To our shareholders and others interested in Roche Bay:
Roche Bay owns substantial iron ore resources, and has an interest in other deposits of iron ore in Nunavut, in northern Canada. We have held these assets for decades, aiming to explore them further, develop mines when economically attractive, and generate revenues or royalties for our shareholders. The current environment, however, is extremely difficult for smaller and start-up mining ventures, and this letter is to update you on where we stand at present and what we expect for the future.
The Iron Ore Industry
Let’s start with a brief overview of the iron ore mining industry. It is now dominated by an oligopoly of three giant mining companies; they control the majority of the seaborne iron ore traded across national borders. They have increased their ore production enormously in the past couple of years. The result, as we have also recently seen in the oil markets, is that iron ore prices have fallen sharply, by more than half since early 2013.
The consequence of this great output expansion and price collapse is that the Big Three miners are, as John D. Rockefeller once said of his own oil monopoly, “giving a good sweating” to the rest of the mining industry. In the short term, we will probably see many weaker producers shut down their operations, some of which will never (in the foreseeable future) be restarted.
Many smaller operating mining companies, in Canada and elsewhere, are filing for bankruptcy. (We will not be one of them.) Much of the domestic Indian iron ore industry has already gone, and significant domestic Chinese production is or soon will be shutting down. This short-term “sweating” will only end once the majors wipe out enough players, or force consolidation of the remaining ones, to enable the oligopoly to control both global production and prices.
Longer term, our prediction is that the next stage in this game is for the oligopoly to run their mines to maximize profits. Mines operating at 90% of capacity are much lower cost than mines operating at 105%. This is because they pay less for labor, can do better maintenance, and can afford to buy supplies based on price vs. urgent need. Iron ore prices are then likely to rebound substantially, if not all the way to the peak levels reached in 2011-12.
Roche Bay’s Position
We are affected mostly indirectly by the industry’s current travails, as we hold mineral assets not yet being mined. Our balance sheet remains strong, with substantial assets (even at currently-depressed valuations) and total liabilities to third parties of less than $100,000. We have no long-term debt and retain adequate financial flexibility for current operations, even assuming more adverse market conditions.
We have two core assets:
- Fraser Bay, on the Western side of Melville Peninsula about 120 kilometers from Roche Bay, which is believed to contain very large amounts of iron mineralization. We own 100% of these properties, they have no material liabilities, and more than $1 million of exploration work has recently been done. This is a good long-term mining prospect, with a very low carrying cost, so we can afford to wait for the short-term iron ore market to sort itself out before we focus again on this target.
- Roche Bay, a group of mineral properties mostly on the Eastern edge of Melville Peninsula within a few kilometers of tidewater and a potential shipping port. These properties are now in a joint venture, of which we own 25%, with Advanced Explorations Inc. (“AEI”) as the project operator responsible for exploration and development of a mine here. This is our most advanced project, and it is the most affected by the current slowdown in the iron ore market. The joint venture covering the Roche Bay deposits and surrounding claims is controlled by AEI in cooperation with two or more consortia of Chinese companies and investors.
The Roche Bay/Advanced Explorations Joint Venture
Our joint venture with Advanced Explorations is being buffeted by the industry-wide turmoil. While AEI has raised and invested more than $50 million in the Roche Bay project, its most recent financial statements show AEI has $15 million in liabilities and limited cash on hand. AEI has been delinquent on a certain portion of its calendar 2013 payment obligations to Roche Bay, on and off, since June 2014. In addition, AEI has not yet made its payment obligation to Roche Bay for calendar year 2014. At this point, AEI owes approximately $1.4 million to Roche Bay. We have been trying to work with them to figure out a mutually acceptable path forward, and we intend to continue to do so.
However, we are only one of several creditors, and we are not the largest creditor, which normally leads in any corporate refinancing. A collective group of several corporate, institutional, and individual investors based in China and Hong Kong hold significant equity ownership in AEI, in addition to $10 million of debentures. Any process for the financial revitalization and payment of default obligations that will occur with AEI must start and end with these Chinese and Hong Kong investors.
We have not had any direct contact with the debenture holders or the Chinese and Hong Kong equity investors. Consequently, we at Roche Bay have no knowledge of their plans. We do not believe that the group(s) who bought the assets will be the same individuals who decide what to do with them. We expect that the various creditors and investors may choose to transfer these assets internally to maximize their option/strategic value.
The Roche Bay Project is a Valuable Real Option
We also believe that the Roche Bay/AEI JV is worth more to everyone alive than dead, for the following reasons:
- Roche Bay and the related Tuktu deposits (some 60 km north of Roche Bay) represent a solid “real option” as a hedge against both the iron ore oligopoly and monetary uncertainty. This real option does not require much tightening by the oligopoly to be worth progressing. It seems unlikely that buyers of iron ore, in China or elsewhere, are naive enough to assume that the short-term market movements are going to lead to long-term repricing of a major globally-traded commodity.
- The land title is secure, the risk of holding is low, and the cost to maintain the asset is very reasonable. We do not expect any Canadian government to put in a “use it or lose it” mineral policy.
- There is significant upside in the district and multiple undrilled mineralized zones, and this could be a region that could produce a material amount of ore for China.
- The total debt not owed to Roche Bay and to the Chinese debenture-holders is not material to the value of the option if the investors are confident that the option is secure.
We believe that AEI’s largest creditors and largest investors need to lead a financial revitalization and restructuring that both preserves value and creates more value for all parties, and we are willing and ready to participate fully to achieve those objectives.
Benjamin J. Cox
President and Chief Executive Officer
January 13, 2015