Moe Lavigne: Ring of Fire could yield lowest cost chromite operation in the world

Asian Metal: Good Morning Mr. Lavigne, thank you for granting us this interview. Could you please give a brief introduction of yourself and your company?

ML: I am the Vice President of Exploration and Development at KWG Resources Inc. KWG is an exploration stage company with a primary focus on development of the chromite deposits in the James Bay Lowlands of Northern Ontario.

Asian Metal: Could you provide a detailed description of the Company’s chromite mining projects in the James Bay Lowlands?

ML: KWG began exploring the James Bay Lowlands in 1994. Back then, they were a diamond explorer, and discovered a handful Kimberlite pipes near De Beers Victor mine,. That exploration lead to looking further west in the James Bay Lowlands, where De Beers, when drilling on one of our anomalies, discovered copper and zinc. That ended up being the first base metal discovery in that part of the world. This lead to the first staking rush in 2002 in what we now know as the Ring of Fire. A number of other companies staked claims near our block of claims.

After further exploration, Noront Resources, one of the other companies that staked claims near ours, discovered what they now call the Eagles Nest, a nickel-copper-platinum deposit in the summer of 2007. The following winter, everyone in the region decided to turn their attention to nickel-copper-platinum . As exploration in this area ramped up in early 2008, both Noront Resources and KWG separately made chromite discoveries, within our respective claims. This was closely followed by a third chromite discovery by Freewest Resources in September of 2008. At this point, everyone realized that these chromite deposits might be big.

At this time, we introduced ourselves to Cliff’s Natural Resources, and they decided to become a major shareholder and partner in this development. Cliff’s took action and bought out both Freewest and Spider Resources, giving them 100% ownership of the “Black Thor” deposit, and 70% interest in “Big Daddy”, with the other 30% interest belonging to KWG. Subsequent to that, we entered into an option agreement with Bold Ventures Inc., who were already in an option agreement with Fancamp Exploration Ltd. who had claims adjacent to the Noront Eagles Nest Nickel deposit and their chromite deposit. In the winter of 2011, Fancamp had intersected chromite about 1km below surface and decided not to move forward. This enabled KWG to earn the option for an 80% interest in this deposit in 2012, which we now call the “Black Horse” deposit.

Asian Metal: How have you developed the “Black Horse” deposit?

ML: Development for the “Black Horse” started about two years ago. It has been subjected to metallurgical testing, and we have reduced the chromite to ferrochrome using conventional electric arc furnaces. However, we have been working on developing a new method for reducing chromite to ferrochrome, using natural gas instead of electricity to power the reduction, and we have had some success doing so. This is the area where we have focused a lot of our attention.

Asian Metal: What advantages will the use of natural gas in the reduction process give you over the competition?

ML: Reducing chromite using natural gas would be at least half the price of using electricity. Eventually, this is the real game changer for chromite processing worldwide. The production process of ferrochrome is quite cost intensive using the electric arc furnace.

Asian Metal: Can you tell me a little more about the specifics of this method?

ML: It is really similar to direct reduced iron. Iron ore has been reduced this way for quite some time, and it is really a derivative of that. What we can’t talk about is what that variety is, because that is the spice that makes this all possible.

Asian Metal: I can understand that. You don’t want to be revealing all of your secrets quite yet. In terms of the purity of the chromite, what are you currently dealing with?

ML: This is where the “Black Horse” has its advantages, as well as the other deposits in the “Ring of Fire”, since the chromite is very rich. From the “Black Horse” we could produce just a simple gravity concentrate that would grade around 52% chromium oxide. That makes it a lot richer than just about any other chromite deposit on the planet, which tend to top out at about 45%. This pays off in the reduction process to ferrochrome, since we can get up over 60% chromium content.

The ferrochrome that we have produced was reduced from raw ore, not from concentrate. So, if we were to run these furnace tests again on the concentrated chrome ore, I suspect that our ferrochrome could be pushing 65% chromium content. That kind of ferrochrome and chromite ore tends to get a pretty good premium price.

I think these deposits are going to have an edge over all of the other deposits on the planet. I think when putting these fully into production, we are going to be able to insert ourselves into the market, because we are going to be able to sell our ore for a better price.

