Chrome ore mining in Turkey

Opinion | 26 June 2017
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Sinan Dallı, CEO of Alser Mining speaks to TFR's Katharine Morton about mining chrome ore in Turkey

Yours has been an interesting journey. How did you get from being CFO of the largest car sealing manufacturer in Europe (Standard Profil), to CEO of a chrome ore mining company?

Following the sale of the [private equity owned] Standard Profil to a new round of PE investors, I started Alser Mining in 2013 together with my partners Muhammed Habbab and Sami Habbab, who are renowned oil traders and oil infrastructure investors. Alser is a mining and exploration company that owned a virtually untapped but very promising chromite concession when we acquired the shares. The mine site is in the Western Taurus mountain range in the inner Aegean region of Turkey. The closest inhabited area is the village of Tefenni in the Province of Burdur. Despite the fact that we had no previous experience in mining, thanks to our expertise in oil trading and operations management, mining was an area where we could adapt rather naturally. In addition, I am proud to say that we have built a team consisting of some of the best mining engineers, geologists and topographers in Turkey, who understand the unique and very complicated geology in our region.  

How did you finance the acquisition?

Mining is an area that requires a special type of project finance. In developed markets, banks provide project finance for longer terms on a non-recourse basis, based on reserve estimation conducted by professional companies and signed by QPs (Qualified Persons). We also relied on a study conducted by a qualified company during our due diligence work, yet the acquisition was self-financed. So far, our investment has totalled approximately US$10m, which is mostly financed with equity. However, in the future, we will use external funding for new projects.  

What is the chromite mining potential of Turkey?

Turkey, being located between Europe and Asia, is a very young land mass in geological terms with tectonic plates actively pulling and moving in opposite directions, often capable of producing massive sporadic earthquakes. We sit on a number of fault lines and the geology has a very fragmented and heterogeneous nature. This allows for rich magmatic content with valuable ore reserves. I always say, what lies underneath the Turkish soil is as rich as a bowl of minestrone soup, as compared to a boring porridge. For geologists, Turkey is blessed with a unique geology - it is a paradise, yet it is often an equation with too many unknowns. For us, mining has started off with an immense learning curve, which is still very steep.  

Tell me about the exploration process.

Initially, we spent our time and effort to identify our mineral resources and deployed a rigorous drilling programme according to the internationally recognised JORC standards. JORC is the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, a professional code of practice that sets minimum standards. In practice, reserve estimations made only according to JORC standards (or other equivalent standards) are bankable and funding can be raised against them. As a result of 15,000 metres of drilling, we have identifed approximately 400,000 tonnes of high grade ore and approximately 850,000 tonnes of low grade ore which is worth around US$120m at today's prices. Once we established the size and the location of the ore body, we started an underground mining operation with approximately 10km of underground galleries. In just three years, we have become the second largest lumpy ore producer in Turkey, producing 4,000 to 5,000 tonnes of chromite per month.  

How do you create value in mining?

In the meantime, we have acquired new sites and are looking to acquire additional sites and concessions. I am happy to say that what has started as a mining project on a single site has since become a well-established business, and new sites we have added to the pipeline to be developed. As you can imagine, you will need to expand and maintain a mineral resource base in order to be able to generate long-term sustainable income from diversified sources and locations. While some sites mature over time and productivity declines, new sites would have to come online to maintain continuity. Generating long-term value is essential to our approach.  

Who are your clients?

China is the main buyer of global chromite. The main producers of chromite are South Africa, Pakistan, Turkey, Iran, Albania and Oman. Turkey ranks second in global output after South Africa. Chrome is predominantly used in ferrochrome production which is in turn used to produce stainless steel. In the old days, stainless steel was mainly used in special applications such as tools and mold manufacturing and military applications, while today it has become a common material, with applications from construction to furniture, from electronics to simple metal equipment. Chromite is also used in the chemicals industry, notably in paint production. China is the world's largest steel exporter but its domestic steel consumption is also huge given all the infrastructure projects there. The recent slowdown in Chinese demand has affected prices along with all commodity groups. However, due to imbalances particularly due to supply and demand conditions in the supply chain of chrome ore, prices have risen from approximately US$150 to US$400 for cost, insurance and freight (CIF) to China for standard-grade lumpy chrome ore (42% purity) during the past year.

Turkish chrome ore tends to attract better prices than many other places in the world thanks to its high grade and favourable impurities which increases output efficiency and reduces cost of production of smelters producing ferrochrome. As a result, ferrochrome smleters tolerate higher Turkish ore prices and blend Turkish ore with cheaper material of lower quality from elsewhere in the world, typically from South Africa and achieve a balanced price-quality-quantity equilibrium when producing ferrochrome.

Do you also trade third party material in addition to selling your own production?

Leveraging on our existing logistical and quality control infrastructure, as well as our experienced sales team, we are not only a producer but also trade chrome ore by procuring it from other Turkish miners all over Turkey. In our trade financing activities, this gives us the volume and scale to attract low-cost funding from local and international trade finance institutions and banks.

How do you finance purchases from third parties?

We usually buy material from third parties on a cash-against-goods basis delivered at port warehouses. Warehouse owners usually produce a holding certificate (HC) stating that they hold the products as a custodian until payment is made to the seller, and release the product to us once payment is made. Value is determined based on quality and quantity certified by independent inspectors such as Mitra and Alfred H Knight. Banks providing working capital funding to fund our purchases accept HCs issued in their name, and release the goods to be loaded on the vessel once a payment instrument such as an LC or a stand-by LC is issued in our name at the bank's counters.

Do you operate in multiple currencies, and how do you manage currency risk?

Yes, we do. We sell in US dollars while most of our own costs are in Turkish lira. We use currency options and forward currency sales contracts. This allows us to hedge our exposure against FX volatility. So, we short US dollars by selling them forward for up to three months. This has proven beneficial so far, especially in Turkey, where domestic currency has been volatile recently.

Our idea is to build a portfolio of profitable mining assets by extensively using the capital markets. Where next? I can comfortably state that we have developed a passion for chromite mining and would like to expand into other ores such as zinc and lead, copper, iron ore, and silver and gold. Combining forces with like-minded investors sharing similar passions and compatible experiences will also be on our agenda.

While developing new projects, we shall creatively deploy alternative sources of funding and investment platforms, such as creating a private equity mining fund specialised for our region, investing in profitable mining assets, which we can then list in an appropriate market such as the Toronto Stock Exchange (TSX) and/or the Borsa Istanbul (BIS), or the Dubai Stock Exchange.  

Sinan Dallı is co-founder and CEO of Alser Mining and chairman of Marmara Capital Portfolio Management company, which primarily manages Turkish equity ETFs mainly targeted at Scandinavian institutional investors and high net-worth individuals. Sinan started his career in banking and worked at Türk Ekonomi Bankası (TEB), now part of BNP Paribas Group. He has also served at JP Morgan in London. Sinan gained experience in oil trading and infrastructure investments, automotive and private equity industries before starting up Alser Mining.

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