http://www.northernminer.com/news/kwg-resources-turns-to-china-for-help-in-ring-of-fire/1003751315/

KWG Resources turns to China for help in Ring of Fire

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2016-01-21

A railway design and engineering company owned by China Rail Construction, one of China’s three major state-owned rail groups, is teaming up with KWG Resources (CNSX: KWG) to study design and financing options for building a railroad to the junior’s chromite deposits in the remote Ring of Fire area of northern Ontario.

KWG’s agent in China, Golden Share Mining Corp. (TSXV: GSH), facilitated the memorandum of understanding between the two companies, and will assist representatives from FSDI travel to Ontario in early March for initial consultations with First Nations groups and other stakeholders.

“This is in part driven by China’s desire to expand their rail construction industry globally,” says Moe Lavigne, KWG’s vice president exploration and development. China Railway First Survey & Design Institute Group Co. Ltd. (FSDI) has led the design and construction of more than 48,000 km of railways in western China’s rail network, along with more than 5,000 km of high-speed railways and rail transit projects in over 30 Chinese cities, and thousands of kilometres of railway, highway and subway projects overseas.

Set up in the early 1950s, the state-owned enterprise has over 2,000 engineers whose signature projects include the building of a railway from Qinghai to Tibet and from Baotou to Lanzhou. The company is also part of a joint-venture by Chinese rail companies and a U.S. passenger rail company that plans to build a high-speed railway project between Reno in Nevada and Los Angeles, California.

Ultimately, however, KWG’s MOU with the Chinese is all about finance. “We could very easily build a railway using only North American talent, no question about it, but it’s not about the engineering, it’s about the financing,” he says. Lavigne and KWG CEO Frank Smeenk believe that FSDI will likely participate in financing the development of the chromite deposits and that there’s “a very good chance” that the Chinese company will end up with an off-take agreement that enables KWG to build a mining operation there. “There’s no engineering company in North America that can give us that,” Lavigne says in an interview. “That’s why the Chinese will end up doing a substantial amount of the engineering work.”

The bottom line, Lavigne says, is developing the Big Daddy chromite deposit, in which KWG holds a 30% stake, and the Black Horse chromite deposit, in which it has the right to earn 80%. (The deposits sit in the James Bay Lowlands, about 280 km to the north of Nakina.)

“If I go to the banks today and say I want money to build a mine, they won’t offer it to me unless I have an off-take agreement — it’s a catch-22,” Lavigne explains, “so we have a situation where we can bypass this catch-22 and end up with an off-take agreement that will get us the finance to build the mine, and that’s why the Chinese are very important.”

Lavigne notes that KWG has been reaching out to various companies in China for a number of years because China produces more than half of the world’s stainless steel and consumes more than half of the world’s chromite and ferro-chrome.

“China has no chromite deposits and there are no other huge sources of chromite like South Africa, so that’s where the Ring of Fire stands out,” Lavigne says. “The Ring of Fire is going to be a huge source of chromite that will probably be there for a couple of centuries, depending on what consumption rates are,” he continues. “Around 20 million tonnes of chromite is produced every year so it’s not a huge amount and everything is sold through off-take agreements; if we didn’t have an off-take agreement with China, chromite developments in the Ring of Fire are next to impossible.”

John Gruetzner, a longtime China watcher and founder of Intercedent, an investment, corporate advisory and capital raising services firm in Beijing that is acting as an advisor on the transaction, believes resources in the Ring of Fire “have the potential to be the single-largest export item from Ontario to Asia." In an email, Grueztner estimates the value of those exports eventually could be as much as US$8 billion a year.

“This is the first step forward,” he says of the KWG-FSDI MOU, “but strategically I think you will see after the National Peoples Congress, a lot of longterm strategic interest by China in positioning its industrial capacity for the next resource boom.”

One interesting element that KWG brings to the table is its vision of lowering processing costs using natural gas. Over the last three years, the company has been developing technology to reduce chromite in its solid state into metallic ferrochrome with natural gas rather than using conventional smelters with electric arc furnaces.

“In an electric arc furnace you’re heating the chromite to about 1700 degrees Celsius to melt it and you end up producing an alloy of iron and chromium and your slag makes up the rest,” Lavigne explains. “When you use natural gas, what happens is, the temperature at which all of that happens is much lower (1200 to 1300 degrees Celsius) so the total energy consumption is much lower and the plant costs are much lower.”

Lavigne notes that in iron ore they have a method called direct reduction in gas so it's not new technology, but it's never been used on chromite before.

XPS, a metallurgical, consulting, technology and test services business has been working with KWG and preliminary tests on a lab scale have been successful. The next step is to choose a commercial furnace and do pilot-scale tests. Lavigne adds that South Africa, the world’s largest producer of chromite, contemplated developing a similar technique about 25 years ago, but didn’t have enough natural gas to develop the technology.

“Our projections are not fully fleshed out because they haven’t been fully verified on one of the new furnaces, but based on what we know, our cost to produce ferrochrome could be about half of what other producers produce it for at the moment,” he says, noting that producing a pound of ferrochrome currently costs between US55¢ and US85¢ and that he is confident “we’ll at least be at the low end of that range.”

“Our potential Chinese partner recognizes that one of North America’s advantages is the endless supply of natural gas that comes out of fracking … so they understand the advantages of developing the gas reduction technique,” Lavigne says.

KWG has had a patent application in progress on the technique for two years now and while Lavigne and the rest of KWG's management team is confident that the company will eventually receive it, commercializing it will cost a lot of money. “That’s where the Chinese are interested in possibly being partners and helping us,” he says. “I think they see the whole picture and want to participate in all aspects of the project, not just the rail.”

Looking further ahead, Lavigne says KWG hopes one day of “getting a stainless steel industry up and running in Canada.” One of the things the company aspires to do is build a chromite gas-reduction plant and ship its ferrochrome to Montreal and use existing electric arc furnaces there to blend its ferrochrome with other material and produce custom stainless steel billets that can be shipped worldwide. Another option is to use an existing steel mill in Sault Ste. Marie.(Babjak1 post)

“We’re trying to set things up in Canada that will invite stainless steel makers of the world to set up shop here, and we ourselves might become a stainless steel maker,” he says. “None of that will happen until we have ways of getting chromite out of the Ring of Fire. That’s the start, the foundation, for everything else to happen.”