Kogi Iron : Fastmarkets Report - Agbaja Project

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20 June 2022

Fastmarkets Report

Double Nigerian steel billet price forecast for Agbaja

Kogi Iron Limited and its Nigerian subsidiary KCM Mining (ASX: KFE, 'Kogi', 'the Company') are pleased to provide an update on the results of the 2022 updated Agbaja project market feasibility study conducted by leading global commodity price forecaster, Fastmarkets.

Highlights

• The 2022 Fastmarkets report forecasts long-term average billet price of US$1,024/ tonne Nigeria/ ddp (nominal; delivered duty paid) Lagos over the period 2023 to 2032, which more than doubles the 2018 report's forecast (US$476/tonne, ex-works Lokoja).
• Fastmarkets report supports Kogi's current design framework to build a 500,000 tonnes per annum (tpa) facility.
• At a capacity of 500 ktpa, Kogi's output will only need to substitute for imports of rebar or billet and will not need to erode any existing domestic producers to be sustainable. This supports Kogi's steel import replacement strategy.
• The updated Fastmarkets Report supports the Company's belief that there is a strong business case for the Agbaja Project and in continuing to progress all the detailed work required to complete the Feasibility Study.
• It appears that this increase in steel billet prices will materially effect the Net Present Value (NPV) of the Agbaja project, as demonstrated in the sensitivities published in the 2021 Scoping Study. A revised Scoping Study is under preparation as a priority to properly restate this improved valuation and will be the subject of a further announcement at the earliest possibility.

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Kogi Iron Chairman Craig Hart commented: "This updated steel billet price forecast for Nigeria by respected global commodity price forecaster Fastmarkets resets the value proposition of the Agbaja Iron and Steel Project. The disruption to the European Steel market caused by the Ukraine war will be felt for at least the next decade.

Moreover, there is likely to be systemic and ongoing change occasioned by the decarbonisation trend across Europe which will impact not only the availability of competitive steel scrap but also its price. Kogi Iron's vision to provide a sustainable import replacement solution for Nigeria's domestic steel market is now more compelling than ever."

The Fastmarkets report is another significant step in the evaluation of the project's economics and, together with other work being undertaken as part of the Feasibility Study, the report will be an important document regarding the project's capability to raise project capital.

Background and Introduction

Since the initial Fastmarkets 2018 study (refer ASX Announcement 16 January 2019) and the 2021 Scoping Study (refer ASX announcement 13 December 2021), a number of events and factors influencing the value proposition of the Agbaja Project have occurred at a global, local and company level.

A more detailed list of these factors include:

• Design change to the Agbaja project nameplate capacity of steel billet production of 1.5 Mtpa to 500 ktpa
• Improved technical understanding of the project
• Covid-19impact
• Disruption to global supply chains
• Ukraine/Russia war
• Changes to inflation and interest rates
• Accelerated global strategies for decarbonisation effecting the availability and the likely increased price of the competitive scrap steel product.
• Changes to the Chinese economy
• Changes to oil, gas and energy strategies and prices.

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Fastmarkets were commissioned in February 2022 to consider the impact of these factors and to provide the Company with a platform to assist evaluation of key project economics, appropriateness of plant sizing, general marketing strategies and other matters critical to progressing the Feasibility Study that is presently underway.

Steel and scrap steel prices contained in the most recent Fastmarkets report are significantly higher than any previous forecasts. The 2022 Fastmarkets report forecasts long-term average billet price of US$1,024/tonne Nigeria DDP (nominal; Delivered Duty Paid) Lagos over the period 2023 to 2032. This compares to US$441/tonne FOB (Free On Board) Black Sea and US$476/t ex-works Lokoja forecasted in the Fastmarkets 2018 report and US$550/tonne ex-works Lokoja assumed in the 2021 Kogi Iron Scoping Study.

Pricing of other project inputs including, but not limited to, scrap steel, energy and shipping are also likely to increase over the same forecast period. However, the sensitivity analysis in the Agbaja financial model, as disclosed in the 2021 Scoping Study, demonstrated that the project is far more sensitive to steel billet product pricing than to input costs.

