By Keith Norbury
Signs abound that enthusiasm for new iron ore mines in the Labrador Trough have tapered off since February 2011 when the spot price was nearly $190 a tonne. Since then, prices have been on a roller coaster, which experienced more downs than ups. They dipped as low as $87 last September, soared back up over $150 in February, and then tumbled back down to below $115 in June.
Coinciding with that volatility, Canadian National Railway suspended a feasibility study on a new $5 billion rail line to serve potential new mines in the Labrador Trough. Mining giant Rio Tinto has put up for sale its 58.7 per cent interest in Iron Ore Company of Canada, one of the Trough’s and Canada’s largest iron ore producers. Champion Iron Mines Ltd., one of the promising junior players in the Trough, abruptly pulled out of its participation in a new multi-user $220 million multi-user iron-ore port at Pointe-Noire in Sept-Îles, Que. And Cliffs Resources shut down indefinitely its pelletizing plant at Pointe-Noire.
Despite those setbacks, the consensus among financial analysts and economists who follow the trials and tribulations of the iron ore industry, as well as of industry insiders, is that long-term prospects for ramping up iron ore production in the Trough remain solid.
China drives iron demand
Continued economic growth in China and its relentless urbanization is driving worldwide demand for steel and its main feedstock, iron ore. While China’s growth has cooled from the double digits of a few years ago, it is still expected to grow at seven or eight per cent annually for years to come — barring any major fiscal catastrophe. China needs steel to build railways, bridges, buildings, and consumer items, such as cars and appliances that its ever-expanding middle class can afford and demands.
“If the growth rates are anywhere near what they have been in the recent past, there won’t be enough capacity coming out of Australia to satisfy this stuff,” said Dr. Wade Locke, a Memorial University economist who co-authored an economic impact analysis or iron mining in Labrador last September for the Newfoundland and Labrador government. “So I wouldn’t expect prices to be depressed for a long period of time and not much below what they are now.” The 102-page report outlined three scenarios in which Labrador’s base production increases in the next two decades. In the most ambitious scenario, production in Labrador would increase to 81.1 million tonnes annually compared to 26 million for the base case. Expenditures would rise in Scenario 3 to $123 billion compared with $40 billion from existing projects, what the report calls the base case.
“The economic impacts resulting from expansion activities are substantial,” the report said, estimating that person years of employment would rise to 515,000 in Scenario 3 compared with 157,000 person years in the base case. While his study looked only at Labrador operations in the Trough, the same principles apply to the Québec side “without a doubt,” he said.
New multi-user port on-time and on-budget
Even Champion, while announcing it was stepping back and reassessing its strategic options, said in a news release that it remains committed to developing its Consolidated Fire Lake North Project in Québec. Meanwhile the new multi-user port at Sept-Isles is on budget and on time to meet its March 31, 2014 deadline for completion, confirmed Pierre Gagnon, President and CEO of Sept-Îles Port Authority. After that, it’s up to the remaining mining companies that helped finance the project, as well as other potential users, to bring their ore to market. “We are really satisfied with the construction and the quality of construction so far,” Mr. Gagnon said, noting that the Port had undertaken a quality control review of the project in early July. Mr. Gagnon declined to comment on the Champion situation, although he did point out that “there’s guarantees when you have a contract.”
Once completed, the deep-water terminal will be able to load ore onto two Capesize vessels simultaneously. That will add at least 50 million tonnes of annual capacity on top of the 34 million tonnes the port expects to handle this year, he said. Most of that is from the Iron Ore Company of Canada (IOC)’s terminal on the city’s side of the bay, with the remainder from Cliff Resources’ existing dock on the Pointe-Noire side. By the end of this decade, Mr. Gagnon predicts, Sept-Îles will handle more than 100 million tonnes of iron ore annually. Even then, Canada will still be a small player in a world that currently produces 2.8 billion tonnes of iron each year.
Market conditions stretch out horizon for new projects
Jackie Przbylowski, an analyst with Desjardins Capital Markets, said that within five years she expects to see a couple of new projects commissioned in the Labrador Trough. However, she doesn’t anticipate total annual volumes reaching anywhere near the 200 million tonnes that some observers were predicting two years ago. “I think it’s going to be a longer term horizon than previously had been expected,” she said. Ms. Przbylowski was also careful to point out that the volatility of the iron ore market is making investors wary of the risks, which makes it difficult for companies to raise the necessary capital. The risk also remains of an oversupply of iron ore should new projects outpace demand, as she warned in a 64-page note to investors in March 2012.
