PAUL HAAVARDSRUD

From Saturday's Globe and Mail

August 22, 2008 at 6:00 AM DT

CALGARY --- Six weeks ago, Michael Beley was leaving the London office of the world's biggest steel maker when it hit him: Half a world away, his proposed sea port was going to become a reality.

Plans for a $250-million (U.S.) port off the Brazilian coast, seemingly distant only a day earlier, were suddenly within reach. Holding the keys to a small but vital piece of a much larger deal being chased by India's ArcelorMittal, his Vancouver-based Adriana Resources Inc. is a case study into how a tiny company can have big plans become a reality virtually overnight.

"We were looking for a way to get our port developed and also go out and acquire an iron resource. Now, here comes a group that will effectively assist us in funding the port, acquire an iron resource of their own to put through the port, and also assist us in acquiring [an iron resource]," says Mr. Beley, 69.

"You've heard of the concept of leaping into the air and clicking your heels together? Well, that's it."



How did tiny Adriana manage to get in bed with a global steel behemoth as part of an $850.5-million deal inked this week to develop iron ore assets in Brazil? The answer can be traced to two phone calls. Adriana

A career gold industry executive, Mr. Beley and a partner, Richard Barclay, started Adriana roughly three years ago, figuring that rocks, not nuggets, had the shinier future. Industrial demand from emerging markets such as China, Mr. Beley calculated, would likely drive up prices for base metals such as iron ore.

They got started by picking up a small iron ore project in Quebec, along with a mining play in Nunavut. At a conference in Toronto soon after, the pair bumped into a newsletter writer, an old acquaintance who liked the story of two veteran gold bugs with global experience shifting to iron ore, and wrote them up.

A New York limited partnership, Athena Resources LLC, read the piece and cold-called Adriana. Looking for experienced people to help with a South American project, the partners at Athena Resources LLC laid out the merits of building an iron ore port in Brazil. Mr. Beley didn't know much about ports then, but he had done work with a West Coast company that did. They liked what they saw. Flights to Rio de Janeiro were soon booked.

Brazil and Iron Ore

The trick in the iron ore business isn't in exploring for supply, which is abundant, but in getting it to market cheaply. Iron ore, the feedstock in steel making, is rarely found right next to steel plants -- making transportation a major cost. In Brazil, the world's second-largest iron ore producer, Adriana arrived at an ocean-side spot that was a mere 300 kilometres from iron ore mines, with an added bonus of a railway running by the front door. After nearly a year of bureaucratic wrangling, Adriana locked up the port location in January.

Arcelor Mittal

When the phone rings and ArcelorMittal is on the other end asking for a meeting, Mr. Beley will tell you it's like a dream come true for a junior mining company. Created in a blockbuster 2006 merger, ArcelorMittal accounts for 10 per cent of global crude steel production. Lakshmi Mittal, the world's fourth richest man, who holds a 44-per-cent stake in the firm, has said the steel maker wants to self-supply 75 per cent of its iron ore by 2014, up from 45 per cent currently.

ArcelorMittal was considering an $810-million offer for Brazilian iron ore assets from London Mining PLC. Without a port facility, however, ArcelorMittal would be unable to ship the iron ore and the deal would be scuttled.

What's next

After a whirlwind round of negotiations, Adriana agreed to sell an 80-per-cent stake in the Brazilian port to ArcelorMittal for $40.5-million. While Mr. Beley wanted Adriana to keep a bigger stake, in return for gaining control of the port ArcelorMittal agreed to help Adriana secure its own Brazilian mining project, while also keeping Adriana in the loop on other opportunities. For Mr. Beley, the potential of future deals with ArcelorMittal makes becoming a minority partner in the port worth the risk.

"I want to be able to go and show ArcelorMittal the balance of our assets and what we're doing and what we're capable of doing," Mr. Beley says. "On the other side of the coin ... for them to buy us out is nothing, but if I can show that I can make a difference to their bottom line, then we'll be here for a while."

Adriana Resources Inc.

Key executives:

Michael Beley: President and chief executive officer

History: Vice-president of Bema Gold Corp. 1976-1992

Vice-president of El Dorado Gold Corp. 1992-2001

Richard Barclay: Chief financial officer

History: Chief financial officer of Bema Gold Corp. 1976-1992

President and chief executive of El Dorado Gold Corp. 1992-1999

Market Capitalization:

$63- million

Share price: 90 cents

Iron ore

Demand for iron ore is surging in hand with the growth of Asia's emerging economic superpowers, China and India.

Iron ore is mined in about 50 countries, with the seven largest accounting for three-quarters of world production. Australia and Brazil are the two biggest iron ore exporters, accounting for about a third of total world exports.

The world's biggest mining companies, BHP Billiton and Rio Tinto, are among the largest iron ore suppliers. As prices have risen, however, steel makers such as ArcelorMittal are sourcing more of their own supply.

Iron ore players hold annual negotiations to set prices. In June, Chinese steel makers and Rio Tinto agreed to a record 96.5 per cent price increase. In 2005, prices surged about 70 per cent as the commodities boom took hold. Last year, iron ore prices charted a more modest 9.5 per cent increase.

Special to The Globe and Mail

www.adrianaresources.com