/board that we’re in the midst of a commodities super cycle, Canada is one of the best places to develop assets, and the West is serious about sourcing critical materials outside of China.

MetalQuest owns 100% of the massive Lac Otelnuk iron ore project in northern Quebec, plus significant properties in Ontario’s Ring of Fire (“RoF”). High-purity iron ore, the kind Lac Otelnuk has, is highly-prized globally.

The Company has just 49M shares outstanding, and is cashed up with ~C$2M. It holds shares + deep-in-the-money warrants in Canadian Copper Inc., (“CCI”) worth roughly a combined C$2.1M (at C$0.70/shr.).

CCI just closed a C$48M financing with OR Royalties. Another C$48M is available from Ocean Partners. Also in July, CCI filed its Environmental Impact Assessment (“EIA”). These major milestones increase the value of MetalQuest’s two NSRs (totaling 1.0%) on CCI’s flagship Canadian project.

I provided a description of the NSRs and asked seven Chat boxes what the 1.0% NSR could be worth today. The average result? C$8.8M. Note, this figure has not been vetted by MetalQuest management.

Even half, C$4.4M, would be great vs. the Company’s current valuation of ~C$6.5M (at C$0.17/shr.).

To reiterate, cash + CCI shares + CCI warrants + the approximate value of the 1.0% NSR is greater than the Company’s entire enterprise value. Investors are getting BOTH Lac Otelnuk AND the RoF properties for FREE.

Lac Otelnuk, is N. America’s largest iron ore project. It’s in the northern Labrador Trough (most iron ore in the region comes from the southern, infrastructure-rich part).

CEO Barr believes ~C$170M has been spent on the Project to date. There’s an historic (2015) Bankable Feasibility Study (“BFS“) showing a 30-year of mine life (vs. a 100+ year total resource).

The Project was considered feasible using 2015 iron ore prices. Post-tax NPV(8%) was C$7.2B, and the IRR 13%. The iron ore price assumption was US$110/tonne. Today, in my view, that same quality ore might be closer to US$135/t.

Does that mean the NPV & IRR in a new BFS would be meaningfully better? It depends on how much op-ex & cap-ex have increased, and to what extent the mine plan can be optimized.

Examples of iron ore prices in recent economic studies…

Since 2015, high-purity iron from western-friendly countries is increasingly desired for “green-steel,” (steel made with hydrogen or renewables to reduce steel’s substantial carbon footprint). Only high-purity iron is amenable, 67.0%+ with low impurities. Lac Otelnuk’s project was 68.0-68.5% Fe in 2015. Management and third party experts are studying ways to improve the Fe content to 69.0%-70.0%.

In my view, there are levers to be pulled to improve project economics, while at the same time, demand for green-steel feedstock, namely high-purity iron ore, is far greater than it was 11 years ago. Also, the desire to source in Western-friendly countries has grown.

Among the largest iron ore countries are China, Russia & Ukraine. Ukraine is of course Western-friendly, but meaningfully impacted by war. Note, the US$/C$ exchange rate is ~15% weaker since 2015, a tailwind for project economics.

A post-tax IRR in the mid-teens percent is not unusual for giant projects. See the following table. Notice the jurisdictions, I prefer remote in #Quebec to Papua New Guinea, Guinea, (in western Africa), Panama & Mongolia.

The same firm that completed the 2015 BFS, (AtkinsRéalis), conducted a gap analysis to show what’s needed for an updated BFS. The results are being shared with prospective strategic partners, many of which are Japanese.

Over the years, including this year, there have been multiple management trips to Japan. Japanese firms including giant trading houses like Mitsubishi Corp., Mitsui & Co., Marubeni Corp., Itochu Corp., and Sojitz Corp remain very interested in iron ore.

Japan is 100% import reliant, and the third largest steel making country on earth. Its steelmakers, including; Nippon Steel, JFE Steel, and Kobe Steel need millions of tonnes per year.

Mitsubishi, Itochu, ArcelorMittal, Franco-Nevada, and Tata Steel have direct stakes in Canadian iron ore assets. Glencore, Rio Tinto, Vale S.A., BHP, Fortescue ltd., POSCO and privately-held Gerald Group are also active.

A knock on Lac Otelnuk is a nearly C$20B cap-ex hurdle, (due in large part to it being remote), and a long timeline to first production, probably the mid-2030s. However, this is only a problem if management cannot secure a strategic partner.

I believe a surprising number of partners could step forward for four reasons. First, Japanese commodity traders have grown substantially since 2015 (enterprise values 3x-6x larger), second, cap-ex would be deployed over 5-7 years, not all at once. Third, major groups have huge debt capacity (if needed), and fourth, green steel is the future.

It need not be just one partner. Two or more groups could form a consortium. Imagine the Company selling a majority stake in the Project for a considerable amount, and getting free-carried through commercial production?

CEO Barr has made 43 deals with much larger companies in his career. In my view, the net present value of the free-carry alone could be north of C$100M, and the residual interest might eventually be worth C$100s of millions. Yet, MetalQuest has an enterprise value {market cap + debt – cash} of just ~C$6.5M.

Much of Project risk could be mitigated by a strong partner (or partners) with deep pockets, long-term horizons, and vast iron ore experience. One should not downplay the remoteness of Lac Otelnuk, but numerous major projects are remote, many of are in; Africa, Russia, Mongolia or China. I prefer Quebec, Canada.

Moving on to the world-class, mineral-rich, Ring of Fire district, (“RoF“). Development has been very slow for decades due to a lack of an all-season road, slow permitting and hesitation from certain First Nations.

Having said that, there’s a land rush underway in the RoF, with MetalQuest in the center of it. A recently-started all-season road in the RoF will make projects more viable, to the benefit of local communities, companies, and the Province.

Lately, prospects for the RoF have improved. Ontario’s Premier Doug Ford has finally committed to a major road/bridge project. Look at the two RoF slides above showing MetalQuest’s recent activities. The Company has become a notable player.

Admittedly, there have been false starts on pledged infrastructure builds dating back over a decade. Why is this time different? Canada can no longer rely on the U.S. for its economic wellbeing.

The transition from economic & security ties with the U.S., to closer alliances elsewhere, is not gradual. There’s a sense of urgency.

A busy image, considerable progress being made…

That means faster permitting times for metals/mining, oil/gas & infrastructure projects. Few areas stand to benefit as much as NW Ontario. MetalQuest Mining is meaningfully undervalued due to its very large cap-ex requirements.

While the cap-ex concern is understandable, readers are reminded that Harry Barr has done 43 significant transactions with much larger companies. The Company could reasonably be expected, (timing unknown), to sell a majority stake in the Project and get free-carried to commercial production.

Owning even a small minority stake in a Project possibly worth over C$10 billion would be a highly attractive outcome. There’s simply too much at stake for the Japanese, and others, in urgent need of long-term, safe, supply of high-purity iron ore, to ignore MetalQuest Mining’s incredible endowment.

Disclosures/disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about MetalQuest Mining, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market-making activities. [ER] is not directly employed by any company, group, organization, party, or person. The shares of MetalQuest Mining are highly speculative, and not suitable for all investors. Readers understand and agree that investments in small-cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, MetalQuest Mining was an advertiser on [ER] and Peter Epstein owned shares in the company, acquired in the open market.

Readers understand and agree that they must conduct due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reason whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.