Iron Ore Business

Prosperity is engaged in the trading of iron ore through its wholly-owned subsidiary, PMMCO, which either purchases iron ore from its suppliers (principally mine owners) to sell to its customers or acts as agent between such mine operators and customers. The Company maintains a prudent risk management policy, engaging only in back-to-back transactions and holds no inventory.

Prosperity’s  20  years’  experience  in  iron  ore  trading,  together  with  long-standing  relationships  with  raw material suppliers and port operators, enables the iron ore trading team to provide a highly valuable service to both suppliers and customers. In particular, the Company provides support in the areas of logistics, financial solutions and technical support, as well as assisting customers to locate and acquire iron ore which meets their requirements.

The Company’s iron ore trading business sources iron ore directly from major international suppliers in South Africa,  Brazil  and  Australia  as  well  as  non-traditional  suppliers  in  South  East  Asia,  including  Thailand  and Malaysia in particular.

Performance

In fiscal 2010-11, Prosperity’s iron ore trading business shipped a total of 6.3 million tonnes of iron ore and contributed a segment profit of $10.4 million.

Iron Ore Off-take Agreements

Prosperity has been looking to increase its access to reliable medium to long term supplies of iron ore at competitive prices. As a result, Prosperity entered into four iron ore off-take agreements which will provide the Company with access, at its discretion i.e. the Company has no obligation to purchase this ore if it is able to source product at more competitive prices elsewhere.

Grace Wise Off-take Agreement

On 31 May 2010, Prosperity entered into an iron ore off-take agreement with Grace Wise to purchase iron ore from South East Asia.

Under the agreement the iron ore is to be offered to Prosperity between 1 May 2010 and 31 March 2013. Prosperity will benefit from the right, but not obligation, to attain an increased supply of ore from Grace Wise. There is no initial outlay or prepayment associated with this transaction.

Blackrock Off-take Agreement

On 28 January 2011, the Company entered into an iron ore off-take agreement with Blackrock to secure a supply of 800,000 tonnes of iron ore from the Quebec Province, Canada over a two and a half year period. Blackrock is a mining company which specialises in minerals such as iron, vanadium and titanium.

Iron ore will be sold to Prosperity at a fixed percentage discount to the prevailing market price in the region. Prosperity has the right but not the obligation to buy the ore offered by Blackrock. First shipments are expected in the Company’s fiscal year 2012-13 and Prosperity also has the option to increase supply to 4 million tonnes over four years. On 24 March 2011, Prosperity provided an $8 million deposit to Blackrock to secure 800,000 tonnes of iron ore.

Century Holdings Off-take Agreement

On 14 March 2011, Prosperity signed an off-take agreement with Century Holdings to purchase iron ore from Labrador and Quebec, Canada. Century Holdings is a resource development company which specialises in iron ore.

The agreement gives Prosperity the option to purchase up to 1 million tonnes of iron ore at prevailing market prices over a three year period. Deliveries are expected to commence in Prosperity’s fiscal year 2012-13. On 14 March 2011, Prosperity provided a prepayment of $8 million to Century Holdings.

Grace Wise & Nanjing Iron and Steel Off-take Agreement

On 10 May 2011, PMMCO, a wholly owned subsidiary of the Company, Nanjing Iron and Steel and Grace Wise signed an off-take agreement. PMMCO acts as exclusive introducing agent for Grace Wise in respect of the transactions under the agreement and will provide Grace Wise with various administrative services, such as handling shipping documents and liaising with payment banks. Grace Wise will pay PMMCO for its services a commission equivalent to $2 per dry tonne of iron ore shipped to Nanjing Iron and Steel under the agreement. PMMCO has the right to terminate its services under the agreement upon giving 3 months’ written notice.

Nanjing Iron and Steel has the right to purchase from Grace Wise up to 19 million tonnes of iron ore over a ten year period. However this is capped at 1 million tonnes of ore for the first year commencing 1 June 2011 and up to 2 million tonnes thereafter.

The agreement is entered into in the ordinary course of business of the Company and is similar to another long term off-take agreement which Nanjing Iron and Steel entered into with an independent third party whereby PMMCO acted as agent. The agreement will enable PMMCO to earn commission income from the sale of iron ore without the risk associated with having to provide Nanjing Iron and Steel with a long term supply of ore. It is also in line with the Company’s strategy of sourcing from reliable suppliers at a competitive price and its low risk operating policy.

Investment in Joint Venture Company Engaged in Exploration and Production of Iron Ore in Brazil

On 29 December 2010, Prosperity completed the subscription for a 35 per cent effective interest in UGL, a joint venture company engaged in the exploration and production of iron ore in the State of Ceará, Brazil. Prosperity subscribed for a 70 per cent interest in Lead Hero for a consideration of $20 million. Lead Hero, in turn, subscribed for a 50 per cent interest in UGL, which will wholly own approximately 602.3 square kilometres of exploration rights and 3.01 square kilometres of mining concession in the State of Ceará (together referred to as the Brazilian Mining Rights). Prosperity now holds a 35 per cent effective interest in the Brazilian Mining Rights.

