KWG Longs,

Some conclusions from the CCC Rail vs. Road Tradeoff Study that really struck a chord with me…thought I’d share to continue the discussion.

From page 52 of the Report:

“There is a deficit of good material through the majority of the corridor. Material for any mode of transportation will have to be imported or hauled in from far distances at a cost. Building a road corridor will adversely impact the development of the rail corridor by depleting the available and critical rock aggregate. The key component for construction of both modes of transportation remains acceptable quality of aggregate and NFS material. Its needs get more acute if a road is built, since good quality of aggregate will be required to maintain the road and reduce the wear and tear on truck tires and improve efficiency of trucking operations. It is clear from this analysis that significantly more rock will be required to maintain the heavy truck traffic and meet the increase in road cross sectional rock requirements further impacting the prospects of a rail corridor.”

Thoughts from KD:

KWG has staked over 30 claims for the purposes of aggregate. Should Cliffs work with KWG, it will significantly reduce the cost of aggregate since the majority of costs are due to hauling the aggregate from remote locations. Further, neither the road nor the rail can be built without aggregate and by the way, due to the barrier of cost of haulage and limited quantity of aggregate in the area, THERE IS NOT ENOUGH AGGREGATE FOR BOTH THE ROAD AND THE RAIL. Since Cliffs has stated that the long term transportation solution is rail, why not get it right the first time? As well Cliffs, your road will require ongoing supply of precious aggregate to maintain the road (did you think about that?) which will require ongoing costs that will significantly increase based on the number of trucks you have using the road.

From page 52 of the Report:

“Rail capital cost is higher than the road by approximately $500M, however this mode of transportation reacts favorably to higher loads, longer and reasonable terms of finance. The amount of time required to recover the additional capital cost of rail over road reduces dramatically if the load increases along the corridor, hence remaining a favorable option within term of the described resource extraction period and the life of the infrastructure beyond initial mine development. Both modes of transportation are not favorable initiatives if production or load remains low and terms of finance are for shorter periods as the associated annual costs to support the financing and operation would likely impact the ability to sell material into the market at reasonable prices.”

Thoughts from KD:

Rail only costs $500m more than the road…let’s see…$500m is just less than the $600m that Cliffs has committed for the purposes of building the road. Why not contribute the $600m to the rail solution and enjoy the significant cost in operating costs? As well, costs decrease in proportion to increase in load…from an economic perspective does it not make sense to mine Big Daddy and Black Thor at the same time to increase load? Minimizing operating costs due to the use of rail and increasing the load is an effective way to protect a company that operates in a market of fluctuating commodity prices (think of the financial mess that Cliffs is in now with depressed commodity prices).

From page 53 of the Report:

“Service support could provide supplies and transportation to regional communities over time, further utilizing planned access corridors. These factors indicate that both infrastructure options should consider the possibility of cost sharing mechanisms with public funding sources, as well as future resource development proponents. Simple calculations demonstrate that an initial public or third-party capital contribution of $500M towards both options significantly improves annual debt service payments, with a higher percentage reduction realized in the road. However, since the road unit costs per tonne are dominated by operating factors that do not appreciably change with volume, there is a lower return per dollar invested in capital compared with rail. For example, under the base scenario with $500M in funding, road unit costs per tonne decrease from approximately $84 to $73/tonne, a reduction of about 13%. The same contribution to rail infrastructure realizes a decrease from $45 to $27/tonne, a reduction of about 40% for the same conditions. Such savings are potentially very significant in the long-term stability of the operations of any associated with the infrastructure as their costs are directly added to mining, processing, and delivery to market.

Thoughts from KD:

The rail will also connect fragmented communities and advantage our FNs which is apparently a priority for the Wynne government and therefore should allow for a public funding mechanism. Again we see the benefit of Cliff’s diverting their planned $600m road investment into the rail solution and substantial benefits that result since cost per ton with rail (cost decrease of 40%) is far more sensitive than road (cost decrease of only 13%) with respect to costs associated with load.

I’d be happy to hear other interpretations of the information in the Report and/or commentary on my thinking.

Going long on KWG!

KD