Feeding at the Trough

Even as world financial markets struggle to find their footing, investors and developers are surging ahead with new projects in the iron ore-rich Labrador Trough – By Stephanie Porter

Equity research analyst Robin Kozar put the momentum and reality of Labrador’s iron ore industry into sharp perspective: While Canada currently produces only about two per cent of the world’s iron ore, he says, that should rise to five per cent in the next three years. It’s a substantial leap – and virtually all of that iron ore will come from the Labrador Trough.

“The Labrador Trough is growing in importance,” Kozar said, speaking at Mining NL’s Resource Investors Forum in St. John’s in September. “It’s not supplying 25 per cent of the market, it’s five per cent. But in terms of companies that are looking to diversify source of supply, it’s relevant.

“It’s an opportunity globally, nationally and regionally to be a more significant supplier to the market.”

This opportunity comes amidst years of uncertainty in the financial markets. Far from deterring major investors, the forecast has never been stronger for the region. Even as the price of iron ore fell to a three-year low last summer, exploration and development charged ahead in Labrador and eastern Quebec. Major partnerships were signed; billions in investment have been made or promised.

Kozar predicts the current production levels of 35 million tonnes of iron ore from the area could increase to about 65 million tonnes by 2015. And it’s only up from there.

The Labrador Trough is a 1,100-kilometre long, 160-kilometre wide swath of iron ore-rich land straddling the Labrador-Quebec border. In many cases, the resource is clean, with lower levels of contaminants than other global deposits, making it a favourite of steel makers.

Mining iron ore in the Labrador Trough has been ongoing for over half a century – Wabush Mines and the Iron Ore Company of Canada (IOC) being two of the longest operating. Some two billion tonnes of iron ore have been produced from the area to date.

It is already a time of growth. Wabush Mines and IOC are both in expansion phases. Last year, they were joined by the newest iron ore producer, Labrador Iron Mines, located near Schefferville, Quebec. Labrador Iron Mines marked its first full year of production in 2012, extracting two million tonnes.

There are two key projects in the development phase on the Labrador side of the border. Alderon Iron Ore, in Labrador West, has completed its feasibility study and is aggressively planning full production by 2015. Further north, near Schefferville, Tata Steel Minerals Canada produced the first saleable product from their Direct Shipping Ore project in September 2012. Tata is also in the midst of its own feasibility study of two major deposits, and is targeting production by 2016.

The forecasted gross value of mineral shipments from Newfoundland and Labrador for 2012 is $5.7 billion – up 25 per cent over 2011 estimates. This is almost entirely due to a jump in iron ore production. It seems to be a sign of things to come.

For all the buzz and activity around iron ore production in the Labrador Trough, it is not without its drawbacks: the area is quite cold for much of the year – some companies only run seasonal mining operations. It is also relatively isolated and distant from key markets, such as China. All of these factors increase the cost of extracting and delivering Labrador iron ore.

While iron ore mining is not new to the area, the recent pace of exploration and development is. Available infrastructure is limited. All iron ore that is mined in the Labrador Trough must be transported, by rail, to the north shore of the St. Lawrence River and the ports of Port-Cartier, Point Noir, or Sept-Iles.

There are currently two main rail lines: the Quebec Cartier Railway connecting Mont-Wright to Port-Cartier and a longer line, the Quebec North Shore and Labrador Railway/ Tshiuetin Rail Line, which runs nearly 600 kilometres from Schefferville to the port of Sept-Iles. This line also connects with Wabush and Labrador City.

The need for additional rail capacity is well recognized, evidenced by a major feasibility study spearheaded by CN Rail, announced in August 2012. The study will examine a proposed third rail line, connecting the Labrador Trough to the port of Sept-Iles. Many of the major players in the area – Alderon, Cap- Ex, Cliffs Natural Resources, Labrador Iron Mines, and New Millennium – are contributing significantly to the study in order to secure future capacity.

There is another major expansion in the works that is critical to the future of iron ore mining in the area: the Sept- Iles Port Authority has begun work on a new multi-user deep-water dock. Again, a number of iron ore players have signed an agreement with the Sept-Iles Port Authority, exchanging financing for confirmed shipping capacity: New Millennium, Labrador Iron Mines, Champion Minerals, Alderon Iron Ore, and Tata Steel Minerals.

“This infrastructure is the key,” says Gerry O’Connell, executive director of Mining NL, an association representing the province’s mineral industry. “The deposits are there, but iron ore is a bulk commodity. It has to go out in bulk.” These agreements, continues O’Connell, are a sure sign the iron ore companies involved have full intentions of getting the resource to market.

Of course, as is the case with all commodities, the price the market will pay for the resource remains uncertain. For decades, iron ore prices were relatively stable – and low. From 1980 until about 2004, iron ore was priced between $11 and $17 (US) per tonne.

Everything started to change in 2004. The price of iron ore began a steep upward climb, to a peak of $187 per tonne in 2010. Analysts theorized about a $120 price floor as exploration and planning went into overdrive. Through a major recession and global financial shakeups, the price of iron seemed unstoppable. Mining the Labrador Trough was no longer prohibitively expensive.

