These latest developments have been revealed in an exclusive interview with Mining Review Africa by ARM Ferrous chief executive Jan Steenkamp. The Khumani mine is being developed by Assmang Limited, which is a 50/50% joint venture owned and controlled by African Rainbow Minerals Limited (ARM) and Assore Limited.
“Initially Assmang was committed to an 8.4m tonne export mine, as that was the allocation available from Transnet on the Sishen to Saldanha export line,” Steenkamp reveals.
Assmang and Kumba began talking on optimising synergies in terms of the current operations and future exploration, and the two organisations started sharing geological information. “In the process we developed such high confidence in the quality of the resource and reserve that we started the first pre-feasibility on this mine about ten years ago,” he adds.
“We put on the table then that we thought we could expand our capacity to 10 million tonnes, and Kumba starting talking about 33 million tonnes,” Steenkamp continues. This — together with the 2 million tonnes that goes to Saldanha Steel, plus an allowance of 2 million tonnes for an additional exporter — makes up the 47 million tonnes per annum that Transnet will transport from mid-2009 onwards.
“Transnet came back with their completed feasibility work, we saw their final numbers, we began negotiating tariffs, and eventually we came to agreement,” says Steenkamp.
“I am very satisfied with what I regard as a very reasonable tariff for our new mine, and we are signing up a 20-year contract.”
EXPANSION TO COST R800 MILLION
“When Transnet indicated to us that we could expect our future allocation to rise to 10 million tonnes, we immediately went back to the drawing board to finalise implementation of a project which would produce the extra 1.6 million tonnes,” he explains. “This is costing an additional R800 million (US$114million),” says Steenkamp, “and there are three reasons why.
Extraordinary cost escalation and one scope change on the original design are costing R500 million (US$71.5 mllion),” he reveals.
“The scope change is geo-technical, due to dolomite cavities discovered in drilling some precautionary deep holes,” he points out, “so we had to shift our crushers, which is the biggest investment on a mine that size, and as a result we had to extend belts and change the whole design. As far as escalation is concerned,” he adds, “we have managed to keep it at 17%, while some projects are overrunning at 30%.”
The other R300million ((US$42.8 million) is going towards expanded capacity — an additional tertiary crusher, screens and additional jigs are required to expand output from 8.4m to 10m tonnes. “We signed up with Dowding, Reynard and Associates (DRA) as the EPCM contractors and went on site in April / May 2006,” Steenkamp continues. “Then in June — after obtaining our new order mining licence, which took 12 months from the first documents to final approval — we accelerated construction,” he says.
“I am happy to report that we are on schedule at this moment in time,” reveals Steenkamp. “The schedule dictates that we start cold commissioning from September 2007; complete hot commissioning by April 2008; and deliver the first 1 million tonnes onto the Transnet train by June 30, 2008,” he adds.”
“This is very specific, but we have to be,” he explains. “We have a clause in the contract with Transnet stating that we have to put 6 million tons on the export line during the July 2007 to June 2008 financial year (the additional 5 million tonnes will still come from our old Beeshoek mine). Then in the 2009 financial year this number rises to 7.24 million, and from July 2010 we will hit the 10-million-tonne mark. It’s a very steep ramp-up schedule.”
“I am confident that we will make our deadline,” Steenkamp says. “We have built more than 50% of the project in the first year, involving excavation, groundwork and laying of foundations,” he adds, “and we are now moving into the construction and building stage”.
With 65% of the committed orders signed off, the remaining 35% are not long lead items. “They are mainly locally manufactured so, with the escalation we have built in, we have high confidence in meeting our budget.”
“I think our biggest challenge today is not managing the mine, but getting enough resources for the next 12 months from the contractors on site. There’s supposed to be 2 500 people on site right now, and there are only about 2 200 — so we are 300 people shy — they are just not available,” he states. “For example, DRA have outsourced design packages to Indian drawing offices in Mumbai.”
FURTHER GROWTH TO 16 MILLION TONNES
Currently the project is designed to handle 10 million tonnes per annum, but looking ahead the mineral resource can easily support a 16 or 17 million tonnes per annum mine, subject to the Transnet capacity allocation through Saldanha Bay.
Transnet has done the feasibility work on expanding its full capacity on the Saldanha line from the current 47 million tonnes to 67 million or even 92 million tonnes.
The first numbers coming out of this feasibility work are provisional and still need a lot of fine-tuning. They have to align with the expansion between the port and the rail line so time and money is not duplicated or lost.
“We are waiting for Transnet to come back to us, but I expect the final figure to be somewhere between 58 and 67 million tonnes — hopefully around the 67 million mark,” says Steenkamp.”
“Then we need to negotiate allocation and tariffs. The ideal allocation for Assmang purposes would be 14 to 16 million tonnes, and we will know this number by September this year,” he confirms. “I am totally confident as I sit here today that we will not be a 10 million tonne mine — we will be bigger!”
“Our current position is solid,” Steenkamp contends. “In short, we are building a 10 million tonne mine, we have an agreement with Transnet for a 10 million tonne export transport allocation, and we have a customer base and demand for 10 million tonnes and more.”
He also referred to another option. “Even if we do not get the export capacity that we would like, there is increasing demand from local South African steel producers, and we have been engaging with them for many months now on additional future supplies. Our current local supply amounts to 700 to 800 000 tonnes per annum from Beeshoek, and we think that this domestic market can grow to 2 million tonnes per annum in the future,” he estimates.
“If Transnet gives us further allocation for exports and we add some local capacity, I firmly believe we will have made what I call the next financial hurdle,” Steenkamp adds. “And 10 to 12 million tonnes is not going to do it for us. It is clear that we need to get to at least 14 million tonnes export, at which stage we will be starting to meet the necessary criteria for success,” he explains.
ANOTHER R2 BILLION SPENDING LIKELY
Turning to finances, it was previously estimated that to expand the Khumai Mine to 16.8 million tons would involve another R1.8 million (US$250 million) in capital expenditure. “That number was calculated as of 1 July last year, and I think you can easily add a 20% escalation, taking the expansion costs to more than R2.1 billion (US$ 300 million),” Steenkamp insists.
The other major issue is timing. “Even if we got the go-ahead from Transnet tomorrow, we would battle to convince any shareholder to spend that sort of money in this high risk period, in the light of the shortage of construction resources and all the 2010 World Cup requirements,” he warns.
“The Assmang view is that — subject to Transnet’s new ramp-up and expansion schedules –— our plant expansion to push output from 10 to 16.8 million tonnes could commence in 2010, with the actual ramp-up happening in 2012/13,” Steenkamp proposes.
In terms of the longer term future the prospects for Khumai are highly gratifying. Currently the mine has a total resource of 691 million tonnes — 352 million tonnes measured, 310 tonnes indicated and 29 million tonnes inferred.
“This gives us a 35-year mine life based on production of more than 16 million tonnes per annum,” Steenkamp reveals. “Furthermore, I am certain that further drilling and optimisation of pit layouts will lead to a significant increase in the life,” he emphasises.
“Looking ahead at total international demand for iron ore, we believe seaborne trade could rise from the current 600 to 700 000 tonnes to a billion tonnes per annum within two years,” Steenkamp claims. “And if economic growth in China lives up to its expected 7 or 8%, China will take about 350 million of that additional 400 million tons,” he says.
“South Africa has about 5% of total international seaborne trade in iron ore,” Steenkamp points out, “but even if the market slowed down, there would always be a demand for our high quality ore. We are not big players,” he concludes, “but we build our credibility on supplying a consistent quality product.”