Investors could not get enough of Northern Iron when it floated in December 2007. Shares in the Norway-focused emerging iron-ore producer soared from a $2.15 issue price to $4.40 within six months of listing, only to sink to 51 cents during the GFC. Operational problems weighed on Northern, but a positive recent production update suggests it might have turned the corner.

The market thinks so: Northern rallied from $1.50 in late November to $1.92 after reporting production of iron-ore concentrate had finally met target-quality specifications in the December quarter. It was an important milestone and a much-needed confidence boost in a company that has had its fair share of project problems, management changes, and capital raisings in the past 18 months.

Keen observers might have noticed Perennial Investment Partners lifted its stake in Northern to 7.5 per cent earlier this month.

Nobody expected a smooth ride with Northern, although previous management may have been a touch optimistic about project timing – a curse of many entrepreneurial mining ventures.

Northern owns the Sydvaranger iron project, a dilapidated former state-owned mine in northern Norway near the Russian border. Sydvaranger began operations in 1910, closed after the end of the Cold War, and reopened again in October 2009. Along the way it produced reasonably high-quality magnetite concentrate from more than 200 million tonnes of ore mined. Like other government-owned enterprises in the area, Sydvaranger was more about creating jobs than huge profits.

Felix Tschudi, a Norwegian entrepreneur, bought the mine from the Norwegian Government for about $20 million in 2006. Mick McMullen, Northern’s founding managing director, took the company through an Initial Public Offering on the Australian Securities Exchange near the market peak in 2007 that raised about $140 million. The IPO was well supported by fund managers who liked the idea of investing in an iron-ore explorer 18 months away from production during an iron-ore price boom.

Sydvaranger was a well-known iron-ore producer, but the big risk was what Northern would find when it recommissioned the dormant mine. There was a four-month delay in project delivery in 2009 and serious cost over-runs. Perth-based McMullen was replaced by European-based John Sanderson as CEO and David Griffiths replaced Neil Hamilton as chairman.

More capital was needed. Northern raised $69.3 million in October through an institutional placement at $1.58 a share, a 12 per cent discount to the then $1.80 share price. Funds were used to reduce debt and creditor bills, and invest in plant capital. Northern allocated US$25 million to rectifying problems in the mine after earlier finding it could not produce the quality of concentrate required. Investors could have been forgiven for giving up on the troubled project.

That’s the brief history. The good news is Northern announced a solid lift in concentrate quality in December after plant improvements. Product quality is now close to plant specifications. But it came at a cost: mill throughput was lower in December with less concentrate produced from each tonne of ore milled. With product quality improved, the next challenge is improving production quantity.

Northern maintained it full-year production guidance, saying it still expects to meet its 2.3 million tonnes production target “despite reduced concentrate volume in December and January”. Its concentrate sales were down 26 per cent on the September quarter to 288,000 tonnes – partly due to bad weather.

Importantly, Northern announced that a “20-30 per cent price increase over the December quarter is expected to be achieved in first-quarter 2011 due to the improved product quality and strength of the iron-ore market.” Higher concentrate quality saw Northern’s average sales price increase by 28 per cent in the December quarter.

Prospective investors might focus on Northern’s expanding production profile at a time of high iron-ore prices. I like how new management has quietly gone about fixing a string of serious operational problems one after another.

Sydvaranger’s potential has always appealed, and this columnist prefers speculative mining stocks that get to production while commodity prices are high – not in five years when prices could be different. But a lofty valuation after Northern’s IPO left little room for disappointment in recommissioning the old mine. Northern ran too far, too fast.

After rallying to $1.92, investors might wait for some heat to come out of the share price and more evidence of production gains in the March quarter.

Northern still has plenty of risk: its $26.3 million of cash at the end of the December quarter is possibly a touch tight if serious production delays emerge, given the company’s monthly cash burn rate. Northern has not had too much trouble raising capital, but potential share price dilution through discounted placements offered to institutional investors can be an issue for retail investors.

And Northern must show it can ramp-up production while maintaining higher concentrate quality. You would have to back new management on this one, but after so many problems investors might reserve doubts. This is not a stock for conservative, long-term portfolio investors.

Northern’s share price is almost back to the $2.15 issue price and its issued shares have swollen from 165 million at the IPO to 336 million after all the equity capital raisings. Northern’s IPO market capitalisation of $354 million compares to $635 million today. The company’s enterprise value (after adding debt and subtracting cash) is a little over $700 million on my numbers.

Much of the enhanced valuation reflects Northern’s reducing production-risk profile, its off-take agreements, the general commodity boom and strong iron-ore prices. The fact that institutional investors stuck with the stock after all the disappointments shows there’s plenty of faith in the project’s long-term potential from processing much more ore through an expanded plant.

But Northern needs to maintain the momentum after its solid December-quarter showing – something it has not yet excelled at it in its limited history as a listed company.

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Tony Featherstone is a former managing editor of BRW and Shares magazines, and a business journalist for almost 20 years. He is not a licensed financial adviser. This column provides general information and ideas on market, sector and company trends, rather than specific financial advice. Readers should not imply stock recommendations from this column. Do further research or consult a licensed financial adviser before acting on information in this column. The author does not own shares in any company mentioned in this article.