By Mark Cardwell
The world-price roller coaster that the iron ore industry has been riding on for the past year is making things difficult for miners in search of financing for projects in the Labrador Trough, says Pierre Gagnon. But the President and CEO of the Port of Sept-Îles, which is home to the miners’ handling facilities and the main gateway to world markets from the northern iron ore-rich region, is confident about the long term prospects for global demand of the key steel-making mineral. “We know there has been a slowdown in project development in recent months,” said Gagnon. “Mining companies are having more difficulty trying to raise money for new projects (and) it takes them longer to complete financing.”
A case in point is the ongoing effort by Alderon Iron Ore Corporation to complete $1 billion in financing in order to start production at its Kami mine project in the Labrador Trough. Surrounded by four producing iron ore mines there, the Kami project is owned by Alderon (75 per cent) and Hebei Iron & Steel Group (25 per cent), China’s largest steel producer. Financing efforts have been stalled for months because prices for the bulk metal have plummeted, reaching a 21-month low of $89USD in June (though they have since rebounded to around $95USD). The project received a badly needed boost on July 29, however, when Alderon signed a take-off agreement with Glencore, one of the world’s largest global diversified natural resource companies. Under the agreement, Glencore has agreed to buy all of annual production from the Kami project that has not already been allocated to Hebei. That means that Glencore will purchase 40 per cent (up to a maximum of 3.2 million tonnes) of the first 8 million tonnes of iron ore concentrate produced annually at the Kami mine. The agreement will continue until Kami has delivered 48 million tonnes of iron ore concentrate to Glencore, which is expected to take 15 years after the commencement of commercial production. “With 100 per cent of the initial production from the Kami project now committed, we believe this enhances Alderon’s ability to obtain the requisite financing required to commence construction,” Tayfun Eldem, Alderon’s president and CEO, is quoted as saying in a company press release. “The off-take arrangement with Glencore gives Kami concentrates global exposure and the multi-year agreement serves as another significant de-risking milestone for the Kami Project.”
That optimism, however, isn’t apparently shared by other neighboring miners.
Cleveland, Ohio-based Cliffs Natural Resources, for example, announced a week earlier that is was in negotiations to sell its Scully mine in Wabush, Newfoundland and Labrador, to American investment firm MFC Industrial. The mine was producing 4 million tonnes of iron ore annually until February, when Cliffs announced that it was mothballing the facility in an effort to slash operating costs. It blamed fourth-quarter 2013 cash costs of $143 per tonne for operations costs at Wabush as “unsustainably high.” “Over the past three years we have seen pricing drop and Wabush Mine’s costs escalate all while we have made significant capital investments into the operation,” Cliffs’ CEO Gary Halverson said then. “This is a regrettable but necessary decision. We simply cannot continue operating a high-cost mine while pricing and freight markets are so volatile.”
The move led to some 400 layoffs at the mine – the third-largest iron ore mine in Canada – and at the Pointe-Noire rail and port operation in Sept-Îles, from where the company ships its product. Cliffs has also been embroiled for more than a year in a legal dispute with the Port over a parcel of land that hinders access to the new multi-user wharf. A Cliffs’ spokesperson said the company would retain ownership of its other iron ore mine at Quebec’s Bloom Lake, as well as its pellet plant in Sept-Îles, which has been mothballed since June, 2013.
In many ways, the moves are a reflection of the rock-and-roll realities of iron ore pricing, which have long been volatile. A raw material used to make pig iron, which is one of the main raw materials in making steel, roughly 98 per cent of all iron ore shipped worldwide is used in the production of iron or steel.
According to industry analysts, an increase in iron ore production by the world’s ‘Big Three’ miners – Vale, Rio Tinto and BHP Billiton – is responsible for the fall in prices.
Big miners, however, are feeling less pain due to lower production costs and increased sales, leading to an increase in share of the $130-billion seaborne iron-ore market.
“Iron-ore is fast becoming a big boys game, with little room for the small or marginal producer,” Gavin Wendt of Australian consultancy MineLife told Reuters in July.
For Gagnon, price volatility is nothing new in the iron ore business or to Sept-Îles, which has both survived and thrived through several boom-and-bust cycles since IOC first began mining the mineral in the region in the 1950s. And he points to projects like the new multi-user wharf and a proposed feasibility study for the construction of a second railway line from Sept-Îles to the Labrador Trough as examples of what it takes to compete in the global iron ore industry.
“We are using a cost-sharing model or approach between producers instead of a profit-cost one,” said Gagnon. “Our first priority is assisting our partners to be competitive in the global market. To do that we are working to get the investments needed to continue to develop the infrastructures in the port and the region, like additional rail capacity to handle the huge amounts of iron ore that are projected over the next ten to one hundred years. “Canadian iron ore concentrate has fewer contaminants and fetches higher premiums from steel makers for blending. Of course it would be nice if we were on the West Coast, since the major markets for iron ore are in Asia. But Chinamax ships, which can’t be loaded in some of our competitors’ ports, are helping producers to reduce their shipping costs and make them as competitive as others. “So, lower prices for iron ore may be making things a little tough for our partners here now. But the medium- and long-term prospects for Canadian iron ore are excellent.”