Iron ore hope­fuls com­pete for at­ten­tion

MIN­ING Trans­port in­fra­struc­ture is crit­i­cal to the suc­cess of iron ore pro­duc­ers who haven’t made it to the big league yet, writes James Dunn

The Weekend Australian - Review - - Steel Special Report -

WITH the iron ore ex­port mar­ket un­der­writ­ten by China’s in­creas­ing de­mand for iron ore, Aus­tralia’s iron ore hope­fuls are jock­ey­ing for po­si­tion to get into pro­duc­tion. Apart from the listed mega- pro­duc­ers Rio Tinto and BHP Bil­li­ton, the Aus­tralian stock ex­change is sur­pris­ingly light- on for iron ore pro­duc­ers. Port­man Lim­ited ( which is 80 per cent owned by US- based Cleve­land Cliffs) pro­duces about 6 mil­lion tonnes a year from its Koolyanob­bing mine west of Kal­go­or­lie and the smaller Cock­a­too Is­land mine on the Kim­ber­ley coast, while Mount Gib­son Iron pro­duces about 3 mil­lion tonnes a year from its Tal­ler­ing Peak mine east of Ger­ald­ton.

Last year, Mid­west Cor­po­ra­tion be­gan pro­duc­ing one mil­lion tonnes a year from its Koolanooka project in the Mid­west re­gion of West­ern Aus­tralia, while ear­lier this year, Murchi­son Met­als be­gan ship­ping 1.5 mil­lion tonnes of ore a year from its Jack Hills project to Chi­nese cus­tomers through Ger­ald­ton.

An­a­lysts say achiev­ing pro­ducer sta­tus de­pends on fac­tors such as qual­ity of ore, ac­cess to cap­i­tal, in­fra­struc­ture and power.

The best cat­e­gory of ore is haematite ‘‘ di­rect ship­ping’’ ore, which is at least 60 per cent iron and low in im­pu­ri­ties, and can be ex­ported with­out the need for any pro­cess­ing other than crush­ing to get lump and fines. The Aus­tralian iron ore in­dus­try has been built on haematite, whereas Aus­tralia’s other com­mon iron ore, mag­netite, has been largely ig­nored.

Mag­netite ore, which is much lower in iron con­tent, re­quires con­sid­er­able treat­ment be­fore be­ing sold — for ex­am­ple, be­ing ‘‘ pel­letised’ or sep­a­rated into con­cen­trate — but in a pe­riod of sus­tained high iron ore prices, be­comes much more vi­able.

‘‘ What we’re see­ing at the mo­ment is the mar­ket start­ing to be­come a lot more com­fort­able with mag­netite re­sources,’’ says Steve Bartrop, an­a­lyst at in­de­pen­dent re­search group Stock­Re­source. ‘‘ This feel­ing of ‘ stronger- for­longer’ iron ore prices, based on the Chi­nadriven de­mand sce­nario, has cre­ated an in­creased con­fi­dence in the abil­ity to ex­tract value from the mag­netite re­sources.’’

Bartrop points to Traf­ford Re­sources, which has a high- grade mag­netite re­source ( ca­pa­ble of pro­duc­ing a con­cen­trate that is 70 per cent iron) near Whyalla in South Aus­tralia. ‘‘ It’s prob­a­bly one of the bet­ter mag­netite re­sources, and you’ve seen the share price ap­pre­ci­ate. But there is still some ner­vous­ness be­cause of the ex­tra pro­cess­ing steps in­volved in mag­netite.

‘‘ There has been a strong share price rise be­cause of some good met­al­lur­gi­cal work, prov­ing the con­cen­trate, but the re­source hasn’t been quan­ti­fied, so there is a spec­u­la­tive el­e­ment to Traf­ford. There is a spec­u­la­tive el­e­ment to all the mag­netite re­sources, and Traf­ford is the per­fect ex­am­ple.’’

Other mag­netite project de­vel­op­ers ( all in West­ern Aus­tralia) in­clude Gin­dal­bie Gold at Karara ( it also has high- grade haematite); At­las Iron at Par­doo; Grange Re­sources in south­ern WA; Aus­traliasian Re­sources at Bal­moral South; and Cape Lam­bert Iron Ore, which is de­vel­op­ing a for­mer Rio Tinto mag­netite de­posit 10km from Cape Lam­bert, the ma­jor iron ore ship­ping port in the Pil­bara.

In­de­pen­dent re­searcher Peter Stra­chan, of Stock­Analysis, says mag­netite is more than vi­able — the ex­tra cost of crush­ing and grind­ing and then us­ing mag­netic sep­a­ra­tion is more than off­set by the pre­mium price of the con­c­n­trate — but as the grade goes down, the pro­duc­ers have to mine and process more ore.

Be­cause of this, power be­comes a big is­sue for the mag­netite de­vel­op­ers, says Stra­chan. ‘‘ The mag­netite projects are go­ing to be fairly sig­nif­i­cant power users, and you have to ask, where will they get the elec­tri­cal power from? I would be ask­ing very hard ques­tions about power be­fore I in­vested in any of th­ese com­pa­nies.’’

