The BC Iron Limited (ASX: BCI) share price is soaring, up more than 10% at 20.5 cents in lunchtime trading.
That comes after the company announced that it was selling its 75% interest in the Nullagine iron ore mine in the Pilbara to joint venture partner Fortescue Metals Group Limited (ASX: FMG).
The Nullagine mine was closed in December 2015, after iron ore prices slumped below US$40 a tonne. It was kept on care and maintenance, with BC Iron hoping the iron ore price would rise.
The iron ore price did recover – it's around US$55 a tonne currently – but it's still not high enough for BC Iron and Fortescue to restart operations under the current joint venture structure.
BC Iron had tried to offload it to other third parties, but in the end, Fortescue appears to be the natural owner and perhaps the only one interested in a small, high-cost iron ore mine.
As consideration, BC Iron doesn't actually receive any cash for the mine from Fortescue up front either. Instead, the miner will pay BC Iron a royalty on 75% of the future iron ore mined from Nullagine consisting of 1-2% of free-on-board revenue received by Fortescue for high-quality direct shipping ore, and $0.50 to $1.50 per tonne for low-grade ore, adjusted for 15% yield loss.
However, Fortescue will only pay 33% of the royalty up to $7.5 million, which offsets the obligations Fortescue is taking on – including rehabilitation of the mine site once it reaches the end of its life.
The good news for BC Iron is that it's no longer liable for that rehabilitation expense and monthly costs of $150,000 to $200,000 keeping the mine on care and maintenance. It's also one less thing for management to worry about.
The junior miner can now focus on its Buckland project and receiving earnings from its Iron Valley mine – wholly operated by Mineral Resources Limited (ASX: MIN).
For Fortescue, it has acquired a small mine it knows well and should be able to add the ore into its existing production – if it wants to – at a reasonable price. BC Iron bought 25% of the mine back from Fortescue in 2012 for $190 million – roughly valuing the mine at nearly $800 million. Iron ore prices were above US$120 a tonne back then though.
Foolish takeaway
Much depends on what Fortescue decides to do with the Nullagine mine now. The miner could keep it on care & maintenance for a while – but that appears unlikely. Why buy the 75% of the mine you don't own unless you are considering resuming mining operations? That should be good news for BC Iron.