Many other factors come into play in determining when and how the iron ore riches of the Trough are developed. Among them are the capacity of infrastructure, like rail, to transport the ore to the coast; the availability of electrical power in the region; the willingness of Chinese and Indian companies to invest in mining projects; the availability of housing for mine workers; the potential impact of the Parti Québécois’s planned increases in mining royalties; addressing concerns of First Nations and environmentalists; the potential for ocean freight rates to creep higher; and whether developing nations like China and India can sustain the high levels of growth and urbanization that is fuelling demand for the ore. “That’s why this stuff becomes interesting from a public policy perspective,” Dr. Locke said.
Each of those factors has been the subject of complex analysis by experts that is far beyond the scope of this article. Confronting those issues is going to make for interesting times, to quote a familiar Chinese curse, for the Trough in the coming years.
Steel producers sweet on Trough’s deposits
What is not at issue is that the Labrador Trough contains world-class deposits of iron — and lots of them. Those deposits contain few “deleterious” materials, such as alumina and phosphorous. That’s not the case with iron ore mined from Western Australia, for example. For that reason, the Trough’s ore fetches a premium price from steel producers, which use it to “bend down” or “sweeten” the feed stock. That reduces production costs and produces higher quality steel. “The problem is that from the Trough’s perspective you don’t need a lot of that material to blend down,” said a financial analyst who asked not to be identified because he was not authorized to speak to the media.
The Trough, also known as the Labrador-Québec Fold Belt, is a 1,100 kilometre-long formation, shaped like the stick of a hockey goalie. It extends from Ungava Bay in northern Québec, along the border with Labrador, with the stick blade brushing against puck-shaped Lake Manicougan. Created during geological upheavals about 2 billion years ago, the formations in the Trough are estimated to contain substantially more iron ore resources than the 23 billion tonnes in all of China, according to industry experts. Century Iron Mines Corporation has two projects alone that have resources almost equaling that amount, although one of them is at Duncan Lake, which is outside the Trough, said Bob Leshchyshen, the company’s Vice-President of Corporate Development and Investor Relations.
The Trough’s iron ore is also much cheaper to produce than iron ore in China, which currently runs around $120 a tonne. “China has high cost iron ore,” Dr. Locke said. “That is why they’re importing so much stuff. That’s one reason why we don’t expect the price to fall very far. If it goes below $110 a tonne, then they’ve got some problems on their hands.”
It’s a long haul to China, however. From Sept-Îles to Qingdao is 14,700 nautical miles, around the Cape of Good Hope. That’s four times the 3,600 nautical miles between Port Hedland, Australia and Qingdao, “a major disadvantage for Canadian projects,” notes a June 18 research paper from Macquarie Capital Markets Ltd. That adds $12 to $13 per ton to the cost of ocean shipping, the report said. That said, Macquarie calculated that the “capital intensity ratios” of proposed projects in the Labrador Trough were less than similar projects in the works in Western Australia. That led Macquarie to say in its 140-page report that “we believe most Canadian projects are well placed to be developed.”
Australia and Brazil dominate iron ore trade
At present, Canada has a small presence in the iron ore world. Canada ranked fifth among exporting nations in 2012, with 34 million tonnes. Canada’s exports were just a fraction of the 524 million tonnes of world-leading Australia and of second place Brazil’s 327 million tonnes. Australia and Brazil combined accounted for 65 per cent of the world’s estimated iron ore exports of 1.1 billion tonnes. The world’s largest iron ore producer is China, at an estimated 1,300 million tonnes in 2012. Almost all of that was consumed in China, which also imported over 60 per cent of the world’s trade in iron ore, according to the U.S. Geological Survey’s January 2013 Mineral Commodity Summaries. It was the opposite for Australia, which exported all but a million tonnes of its 2012 production.
Australia boasts the world’s largest reserves of iron ore, although they are not as iron-rich as Brazil’s. Australia’s reserves total an estimated 35 billion tonnes with an estimated iron content of 17 billion tonnes. Brazil has 29 billion tonnes of ore in reserves that boast an iron content of 16 billion tonnes. China, meanwhile, has 23 billion tonnes of reserves, but with an iron content of just 7.2 billion tonnes. “Chinese companies are investing in all phases of mining and production, to include the takeover of a major iron ore producer in South Africa, for increased production of higher grade ore by Chinese mining groups,” the USGS report said. Canada’s iron reserves were 6.3 billion tonnes in 2013 with an estimated iron content of 2,300 tonnes. That’s about the same as the U.S. reserves. However, companies exploring the Trough say that its reserves and resources far surpass the USGS estimates.
