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
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.’’