I doubt iron ore 100 km into the wilds of Liberia is very attractive by world standards, but if the price of iron ore hits and stays at $100 per tonne, the purchase by Severstal is a good bet. What they are buying is a real option of the long-term iron ore price. If the price craters, then this ore body is not going to be economic, but if the price soars–and there is a good chance of that–then this ore body will be just another little gold mine.
I hate it when people create artificial options because they always tend to have some level of issues with them. You cannot create perfect mimic systems to the market. Having said that, a real option on the price of ore such as this makes complete sense. As I said above, if the price of iron ore goes up, the project has value. If the price goes down, then they paid $38 million, or the price of one spot market loaded cape-size vessel delivered to China, as insurance premium.
The risk here, however, is not the iron ore market risk, but the Liberia risk. But then again, who better to manage the wilds of west Africa than the Russians? Having said that, no amount of AK-47s will stop the next round of trouble, and I doubt mineral tenure in the area will last 15 years. Maybe the location explains the price more than the lack of a resource or the high-phosphorus ore.