Big three firms control much of world’s market
Among companies, three dominate the iron ore world: Brazil-based Vale, U.K.-based Rio Tinto, and Australia-based BHP Billiton. Together they controlled 40.1 per cent of world production in 2011, Natural Resources Canada reported in its most recent iron ore review. The big three accounted for 57.3 per cent of seaborne iron trade, the report noted. In Canada, and that means the Labrador Trough, the dominant players are Iron Ore Company of Canada, ArcelorMittal Mines Canada, and Cliffs Natural Resources. Macquarie’s June 2013 report estimates that the Trough produced 40 million tonnes in 2012. Of that, IOC accounted for 14 million, ArcelorMittal 15 million, Cliffs 8.5 million, and Labrador Iron Mines (LIM) 1.7 million. LIM’s was the first new mine in the Trough since the 1970s. Natural Resources Canada’s preliminary estimates for 2012 put total iron production in the country at 39.4 million tonnes. Of that, 20.7 million tonnes was mined in Québec and 18.6 million tonnes was mined in Newfoundland and Labrador. The only other iron ore producing province was B.C. with a scant 51,000 tonnes.
Foreigners bankroll activity in the Trough
Canada’s three major iron ore mining concerns are all currently controlled through foreign ownership. Rio Tinto, headquartered in the U.K., owns 58.7 per cent of IOC, but has put that interest up for sale in order to focus on its core assets. ArcelorMittal is headquartered in Luxembourg and chaired by Lakshmi Mittal, who comes from a steelmaking family in India. Cliffs is based in Cleveland, Ohio.
IOC spokesperson Marsha Power Slade said the company would decline comment — after requesting and receiving a list by email of proposed questions. ArcelorMittal spokesperson Catherine de Grandpre also requested and received a list of questions but did not provide answers by deadline. Arlene Beaudin, Cliffs’ District Manager of Public Affairs for Eastern Canada, did grant an interview. She confirmed, among other things, that work is proceeding on phase 1 of Cliffs’ Bloom Lake mine in Québec but that a proposed second phase expansion is “on hold for the moment until the market price gets better.” Cliffs owns 75 per cent of Bloom Lake. The remainder is owned by Chinese steel giant Wuhan Iron & Steel Group Corp. a.k.a. WISCO. Cliffs also owns 100 per cent of the 50-year-old Wabush Mine, a Labrador property it acquired in its 2011 purchase of Consolidated Thompson Iron Mines.
Trough formations first discovered in 1800s
There’s nothing new about a foreign presence in the Labrador Trough. IOC’s development of its mines, and the accompanying infrastructure, was financed in the 1950s by a consortium of 19 U.S. and Canadian steel and insurance companies. A Jesuit missionary, Father Babel, first described the Trough’s iron formation in the 1860s, according to a 2012 pamphlet on iron ore prepared by the Natural Resources Ministry of Newfoundland and Labrador as part of a series on the province’s mineral commodities. The Geological Survey of Canada’s A.P. Low first reported the potential of large deposits in 1890. However, it wasn’t until 1929 that high-grade ore was first discovered in the area. And development of the Trough didn’t begin until the early 1950s when work began on a railway to reach those ore bodies.
By 1959, Canada was the world’s fourth largest iron-ore producing country, extracting nearly 22 million tonnes annually, according to Natural Resources Canada. At that time, Australia produced almost no iron ore, in part because of restrictions on exports in place because it was believed the country didn’t have enough iron ore to meet its domestic needs. Discovery of vast resources in Western Australia’s Pilbara region changed that. In the 1970s and 1980s, Australia exported about 100 million tonnes of iron ore annually. Since the turn of this millennium, its annual production has spiked to almost 500 million tonnes, according to figures in the 2012 Western Australian Mineral and Petroleum Statistics Digest.
Australia is by far the world’s largest exporter of iron ore, almost all of which travels by sea to its destination. Australia produced 520 million tonnes of that seaborne trade in 2012, according to Macquarie. Brazil was next at 323 million tonnes. Canada meanwhile contributed just 3.5 per cent of the estimated 2012 seaborne iron trade of 1.13 billon tonnes.
The largest iron ore producer, though, is China. Its output was estimated at 1.3 billion tonnes in 2012, the USGS reported. China’s production, dogged by low-quality ore and high costs, cannot meet its economy’s voracious demand. At its current rate of extraction, China would consume its estimated reserves within two decades. No wonder China is also the world’s largest importer of iron ore — by far. Its seaborne imports tallied 744 million tonnes in 2012, Macquarie noted. They are forecast to surpass a billion tonnes annually in 2017. Australia and Brazil are expected to meet most of that additional demand. But mines in the Labrador Trough are poised to snatch a growing share of that increase. Macquarie projects that Canadian iron ore production will reach 95 million tonnes in 2017 or 6.5 per cent of anticipated 1.45 billion tonnes of seaborne exports.
New Trough players are in a footrace
Not every prospective mining company in the Trough is going to share in that bounty. The consensus among analysts and industry insiders is that the existing players have an advantage because they already have infrastructure in place to ramp up production. “You’re going to see guys with high-cost operations or big, complicated projects with high capital expenditures have problems,” said Garnet Salmon, senior mining analyst for base metals and bulk commodities with Jennings Capital Inc. “So it’s footrace for all the guys and a few are going to reach the finish line,” Mr. Salmon added.
