The Iron Ore Market has traditionally been too limited and predictable to be considered a popular investment. But that is changing, given that the price of the raw material from which steel is made is on a tear as producers scramble to feed Asia’s seemingly insatiable appetite for the ore.
Although iron ore deposits are abundant, global supply is dominated by three players and prices are determined just once a year during contract negotiations between miners and steelmakers. In 2005, contract prices jumped by 71.5%, followed by a 19% increase in 2006 and a 9.5% jump in 2007.
This year, analysts are expecting a 20%-50% price increase, depending on the type of iron ore product and just how needy for raw materials Japanese and Chinese steelmakers are. China alone is expected to import 415 million tonnes of iron ore this year, up by 40 million tonnes (11%) from 2007 requirements.
“Steel production continues to move ahead rapidly, particularly in China,” says Patricia Mohr, vice president of economics and a commodity market specialist with Bank of Nova Scotiain Toronto. In addition, the time and capital needed to develop new sources of iron ore should keep supply in check in the medium term, she says, maintaining the tight fundamentals required to keep prices buoyant.
Early reports suggest that contract prices for “fines” — one of the three main iron ore products, along with “pellets” and “lump” — will jump by 25% in 2008, she says. Meanwhile, pellets and lump, which are considered to be higher-quality products, could experience even greater gains.
Currently, three-quarters of seaborne iron ore production is controlled by just three companies: Britain-based Rio Tinto Group, Australia-based BHP Billiton PLC and Brazil-based Vale, previously known as Companhia Vale do Rio Doce SA. A proposed merger between Rio Tinto and BHP would concentrate this market dominance even further. European and Asian steelmakers, however, would welcome more competition in the market, Mohr says, not less.
So, what do these developments mean for clients interested in commodity markets? They represent an opportunity to invest in a new wave of Canadian companies eager to fill the iron ore supply void or entice the major producers and ore-hungry end-users to buy them out.
However, investors should proceed with caution. Iron ore juniors may be an even riskier bet than their counterparts in precious or base metals because of the huge capital investment required to take an iron mine from exploration to production. Your clients can minimize this risk by looking closely at these three main factors:
> Is the junior company able to raise large amounts of capital to cover the cost of exploration, permits and development? Toronto-based Baffinland Iron Mines Corp. , for instance, has raised more than $200 million to explore its Mary River deposits on Baffin Island. But it is still years from production.
> Where is the project located? Accessibility to ports for shipping to Europe and/or Asia can make or break a project. Also, if the project’s location is considered environmentally sensitive, securing permits and agreements with First Nations groups to build an open-pit mine can be challenging.
> Timing is the final main consideration. The lag between exploration and development can be a decade or more. As a result, projects that have not yet reached the advanced exploration or development stage have a higher risk of missing the bull run entirely.
Other factors to consider include: whether the company has the resources or reserves that meet regulatory standards under National Instrument 43-101: Standards of Disclosure for Mineral Projects; the project’s potential for high-grade or “direct-shipping” ore (which are attractive because they can be fed directly into blast furnaces after being crushed and screened); and — as the project advances — sales agreements with trading companies or, even better, end-users.
Although a few Canadian juniors with an iron ore focus are working in the Far North or overseas, many are clustered around the Labrador Trough of north-central Quebec and Labrador, where Iron Ore Co. of Canada (once known as Inco, now controlled by Rio Tinto) has been mining since 1954 and is currently pumping $60 million into expanding production at its operations in Labrador City, Nfld.
For clients interested in including iron ore in their portfolios, here’s a selection of smaller players that have potential for growth:
@page_break@> Baffinland Iron Mines Corp. owns the high-grade Mary River iron ore deposits on Baffin Island in Nunavut and, in comparison to other juniors on this list, is a veteran in the business.
The Toronto-based company has spent four years proving reserves at Mary River and is currently putting the finishing touches on a feasibility study to produce 18 million tonnes of direct-shipping iron ore a year. Baffinland recently signed a letter of intent to sell up to three million tonnes a year, or about 15% of its production, to Europe’s ThyssenKrupp Steel AG.