It is intended that UGL will develop and operate the mines related to the Brazilian Mining Rights and other iron ore mines which UGL may acquire in the future. All iron ore produced by UGL will be distributed through Lead Hero.

The  majority  of  the  Brazilian  Mining  Rights  are  at  early  stages  of  exploration  but  also  include  one  mining concession which has been in operation since 2001 and, as at the time of investment, it produced 3,000 tonnes of iron ore per year. The mining concession is valid until the resource is depleted.

Brazil is one of the World’s largest exporters of iron ore. It also has a long history of iron ore mining and is known to have large, high quality iron ore deposits. As this time, the majority of the Brazilian Mining Rights are at an early stage of exploration, but they are located in Ceará, an area where many good quality deposits have been found. Ceará also has good infrastructure, including existing railway lines and port facilities.

The first shipment of 52,001 tonnes of iron ore from UGL was shipped in March 2011. Prosperity expects the tonnage shipped to increase in coming years.

Map of the State of Ceará, Brazil, where the Brazilian Mining Rights are located

Sales and Distribution Process

The PRC government limits the number of companies that are allowed to import iron ore into the PRC by restricting the ability of companies to enter this market; currently only around 100 companies are allowed to import iron ore into the PRC. These import companies primarily comprise large iron ore import companies that have consistently imported significant amounts of iron ore into the PRC in recent years and large steel manufacturers. Prosperity supplies all of its iron ore direct to such importers in the PRC. The majority of Prosperity’s iron ore sales are to large steel manufacturers in the PRC which purchase iron ore in the form of fines or lumps and, when available to Prosperity, in the form of pellets.

A few weeks before one of Prosperity’s iron ore suppliers has a shipment of iron ore ready for Prosperity, the supplier will contact Prosperity and advise them of the quantity and quality of iron ore that will be available and the shipping window for this. Prosperity then has a short period to confirm whether it is interested in the shipment. After being given the details of the available supply, Prosperity checks the availability and rates for shipping with its shipping brokers. Prosperity will then call its iron ore customers to assess the demand for the proposed shipment. If requested to arrange shipping of the ordered iron ore, Prosperity will then review the availability of cargo vessels and the freight costs of a number of shipping brokers to ensure that the necessary shipping arrangements can be made to deliver the order to the customer’s designated port in the PRC. When it has confirmed the availability of the customer’s requested iron ore product and identified a shipping provider, as appropriate, Prosperity’s trading department negotiates a delivery price with the customer for its order, including freight and insurance costs. The iron ore trading transactions are back-to-back in nature and works on a pre-sold basis to eliminate any inventory risk.

Sales and Marketing

Prosperity is focused on developing and maintaining long-standing customer relationships that Prosperity’s Chairman, David Wong, and the iron ore trading team have established over the last 18 years. Members of Prosperity’s iron ore trading team pay regular site visits to both existing and prospective customers enabling them to improve their understanding of those companies’ production capacity, production plans and iron ore requirements. This ongoing dialogue and the iron ore trading team’s first-hand knowledge of demand trends and supply conditions means that Prosperity is proactive in meeting customer needs and developing new business opportunities.

Shipping and Logistics

David Wong and the iron ore trading team have developed strong relationships not only with customers and suppliers but also with the ports and shipping freight companies that Prosperity uses to transport iron ore to customers in the PRC. 
These relationships are very important to Prosperity’s iron ore trading business as it manages the shipping and logistical arrangements for the delivery of iron ore to the majority of its customers. By monitoring shipping availability and anticipating the volatility in the shipping freight market, Prosperity aims to procure the appropriate vessel at competitive rates on charter to meet its customers’ requirements. The Directors believe that this logistical planning enables Prosperity to leverage its competitive advantage and enhance its margins.

Prosperity also provides value-added services such as co-ordinating the unloading of the cargo at the ports when requested by its customers. By co-ordinating the critical cost elements in the chartering business such as tugboat services, harbour services and unloading equipment, Prosperity seeks to minimise losses resulting from demurrage delays.

Quality Assurance

Prosperity actively seeks to increase its secured supply of iron ore from both existing and potential suppliers. When it is offered a new supply of iron ore, Prosperity has samples tested in CIQ laboratories or at its customers’ laboratories, to ensure that it meets Prosperity’s quality standards. Prosperity’s quality control measures form an integral part of its operations, enabling it to deliver appropriate iron ore products that meet its customers’ requirements.

Quality assurance procedures enable Prosperity to supply its customers with products of a consistent quality, helping it to maintain good customer relationships. Prosperity’s understanding of the qualities of its iron ore supply also gives it additional flexibility in meeting customer needs and helps it to provide specific iron ore grades at customer request.

Some of Prosperity’s major iron ore suppliers include a price adjustment mechanism in their purchase contracts relating to the minimum Fe content of the iron ore that they supply but are also contractually bound to deliver a consistent quality of iron ore specification that meets Prosperity’s customers’ requirements.

Trade Finance Facilities

Prosperity currently has trade facilities with seven international banks that have provided sufficient facilities for Prosperity’s iron ore trading activities.