Among new players in the Trough, those with deep-pocketed partners in China and India are more likely to go ahead in the near term. They include Adriana Resources Inc., which is partnering with WISCO on the $12.9 billion Lac Otelnuk project in Québec; Alderon Iron Ore Corp., which has agreements in place with another Chinese firm, Hebei Iron and Steel Group, on the Kamistiatusset project in Labrador; Century Iron Mines, which cut deals with WISCO and China MinMetals Corporation; as well as New Millennium Iron Corp. and Labrador Iron Mines Holdings Ltd., which each have agreements in place with Tata Steel Minerals Canada, a subsidiary of the Indian steel goliath. Ore from the latter would feed Tata’s steel mills in Europe.
“If a company already has a strategic partner that they’ve signed on with, it gives them more likelihood there is a customer for the iron ore and, as well, that there’s somebody to help them finance the project construction,” Ms. Przybylowski of Desjardins observed.
More remote proposals expected to come later
Among the projects that are pushed further into the future is Oceanic Iron Ore Corp.’s proposed operations near Ungava Bay at the northern reaches of the Trough, Mr. Salmon and other observers said. Alan Gorman, Oceanic’s President and Chief Financial Officer, remains optimistic that its Hopes Advance mine will be one of the next major iron projects to go ahead in the Trough, along with Alderon’s. Mr. Gorman bases that assessment on a prefeasibility study that pegged Oceanic’s life-of-mine operating costs at $30.18 a tonne. That’s largely because the mine would produce very little waste and wouldn’t need a railway to ship ore to the proposed port on Ungava Bay. On the other hand, the project would have to deal with tide differentials of 20 feet or more, and sea ice for seven months of the year that requires using icebreakers to transport the ore for transshipment, possibly in Europe. “I think it would be reasonable to say that 2018 versus 2017 would be a reasonable start date,” Mr. Gorman said, referring an earlier timeline for the project. What the company lacks, though, is a strategic partner to cover the $2.9 billion capital cost, although not for lack of trying. “We’re spending a lot of time in China recently and we’ve met with a dozen capable potential strategic partners,” Mr. Gorman said. “Some of them aren’t showing any interest at the moment; others are.”
Projects need partners and infrastructure
Santo Ranieri, an analyst with Paradigm Capital, said that a partnership combined with a competitive logistical solution is key “because at the end of the day you have to be able to ship the product to market and make a profit.” He and others say governments should play a larger role in developing infrastructure, as it has done with the Sept-Îles multi-user dock, because of the massive capital required to build them. “The bottom line is if you don’t help the companies that need the help in terms of infrastructure then you won’t get any royalties,” Mr. Ranieri said, noting, as did John Kearney, Chairman and CEO of LIM, that’s is a “chicken and egg” dilemma. “The iron ore is in the ground and if the rail goes there, the mines will be viable,” Mr. Kearney said. “It’s an analysis that has to be done.”
While prospective producers estimate operating costs of around $70 tonne and profitability at $100 a tonne or more, Mr. Salmon isn’t convinced. Those figures don’t likely include ocean freight, marketing, and “price participation,” Mr. Salmon said. At $115 tonne, Mr. Salmon said, most of the players in the Trough would be at a loss, except for the incumbents.
For the Labrador Trough to reach its full potential, which been estimated at 200 million tonnes of annual production, more infrastructure will be needed. The 414-kilometre Iron Ore Company of Canada-owned Quebec North Shore and Labrador Railway, which runs from Labrador City to Sept-Îles, can carry about 80 million tonnes with addition of sidings and more rolling stock. That’s more than double the current volume that goes through Sept-Îles. “You have to understand that what makes a property valuable is not the content or the ore. It’s the infrastructure and the proximity to infrastructure,” said Ian Chadsey, Alderon’s Vice-President of Investor Relations.
It’s all about logistics
“It’s a logistics business. It’s not really a mining business,” noted Bob Leshchyshen, Vice-President of Corporate Development and Investor Relations for Century Iron Mines. He said one possibility would be to loop the QNS&L with ArcelorMittal Canada Mines’ private Cartier Railway. Mr. Leshchyshen said such a loop, which he said has been done successfully in Brazil, would increase capacity up to 200 million tonnes annually or more. However, it would require the approval of ArcelorMittal, which to date hasn’t shared its railway, or some form of government intervention to require the company to share the line. Representatives of ArcelorMittal and of Québec’s Ministry of Natural Resources did not respond to questions about that scenario and other issues related to the Trough by deadline.
To make any money out of iron ore means having to move an awful lot of it. “You’re talking $120 a tonne. That’s very very low value stuff,” Mr. Kearney said. “Therefore, infrastructure is hugely important to the iron ore industry. The Labrador Trough on both sides of the border has an awful lot of iron ore, but so does the rest of the world.”
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