National Post (National Edition)
Juniors revive iron ore mines
SITES MOTHBALLED AFTER COMMODITIES CRASH SIX YEARS AGO FIRED UP AGAIN
Six years af ter a once-in-a-generation commodities crash forced Noble Group Holdings Ltd. to close the Frances Creek iron ore mine in remote northern Australia, its new owners are restarting it.
Darwin-based NT Bullion is among a host of junior miners from Australia to Canada that are resuscitating operations abandoned by larger producers of the steelmaking ingredient.
Their bets made at the bottom of the mining cycle could prove lucrative. The price of iron ore surged 65 per cent last year to a nineyear high of US$166 a tonne on the back of sustained strong demand in China and supply constraints in Brazil, the world's second-biggest producer.
“At current prices, it gets close to a US$100 per tonne margin for us,” said Rodney Illingworth, managing director and co-founder of NT Bullion.
Analysts forecast prices to remain above US$100 a tonne in 2021 with the four largest producers — BHP Group, Rio Tinto Ltd., Vale SA and Fortescue Metals Group Ltd. — unable to significantly expand production. After that, they expect prices to fall back with Brazilian supply recovering faster than global steel production.
NT Bullion bought the Frances Creek mine in 2020 from Perth-based Gold Valley Holdings, which acquired it from Noble for $1 Australian in 2018. It is investing $15 million Australian ($14.8 million) to upgrade equipment, process ore from existing stockpiles and begin mining. The first trains of iron ore left for Darwin port in December and are due to be shipped in January under a marketing deal with Anglo American.
A few hundred kilometres away, operations have also restarted at Roper Bar, a mine bought in 2017 by British Marine Group subsidiary Nathan River Resources that now has an annual production target of 1.5 million to 2 million tonnes of iron ore per year. Nathan River has a marketing deal with Glencore.
“You certainly see a correlation between high iron ore prices and expanding output from junior miners outside the big four producers,” said Paul McTaggart, commodities analyst at Citigroup. “Juniors will look to restart mothballed mines and bring some marginal tonnes back on to the seaborne market.”
Citi Research shows non-traditional iron ore supply (from nations other than Australia, Brazil and South America) to China fell from 206 million tonnes in 2013 to 109 million tonnes in 2015, when average iron ore prices crashed from US$97 per tonne to US$56 per tonne. This year Citi predicts non-traditional supply will jump back up above 200 million tonnes, as average prices hit US$120 per tonne.
But McTaggart believes there is a limit to any further expansion of non-traditional iron ore supply unless a China-backed consortium and Anglo-Australian miner Rio Tinto commit more than US$20 billion to develop their respective share of the huge Simandou deposit in Guinea.
“This is a complex project involving 650 kilometres of railway through difficult terrain that could provide up to 200 million additional tonnes per year,” he said, adding that it would take a least six years before production at Simandou could begin and a decade or more to reach full production.
Another beneficiary of the iron ore price surge is Champion Iron, an Australia-listed producer that bought the mothballed Bloom Lake mine in Quebec in 2016 for $10.5 million. The previous owner, Cliffs Natural Resources, spent US$7 billion acquiring the mine in 2011 and building infrastructure over five years.
“Look at what happens when the herd mentality sets in and most analysts and investment bankers say iron ore prices are going to X and staying there forever,” said Michael O'Keeffe, Champion's founder and executive chairman. “I like to take countercyclical views.”
O'Keeffe, a metallurgist by training and former managing director of Glencore Australia, is known in the industry for building up Mozambique-focused Riversdale Resources, which Rio bought for US$4 billion at the peak of the mining boom in 2011 before selling it for just US$50 million during the commodities crash a few years later.
With the financial backing of Glencore, the Quebec government and Chicago fund Wynnchurch, Champion restarted mining in February 2018 and produced 7.9 million tonnes in its first year of operation. It is planning a US$500-million expansion to double production to 15 million tonnes a year by mid-2022, which it says would cut production costs from US$40 to US$35 per tonne including shipping.
Champion forecast longterm sustainable iron ore prices at about US$85 per tonne in its expansion project feasibility study. Its highgrade output fetches a premium over the benchmark iron ore price.
“We're getting US$166 to US$167 per tonne,” said O'Keeffe. “I mean, that allows us to just print money. But that's not going to always be there and our decisions are not based on today's price. It's more about how we see the market going.”
He said Brazil would struggle to increase production rapidly in the short to medium term because of the pandemic and fallout from recent mining disasters, while Australia lacked spare capacity at existing high-grade projects. His longer-term goal was to expand output to “somewhere between 28 million and 30 million tonnes a year of high grade”.
For now, the stars are aligned for smaller producers to reap outsized rewards from their investments. But they need to move quickly.
High prices are now providing a strong incentive for new mine development expansions across many commodities, including iron ore where the supply discipline of the major producers may not last for ever. Iron ore demand could also be threatened by a faster uptake of scrap in China's steelmaking industry.
“Elevated iron ore prices over the last two years have resulted in increased project activity — we've identified over 340 million tonnes per annum of growth projects, with an average incentive price of US$51 a tonne, vs a pipeline of 230 million in 2019,” Morgan Stanley said in a recent report.
Still, the junior producers expect to remain profitable even when prices fall.
“We didn't project this price and we would be fine even if prices fall to US$55 per tonne,” said NT Bullion's Illingworth. “But it is certainly an added bonus.”
I MEAN, THAT ALLOWS US TO JUST PRINT MONEY.