Initial construction at Mary River is expected to begin in mid-2010, mining is expected to start in 2013 and direct shipping to mainly European markets to start in 2014. In May 2006, a scoping study indicated a 34-year mine life at a production rate of 10 million tonnes a year, at a capital cost of almost $1.5 billion.
Baffinland has opted to almost double that output to take advantage of economies of scale in light of exploration success, an escalating cost environment and “stronger for longer” iron ore price projections.
> Consolidated Thompson Iron Mines Ltd. (symbol: CLM) owns the Bloom Lake iron ore deposit, about 400 kilometres north of Sept-Iles, Que. At an estimated capital cost of US$333 million, Bloom Lake is expected to produce seven million tonnes of 66.5% concentrate a year from a reserve of 580 million tonnes that grade at 30% iron.
Toronto-based CLM has an agreement with Worldlink Resources Ltd., a trading company based in China, to supply five million tonnes of this concentrate per year. Flush with cash from a recent $200-million financing, CLM has just started developing Bloom Lake in preparation for production in the first quarter of 2009.
> Labrador Iron Mines Holdings Ltd. This new Toronto-based player plans to explore for and develop direct-shipping iron ore deposits on properties formerly owned by Inco that contain reserves and resources established before Inco closed its direct-shipping operations in Schefferville, Que. Labrador Iron Mines’ recent initial public offering raised gross proceeds of about $46 million.
> New Millennium Capital Corp. has a 100% interest in the KeMag property at Lac Harris, Que., and an 80% interest in the LabMag property just across the border in Labrador.
Subject to positive feasibility studies, Montreal-based New Millennium plans to pump concentrate from both properties through hundreds of kilometres of slurry pipelines. The concentrate would then be either sold or made into pellets before being shipped out of the port in Pointe-Noire, Que.
KeMag, an operation producing 15 million tonnes of pellets and seven million tonnes of concentrate a year, is expected to cost US$3.5 billion. Production of 15 million tonnes of pellets a year from LabMag would cost an estimated US$2.75 billion.
> Adrian Resources Ltd. of Vancouver has just raised $30 million to design and develop an iron ore port facility and look for iron ore acquisition opportunities in Brazil. Adrian’s goal is to become an integrated iron ore producer with a focus on Brazil.
> Cardero Resources Corp. is using magnetic separation — a method of removing iron ore from slag by using magnets — to produce a 40-tonne concentrate from its Pampa de Pongo iron deposit in Peru. Pampa de Pongo contains a NI 43-101-compliant resource of 953 million tonnes that grade at 44.7% iron and 0.12% copper. Preliminary tests suggest the mineralization can be upgraded to 69% iron concentrate or 67% iron oxide pellets.
Vancouver-based Cardero has also launched an aggressive drilling program at Pampa de Pongo to upgrade resources to reserves.
> Northland Resources Inc. owns the Tapuli iron project in northern Sweden, among other Scandinavian iron, gold and base metals interests.
The Vancouver-based company wants to fast-track development at Tapuli, at which resources — which are not NI 43-101-compliant — stand at 60 million tonnes that grade at 30% iron. Metallurgical tests have so far determined that a high-grade, low-sulphur iron concentrate may be achievable through magnetic separation.
> Advanced Explorations Inc. of Toronto has just signed a memorandum of understanding with Melville Capital Corp. to raise up to $65 million to develop the Roche Bay iron deposit on the east coast of the Melville Peninsula in Nunavut.
Melville is headed by Roman Bittman, an aboriginal financier best known in the film world. Advanced Exploration has the option to earn a 50% interest in the Roche Bay project, and envisions a mine and plant producing six million tonnes a year of iron concentrates or pellets. IE
Iron ore market heats up as prices skyrocket
Asia’s appetite for steel’s main ingredient is turning investors’ attention to junior miners
- By: Virginia Heffernan
- January 21, 2008 October 31, 2019
- 14:21