Junior miners bring abandoned iron ore projects back to life

Junior miners bring abandoned iron ore projects back to life

Six years after a once-in-a-generation commodities crash forced Noble Group 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 nine-year high of $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 $100 per tonne margin for us,” said Rodney Illingworth, managing director and co-founder of NT Bullion.

Analysts forecast prices to remain above $100 a tonne in 2021 with the four largest producers — BHP, Rio Tinto, Vale and Fortescue — 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 A$1 in 2018. It is investing A$15m ($11.3m) 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 1.5m to 2m 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 206m tonnes in 2013 to 109m tonnes in 2015, when average iron ore prices crashed from $97 per tonne to $56 per tonne. This year Citi predicts non-traditional supply will jump back up above 200m tonnes, as average prices hit $120 per tonne.

But Mr 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 $20bn to develop their respective share of the huge Simandou deposit in Guinea.

“This is a complex project involving 650km of railway through difficult terrain that could provide up to 200m 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 Canada’s Quebec in 2016 for C$10.5m ($8m). The previous owner, Cliffs Natural Resources, spent $7bn 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.”

Mr 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 $4bn at the peak of the mining boom in 2011 before selling it for just $50m 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 7.9m tonnes in its first year of operation. It is planning a C$500m expansion to double production to 15m tonnes a year by mid-2022, which it says would cut production costs from $40 to $35 per tonne including shipping.

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Champion forecast long-term sustainable iron ore prices at about $85 per tonne in its expansion project feasibility study. Its high-grade output fetches a premium over the benchmark iron ore price.

“We’re getting $166 to $167 per tonne,” said Mr 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 28m and 30m 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 340m tonnes per annum of growth projects, with an average incentive price of $51 a tonne, vs a pipeline of 230m 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 $55 per tonne,” said NT Bullion’s Mr Illingworth. “But it is certainly an added bonus.”

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