Asian Metal: Is the plan moving forward to first market the chromium ore to finance the ferrochrome furnace, or will you be moving straight towards ferrochrome production?

ML: The logical manner of this is always to avoid your capital expenditures as much as possible, so you would initially be marketing the concentrate, and then using that to finance the building of the reduction plant. However, we have not made those decisions yet. That is not to say that we won’t try to build it all at the same time, but that is usually how these things unfold.

The third step that we are pursuing is to actually produce custom stainless steel. We do have the metals available here to be able to produce stainless steel billets at whatever composition steelmakers need.

Asian Metal: If you had to give a rough timeline of how these events will unfold, how would detail that.

ML: Building a mine is actually fairly predictable in terms of how long it takes to get all of the components up and running. The problem is the starting point to that process. Development in the Ring of Fire cannot get started until the province of Ontario government and the First Nations sit down and resolve the issues that are preventing this from happening. One of the issues is that we can’t build anything in the Ring of Fire until the regional infrastructure plan is put into place. The Ontario government and the First Nations are negotiating that plan at this time. When that agreement is made, we will have a much more definitive answer on how long this will take us to get it off the ground.

Asian Metal: I understand that there is also an issue with the terrain surrounding the Ring of Fire, creating more difficulty in extracting the material?

ML: Yes, that is correct. In the fall of 2008, when we realized that this was going to be a very significant deposit of chromite, we zeroed in on the fact that we needed to get this commodity to the market. When we started searching for a possible route to build a railroad to get material to the market, we came to the realization that we had to stake claims on the only ridge of high ground that leads out of the Ring of Fire. The James Bay Lowland is best described as a large swamp, with no high ground whatsoever.

You may have seen in the news that this is something that we have been fighting in court with Cliff’s over the past couple years. In order to get the chromite out, we need to build a railroad or a slurry pipeline to make this thing economic. The mining of chromite is not economic if you are going to haul everything out by truck. That was Cliff’s plan, and I don’t think that plan would have ever seen the light of day because it does not make money. The difference is that it would cost CAD60/T to haul the material out by truck, as compared to CAD10/T to haul it out by train. Since a ton of chromite ore, generally speaking, runs for about CAD200/T, cutting CAD50/T off the top just does not make economic sense. The need to get the material out cheap is imperative. The other way we are investigating the removal of the material from the site is a slurry pipeline.

Asian Metal: Which is the greater obstacle to building the railroad? Is it the difficulty with the ridge, or is it the ongoing negotiations between the Ontario government and the First Nations?

ML: Well, we have been pushing the government to use a government owned railroad and extend it up to the “Ring of Fire”. We also hoped to be able to make the First Nations a partner in this by using their land. We wanted them to have a stake in this infrastructure company that would be created for this purpose. That would be one way with getting the First Nations on board. They have said from the beginning they do not want to simply be accommodating. In their history, they have always watched things from the sidelines. They want to be partners in this development, and they want to participate in things. We think if they were partners in the infrastructure company that supported the mining operations that would be a good way to get them to finally decide that it was time to give this the OK to move forward. They are actually eager to make this happen, but they want to do it on their terms. That is really the core of the negotiations between Ontario and the First Nations.

Asian Metal: Is the slurry pipeline the backup plan?

ML: At the end of the day really depends on who is building what for what purpose. If, for example, the government decides that they want to create this development corporation to support all of the mining operations up in the James Bay Lowlands, a railroad is much more flexible in that it has multiple uses when compared with the slurry pipe which would only serve a single use. The railroad can serve multiple mining operations as well as the communities in the area. If you simply want to get one product to market and support one mining operation, then the slurry pipeline is the most economical route.

There are political decisions that need to be made here before that choice gets made.

Asian Metal: Have you had any talks with a producer of ferrochrome for a potential off-take agreement or is that on hold until these issues sort themselves out?

ML: We are having discussions with several other parties at the moment about off-takes and marketing agreements. We just want to ensure ourselves that we can insert ourselves into the market, and we think the best way is to have partners that are already in the market. That is about all I can say about that at this point.