Fastmarkets Completes Market Study

In the ASX Announcement "Agbaja Leveraged by Higher Steel Billet Prices" released on 23 March 2022 the Company advised the market that it had commissioned Fastmarkets to provide a comprehensive market feasibility study, updating a similar study completed in 2018 with the output to be utilised in the ongoing Agbaja Steel Project's Feasibility Study. In conducting the study, Fastmarkets undertook analysis of the steel industry in Nigeria and West Africa, with specific reference to:

• Steelmaking raw material costs and substitutes
• Competitor and customer analysis
• Existing and future market demand for Kogi cast steel billet products
• Recommendation of an appropriate product mix and plant capacity
• Price forecasts

The objective of the Fastmarkets study was also designed to update the overall level of potential market demand and forecasted pricing for planned steel billet production from the Agbaja Steel Project.

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Key Results from the Fastmarkets Study

Economic and Market Outlook

Fastmarkets have made the following general observations:

• Economic growth in Nigeria and other African nations is accelerating after the Covid- 19 pandemic brought slowdowns and recessions in 2020 and 2021.
• Oil prices have recovered strongly after the weakness of the last 24 months and are holding up, which will see investment in new energy projects.
• The Nigerian elections are due in early 2023. Until then, activity will be slowed, but when the new Ministers are in place, they are likely to initiate projects involving substantial construction that should in turn further increase the demand for steel.
• Rates of construction growth, the major market for steel long products, are forecast to rise at an average of 4.6% per annum in the years to 2030, with civil engineering construction growing at a slightly faster 5.1% per annum.
• Billet demand is expected to exceed the previous high of 2014 and reach 2.07 million tonnes by 2024, when Kogi Iron's facility is due to start to ramp up.
• In its base case, Fastmarkets forecasts a long-term average billet price of US$1,024/tonne ex-works Nigeria/delivered duty paid (ddp) Lagos in nominal terms over the period 2023 to 2032.

Billet Pricing Forecast

Since the advent of Covid-19, the Ukraine/Russia war, global supply chain disruption, increased inflation, a drop in commodity demand from China and various other significant global events there is prevailing global economic uncertainty. The Company recognises that additional Fastmarkets updates will be likely nearer to the completion of the Feasibility Study.

Fastmarkets key inputs to the forecast of Nigeria pricing is based on several drivers, namely:

• Input costs
• International prices
• Nigerian demand outlook
• Balance between Nigerian supply and demand

Given the present global steel market uncertainty, the Company requested Fastmarkets provide interim information on a number of demand/pricing scenarios and the following three cases were determined by Fastmarkets.

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1. Base Case:
   The base case price forecast uses Fastmarkets' current assessment of future market fundamentals and raw materials price development. With the arrival and ramp up of Kogi Iron's operation in circa 2024, Nigerian buyers will effectively have another source of material for the production of rebar - produced from Kogi Iron's billet. At the Kogi planned 500 ktpa level of production, output will deliver an opportunity for replacing the reliance on imported product, rather than replacement of existing domestic capacity.
2. High Case:
   In the high case, the economic growth lifts noticeably. A combination of stimulus programmes and recovery after the Ukraine-Russia war sees increased spending globally. Building out the 'net-zero' economy adds to the demand for new vehicles and infrastructure. The result is a strong increase in oil prices and stronger demand for steel, which pushes up steel prices.
3. Low Case
   In the low case, economic growth falls following a drop in energy demand. This is reflected in both lower streel scrap and oil prices. With so much of Nigerian GDP associated with the oil industry, weaker oil prices apply downward pressure on economic growth. Overall, steel consumption contracts 1% for each year 2022-2024. Under these circumstances, domestic producers would have to compete for market share, so depressing prices for all producers, including Kogi.

Fastmarkets' forecasts that the billet price in 2032 would be US$1,258/tonne (ex-works Nigeria/ddp Lagos) in nominal terms under the base case, and US$997/tonne and US$1,444/tonne under the low- and high-case, respectively.

Plant Sizing Supports Import Replacement Market

At the time of preparing the 2018 Fastmarkets study, Kogi Iron was planning a facility with nameplate capacity of 1.5 Mtpa. Given the size of Nigerian demand, export markets or replacement of local production would have been substantially needed to place all the Agbaja production. The current plant design now scales that back to 0.5 Mtpa capacity and suggests all production can be reasonably placed in Nigeria, with exports not necessary. This confirms the scope and size of the plant and the capital expenditure basis that was included in the 2021 Scoping Study Report.

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