Trans­port in­fra­struc­ture is also crit­i­cal in the progress to pro­duc­tion. It is no co­in­ci­dence that the two most re­cent new pro­duc­ers — both of which kicked off in June — had few prob­lems on the in­fra­struc­ture front.

In June, Mount Gib­son shipped its first ore from its Koolan Is­land project, an old BHP mine, in Yampi Sound, on the Kim­ber­ley coast near Derby. Koolan Is­land, which Mount Gib­son grabbed when it took over Aztec Re­sources ear­lier this year, is one of the high­est- grade haematite de­posits in Aus­tralia: it pro­duces ore with 67 per cent iron ore and few im­pu­ri­ties. Be­ing on an is­land, the mine is also unique in Aus­tralia in that ships are loaded di­rectly from the mine.

Also in June, Ter­ri­tory Re­sources be­gan pro­duc­tion from its Frances Creek project in the North­ern Ter­ri­tory, tak­ing ad­van­tage of the fact that the Alice Springs- Dar­win rail­way is only 15km from the mine, which is only 190km south of Dar­win.

Con­trast this with the tra­vails of the great hope of Aus­tralian iron ore, Fortes­cue Met­als Group. Self- billed as ‘‘ the new force in iron ore’’, Fortes­cue has as­sem­bled an im­pres­sive as­set: 38,000 sq km of ten­e­ments in the Pil­bara — the largest acreage in the re­gion — host­ing a re­source cur­rently in­di­cated at 2.4 bil­lion tonnes at 58.2 per cent iron.

Fortes­cue has signed ma­jor iron ore off­take agree­ments with China’s largest and third largest steel mill — Baos­teel and Tang­shan Iron and Steel Group. But Fortes­cue is not ex­pected to ship its first ore un­til May 2008: and has yet to solve the small prob­lem of be­ing lo­cated at least 260km from the coast.

To get around this the com­pany has fought a very pub­lic bat­tle in the courts to win ac­cess to BHP Bil­li­ton’s rail in­fra­struc­ture in the Pil­bara, while also build­ing its own rail­way — as part of its $ 2.7 bil­lion Pil­bara rail, mine and port project. ( An em­bold­ened Fortes­cue is also eye­ing off Rio Tinto’s rail lines, as it at­tempts to mine ‘‘ stranded’’ de­posits.)

‘‘ In­fra­struc­ture is a very im­por­tant as­pect of get­ting an op­er­a­tion up and run­ning,’’ says James Wil­son, re­sources an­a­lyst at DJ Carmichael. ‘‘ An­other com­pany that has a very good chance of get­ting into pro­duc­tion rea­son­ably quickly is At­las Iron, which has the Par­doo project, 75km east of Port Hed­land. In­stead of build­ing a rail­way, At­las has the op­tion of sim­ply truck­ing its ore to port. It’s di­rect­ship­ping ore, so it won’t need any pro­cess­ing — and it won’t need a rail­way.’’

Be­cause At­las is so close to Port Hed­land, Wil­son would pre­fer to see it ditch its mag­netite projects and con­cen­trate on the di­rect- ship­ping ore. ‘‘ Mag­netite is com­ing to the fore a bit, but the fact is that it is much eas­ier from a capex point of view to fo­cus on di­rect- ship­ping ore than it is to build a $ 200 mil­lion pro­cess­ing plant.

‘‘ The price pre­mium for mag­netite can make those eco­nomics stack up, but the im­me­di­ate short- term fi­nan­cial gains with di­rect- ship­ping ore are also very at­trac­tive. If you’re At­las, and you’re so close to port in­fra­struc­ture you can ac­tu­ally truck the ore, why would you worry about pro­cess­ing mag­netite?’’

Bartrop says Fer­rAus, which has the Robert­son Range iron ore project, is an­other com­pany where the in­fra­struc­ture sit­u­a­tion looks promis­ing. ‘‘ Fer­rAus wants to fast- track the de­vel­op­ment of Robert­son Range to pro­duce low­cost, di­rect- ship­ping prod­uct from the haematite- based Marra Mamba ores. It’s ex­port- grade di­rect ship­ping ore, grad­ing 58- 62 per cent iron.

‘‘ The great thing about Robert­son Range is that it is just 65km from BHP’s Jim­ble­bar rail spur and load­ing area, so ac­cess to in­fra­struc­ture is very good. Fer­rAus is likely to truck the ore to Jim­ble­bar and send the ore to Port Hed­land via BHP’s rail line.’’

Wil­son says BC Iron, whose Nul­lagine iron ore project is lo­cated near Fortes­cue’s pro­posed rail­way, is in a sim­i­lar cost po­si­tion — if the rail­way pro­ceeds.’

Wil­son’s pre­ferred iron ore stock does not ac­tu­ally have a project in Aus­tralia. ‘‘ We like Sun­dance Re­sources, which has the Mbalam in the African repub­lic of Cameroon. We’ve cov­ered Sun­dance all the way from 7 cents to 48 cents, where it’s now worth $ 880 mil­lion.’’

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