Asian Metal: We have seen that Cliff’s is attempting to pull out of their Ring of Fire claims, and that there have been discussions that KWG and the other companies with claims in the region might attempt to acquire Cliff’s assets. Is that not feasible at this time due to capital concerns? Is that something that you are looking into long term?

ML: We are going to try to buy Cliff’s assets, but we do not see it as absolutely necessary to execute our plan due to our ownership of the “Black Horse”. The “Black Horse” is a very young resource. We have only done a little bit of drilling on it, and it is already greater than half the size of the Cliff’s deposit. I am very confident that we are going to continue to grow that resource, and that it will be sufficient to execute our plan. It would it be nice to have all of the chromite assets in the Ring of Fire under one roof, but it’s not essential for our purposes.

Asian Metal: With regard to funding for infrastructure purposes, is this determined by what the government is going to help out doing here?

ML: The provincial government in Ontario has committed to spend CAD1 billion on the Ring of Fire to get it up and running. The Canadian federal government wants to participate as well, and they may match the provincial commitment dollar for dollar. However, the federal government is not going to make a commitment until there is a plan in place. Potentially we could be looking close to CAD2 billion dollars, which is pretty close to the cost of a railroad.

If I am forecasting, ideally there will be a railroad and there will be road network that links all the communities up in Northern Ontario to link each other and link the major infrastructure to the south. Building a road network between the First Nations is not that large of an expense, and it will certainly help catalyze an agreement.

I think both the federal and provincial governments have shown a strong commitment that they want this all to happen. It is going to be an economic driver at both a local and countrywide scale, especially if these downstream industries, like the stainless steel mill, get put into place. With that kind of commitment, I think that this definitely will happen. The only question here is “When?”.

Asian Metal: Without giving any definite timeline, what are the approximate expectations for how long each stage will take in your plan if the infrastructure plan were implemented?

ML: Hypothetically, if an agreement were made this winter between the government and the First Nations, it would take us almost two years to get the first road link from the Ring of Fire to the main road network. If we started building the railroad at that point in time, it would take about 3.5-4 years to build the railroad. Some of the infrastructure at the mine site can start being worked on about 1.5-2 years after the starting point. Then, it would take about 3 years to put the mine infrastructure into place, including the mineshaft, the mill, the concentrator, and the pelletizing plant. So in total, you are looking at about 5 years from the starting point before you might see some product come out.

Asian Metal: Will this all be built at the mine site?

ML: The crush and grind mill will be at the mine site. However, we are planning on building the concentrator at an intersection on the transcontinental railroad and transcontinental pipeline. This will enable us to have both natural gas and the railroad, making this the ideal location to build the concentrator, the pelletizing plant, and eventually the ferrochrome furnace.

With respect to stainless steel, we think there are plants that need to be built. However, we are going to try to piggyback off of some already existing infrastructure since there are quite a few choices in that region. This is speculative at this point, as we haven’t sat down with anyone or worked out any details in this regard.

So, if we got the green light today, you are looking for 5-6 years before seeing any of this come onto the market.

Asian Metal: Is Cliff’s pulling out of the region an issue for the government? Or are they OK to move forward without them involved?

ML: Well, it certainly shocked them. There are a number of people who thought this was more or less a done deal. However, they have come to realize that the metals industry is not as robust as everyone thinks and these things can happen. One of the lessons learned over the past couple years has been from this situation. Cliff’s is a higher cost producer of iron ore, and the decision is to leave this area stems from this fact. Iron ore prices are being driven down by the larger producers as they continue to ramp up production volumes. This has forced Cliff’s to have to re-evaluate their current business plan.

The moral of the story here being that you don’t ever want to be at the high end of the scale in terms of production cost relative to your peers. The only way to survive these downturns that inevitably happen is to ensure that you are on the low end of that of that scale. That has always been our focus in the development of the Ring of Fire. We want to make our Ring of Fire chromite operation the lowest cost on the planet, and I think that is achievable.

Asian Metal: What will give you the cost advantage over your peers?

ML: The three big factors here are the high grade of the chromite, the railroad, and the natural gas reduction. Those three converge to enable us to be one of the lowest cost producers on the planet if all goes according to plan.