Due Diligence Review on Iron Ore Projects in China

Due to the continuing high demand in the iron and steel industry, iron ore projects have become increasingly hot these days in China. SRK China was commissioned by Hua Yi Copper Holdings Limited (Hua Yi), a company already listed on the Stock Exchange of Hong Kong Limited (HKSE), to conduct a full due diligence review of the Longxin project. Hua Yi was interested in acquiring the Longxin project, including the Beipuzi mine and Gushan exploration tenement, which is located in Chengde, Hebei Province. SRK China provided the Independent Expert Report that is required for major transactions on the HKSE. The Report needs to be in compliance with Chapter 18 of the Hong Kong Stock Listing Rules. The acquisition and transaction was successfully completed early this year.

The Longxin project is located about 3 hours driving distance from Beijing. It contains low grade ore where an average total iron (TFe) grade is 21.46% and average magnetite content is about 11.29%; that is about 53% of the average total iron content. It is a typical magmatic deposit, a product of late stage magma segregation.

The Longxin project operates 4 open pits inside the mine boundary. During SRK’s site visit, only 2 pits were operating. One hydraulic shovel with a capacity of 1.2 m3 and one front-end-loader were assigned to each mining face. The truck fleet consisted of ten 20-tonne trucks and thirty-five 25-tonne trucks. In general, the operation runs on 12-hour day-shifts only. Each truck can travel 20 return trips from the mining area to the ore processing plant daily. The surrounding rocks are primarily feldspar or pyroxene diorite and the pit walls appeared to be moderately stable.

While SRK considers the current parameters proposed for the Beipuzi open pits to be appropriate, more work is needed to better understand the geotechnical conditions at the mine and to confirm that the pit wall design criteria meet those conditions. SRK noted that double benching would only be practical if rock conditions are good, and attention has been given to forming final walls with minimum damage.

At the time of the SRK site visit, the mine operators had not worked out a detailed mine design by year for the next 5 years. The mine has measures in place to blend ores with various grades to optimize production. In addition, further geological exploration work is underway and ore resources are expected to increase to provide a basis for the mine’s sustainable development. In SRK’s view, that long-term planning should be completed as soon as possible.

Mine production primarily uses the contract mining and shallow-hole blasting technique. This is labour intensive and inefficient. Interim berms and benches inside mining areas have not been formed properly, which will have an adverse effect on long-term mining. SRK recommended that management of safe production as well as improved mine design should be conducted jointly. The photo below shows the current mining being conducted.

The process flow includes three stages; preliminary dry-magnetic processing, grinding and classifying, and coarse-grinding magnetic processing. The plant is designed to process 1.50Mt of raw ore per year and to produce around 200,000t of iron concentrates with TFe grades of more than 60%.

SRK’s environmental technical review identified numerous environmental issues. The project needs to follow strictly the conditions for operation stated in government approvals. The operation also needs to improve its compliance with Chinese environmental laws and regulations, particularly related to water control, monitoring and management measures, as well as erosion control measures.

SRK has conducted several similar reviews on iron ore projects over the past few years. Additional services have also been provided as follows:

Resource Update
• provide site supervision on further drilling to upgrade the resources and to bring them into compliance with JORC code
• conduct resource estimation using either Surpac or Micromine software to update resources with the newly drilled data being considered

Geotechnical Review
• review the current geotechnical program and recommend a detailed program to obtain realistic parameters for mine design
• review the safety status on the existing tailings dam

Mine Design
• conduct the detailed mine design, including the yearly mine scheduling for the first 5 years and the design of the final pit
• estimate reserves that can be reported in the Independent Expert Report for transactions being conducted in the HKSE or for project finance

Environmental Review
• carry out a compliance review
• develop a site monitoring program to improve the status

SRK China will continue to review iron ore projects, either for geology only or for full due diligence, depending on the nature and status of the project. SRK China has its own qualified geologists, geotechnical, processing and environmental engineers and a pool of close associates who are mining engineers so that we can mobilize a team on short notice for any project site.

Dr. Yonglian Sun: ysun@srk.cn

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