Boom times are coming back to the USA, says Petmin
One of the newest hotbeds of investment opportunity is, to everyone's surprise, the United States. With the expansion of fracking and increased exploitation of natural gas resources, the US is suddenly a major low-cost energy producer at the cusp of a major reindustrialisation process. After decades of deindustrialisation during which capacity and jobs migrated to low-cost destinations in the far East, the US is suddenly looking like a good place to make stuff again. As this interview explains, Petmin is one of the many companies lining up to take advantage of the impending good times and the many generous tax incentives that US states are offering to make sure that they get their piece of the reindustrialisation pie. – FD
ALEC HOGG: Bradley Doig, Business Development Director from Petmin joins us to discuss plans to unbundle its iron ore assets. A big, North-American deal, with the share price moving up very nicely in anticipation of this. Brad, if you go back a couple of months, it's gone from around 170, and today it's trading at 245. Just unpack this for us. There's an organisation called the North Atlantic Iron Corporation, of which Petmin owns about one-third.
BRADLEY DOIG: Yes.
ALEC HOGG: What does that do?
BRADLEY DOIG: What we did is we looked at the American market from an energy cost perspective. When we looked at the business, we said 'what competitive advantage will doing business in America offer us'. What we found was it's the lowest cost energy producer in the world at the moment, with the advent of natural gas.
ALEC HOGG: Fracking.
BRADLEY DOIG: Yes. We looked at this and we said 'what can we do? What can we beneficiate in that environment' and potentially looking at low cost input, upgrading them, and selling them into that market. We also believe that America has to reindustrialise itself anyway, based on this natural gas phenomenon and that there's going to be substantial reinvestment in their own infrastructure. We took the focus off the eastern hemisphere and looked at the western hemisphere. What we've done is we've looked at a business, which can actually take low-grade input and manufacture high quality pig iron. The American market requires about five million tons of pig iron per year. Principally, they import it from Brazil, the Ukraine, and Russia. We believe that with this project, we can be at the bottom end of that cost curve in Canada and the U.S., supplying up to about one million tons of pig iron.
ALEC HOGG: That's fascinating because Sasol's making a $21bn bet – over half its market cap – in Louisiana. Where exactly is North Atlantic Iron Corporation?
BRADLEY DOIG: Well, we looked at a number of sites – 13 in all. We honed it down to two, and within the next couple of weeks, we're hopefully going to make an announcement as to our final site – where we're going to locate our first plant. That's all predicted on a massive exercise around logistics, movement, and materials. In addition, which is quite a phenomenon for us – coming from where we are – is how much government support is available for projects of this nature where you're creating jobs, especially in the old Rust Belt in the U.S. where they have gone through some tough times.
ALEC HOGG: It's interesting that you say that, because Sasol's getting a ten-year tax holiday from the State of Louisiana plus two billion in tax incentives. Obviously, your project is a different scale. What kind of incentives are likely?
BRADLEY DOIG: Well, currently on offer are many tax incentives and many tax holidays of up to ten years. Funnily enough, they also offer a government guarantee on your funding for your CapEx, so they'll write a guarantee for 25/30 percent of your capital requirements. They'll even take an equity position in the project. It's just depends who you're talking to.
ALEC HOGG: That's fascinating. The transaction today though, is that you're unbundling your stake in North Atlantic Iron Corp. It's going into a company, called Muskrat Minerals and then that's going to be listed separately. Muskrat is on the JSE as a secondary listing as well as in Canada. Why are you doing it this way? Why not just hold on to the stake?
BRADLEY DOIG: Well, we looked at the assets and what we want to do is show our shareholders the value of geographically diversifying into a different commodity suite as well, so we looked at this. Muskrat, effectively, are our shareholders and our partner there, so it's a consolidation of everybody's shareholding in the North Atlantic Iron Corporation. Muskrat will be rebranded North Atlantic Iron Corporation and once we've done that, our partner shareholders will get their shares distributed to them, as we will do to our shareholder base. We think this is a much better way of showing value and enhancing where this project is in terms of development.
ALEC HOGG: If I understand correctly, North Atlantic Iron Corporation has pig iron. Does it mine pig iron at the moment?
BRADLEY DOIG: It has a resource in Canada, but what we've done is we've looked at alternative inputs. The beauty of the process we designed is we can take low cost/low quality iron ore finds from different sources, and actually produce pig iron – not only from our own resource. We're therefore looking at this as a flexible business model, at this point.
ALEC HOGG: And then you're looking to put a plant somewhere in the United States to support the reindustrialisation of the U.S.
BRADLEY DOIG: Absolutely.
ALEC HOGG: Based on cheap gas…
BRADLEY DOIG: Absolutely. That plant will probably be located either in Canada or in the Rust Belt of North America. We're deciding on the final site, as I said earlier.
ALEC HOGG: But why not hold onto your shares…is it part of a bigger play then that you'd like to unbundle to shareholders?
BRADLEY DOIG: Petmin is a small company. We have a reasonable track record of trying to create value for our shareholders. We've bought and sold a couple of operations. We've turned them around. We think this is a great way to show… We've gotten to a point. We're going to spend $25m of shareholders' funds on this. We'd like our shareholders to see that there is value being created, and then this business must stand on its own two feet. Once the BFS is completed, we think there'll be a very good project here – easily fundable with the assistance of the local governments that we've been talking to. That will show, in reality, a much higher valuation than what we get in the current portfolio of assets with a South African risk profile, and we don't want that to be negatively affected or positively affected by what we're doing in the U.S.
ALEC HOGG: It would be positively affected at the moment, no doubt. Bradley Doig is the Business Development Director there.