Alderon Iron Ore Corp. (AXXDF)

[LGL8054]

Grandich Client Update

The Lobster is in the Pot
Alderon’s announcement on Tuesday that it has closed its share subscription agreement with Hebei Iron and Steel marks another significant milestone for Alderon. As I noted a few days ago, Alderon continues to make virtually all the right moves with respect to the things it can control but must live with the things it can’t, namely falling iron ore prices. However, I think the closing of this deal clearly illustrates Hebei’s view on the current iron ore price. The fact that they are committed to this agreement in the face of relatively rapid falling prices tells me that they believe the current price situation to be a near-term phenomenon that is unsustainable in the long term. While the growth of the Chinese economy is slowing, the recent dramatic iron ore price drops are more directly related to Chinese steel mills producing at record levels during the first half of 2012 into a market of softened demand, rather than a response to some sort of fundamental shift in the iron ore market. This record steel production has resulted in downward pressure on the steel price which, obviously, squeezes margins. In response to this profit margin squeeze, the Chinese are drawing down their raw material stockpiles to levels well below normal. I believe it’s this short-term destocking that is driving the current iron ore price volatility, not a dramatic slowing of the overall Chinese economy. I’m speculating that it shall be a limited time event and can push the price back past $150 in a quarter (If and when it has run its course).
There had been quite a bit of chatter about this Alderon/Hebei deal in the period between its initial announcement and Tuesday’s announced closing, much of it negative, intimating that the deal would never be completed in the current market without a radical restructuring. Although the deal was altered slightly following the initial announcement, the overall investment by Hebei in Alderon is still approximately $400 million. The subscription share price was lowered to $2.41/share, from the original $3.42/share, but this was materially offset with the direct project investment rising to $120 million, from the original $105.7 million. Overall, the deal term adjustments have resulted in a minor 3% reduction in Hebei’s originally proposed investment; a far cry from what many naysayers were suggesting!
While on the subject of naysayers, there was a Toronto based analyst’s note back in April which suggested that Alderon would potentially be in some financial difficulty as the year progressed as deals such as this take 8 to 12 months to receive Chinese government approval. The fact that the deal received all the necessary Chinese government approvals in 4 months, half the time of similar deals, is a strong indication of the merits of this deal. As an investor you have to decide for yourself whether you are going to put your money on an analyst that still has milk on his chin or with an experienced management team such as Alderon’s that has proven they can execute when others cannot.
Bottomline
No one can deny that the current situation in the junior resource sector is difficult and that these difficulties are even more acute in light of the current iron ore price shifts. However, these are precisely the times when the true character of a management team is revealed. The fact that the Alderon team was able to close this deal in the current environment, which is anything other than friendly, and in record time, is undeniable evidence that these guys know what they are doing,,,con't