The single reason for this huge price spike? The urbanization of China. Even as the rest of the world’s finances struggled, China built bigger cities, requiring huge amounts of steel – of which iron ore is the primary ingredient.

“We are in a period of prolonged global financial turbulence,” says Tayfun Eldem, president and CEO of Alderon Iron Ore. “China has unilaterally shouldered the burden and allowed the worldwide iron industry to thrive …Although the pace is slowing down, they are still experiencing impressive growth. Their needs and their growth are far from over.”

That may be true, but the pace of growth and construction has slowed. By mid-2012, prices were dipping again. In September 2012, they fell sharply, to under $87 per metric tonne.

“There is a lot of concern about volatility in the market, a lot of concern about where prices are going,” says analyst Kozar. “And there is some near- term volatility, but at the end of the day, China is the key driver.” While the pace of growth in China may slow down, it is still growing.

“We’re firm believers that steel production will continue to grow.”

Investors from China are seeking new sources of iron ore, in efforts to both secure supply and diversify. The famously high-quality, clean resource from Labrador is attractive.

Alderon Iron Ore, which is developing the substantial Kami deposit in Labrador West, is driven by Chinese investment in a very direct way. Alderon currently has two key partners: Hebi, China’s largest steel maker, and Liberty Metals and Mining Holdings. Importantly, Hebi has agreed to purchase 60 per cent of the iron ore production from the project for use in China.

It’s proven an effective way to de-risk Kami’s development. Recent low iron ore prices have not affected Alderon’s schedule, says Eldem.

“Our view is that iron ore prices are unlikely to go back to $180, but by the same token, it is highly unlikely that iron ore prices are going to regress back to where they were in the 1980s,” he says. “It’s full steam ahead into development.”

Alderon is certainly one of the biggest-name projects in the Labrador Trough. Located near Labrador City and Wabush, the project is known to many Newfoundlanders as much because former premier Danny Williams is on the board of directors as for its potential.

But the potential is there. “The Kami deposit is world-class in terms of size and quality,” says Eldem. He says there is a confirmed 1.4 billion tonnes of iron ore in the deposit. Alderon’s posted plans are to mine about eight million tonnes a year – but Eldem indicates that number could double. He estimates the life of the mine to be between 27 and 30 years.

The project’s feasibility study is expected to be completed by the end of 2012.

“All of our accomplishments so far have been on schedule or ahead of schedule,” says Eldem. “Going forward, we are very confident that we will reach our goal of production by 2015.”

There are also distinct benefits to Newfoundland and Labrador. According to a press release from the company, Alderon expects the Kami project to generate $2 billion in tax revenues, $1.6 billion in employment, and contribute $13.6 billion to the provincial GDP.

“We are putting Newfoundland and Labrador on the radar in terms of value globally,” says Eldem. 

Tata Steel Minerals of Canada, a partnership between India’s Tata Steel and New Millennium Iron, is also moving forward quickly. The company produced the first saleable product from their Direct Shipping Ore project in September.

The bigger story for this group, however, is its own feasibility study, to be complete by the end of 2012. This $50- million study is examining the potential of two key deposits – LabMag (Labrador) and KéMag (Quebec) – in the Millennium range, a 210-km Taconite belt controlled by New Millennium.

New Millennium’s vice president of investor relations, Ernest Dempsey, recently pegged the potential of the Taconite project at 9.2 billion tonnes. The planned full annual production level of 22 million tonnes – which could be reached by 2017 – puts the mine’s operations at the level of IOC’s.

“We are not about a single project, but about developing an iron ore district,” Dempsey stated.

Looking through the program for Mining NL’s Resource Investor’s Forum, it’s not hard to see where the focus was this year. Fully half of the companies presenting during the two-day conference were there to speak about iron ore projects.

Many of the presenters, including Cap- Ex Ventures, Golden Dory Resources, Adriana Resources, Century Iron Mines, and Ridgemont Iron Ore, are deep into the exploration phase of sites within the Labrador Trough. North Atlantic Iron was also present, and spoke about their unique iron sands project, near Happy Valley Goose Bay.

Even after the sting of the low iron ore prices, Mining NL executive director O’Connell doesn’t see any reason to be anything but optimistic about the future of the resource within the province.

“People may be pulling back a bit,” he says, “but there is no reason that all of these companies will not continue to expand.”

Does the recent global market instability have any effect on iron ore producers?

“It’s extra difficult to raise money, there is a worldwide flight from risk. People are not interested in investing in commodities, in general,” says O’Connell.

But iron ore will continue to be shielded from this to some degree, he continues, particularly as long as China keeps building. “People need it. They can stop buying gold; they can’t stop buying iron ore.” | NRM


Source: http://www.atlanticbusinessmagazine.ca/feature/natresfeeding-at-the-trough/

December 10th, 2012

Posted In: Town Centre News