Iron ore price plummet brings trouble to Labrador Trough – by Peter Koven (National Post – October 1, 2012)

The National Post is Canada’s second largest national paper.

Short of the oil sands, there is no Canadian resource getting more foreign attention than the Labrador Trough.

The red-tinged ground that permeates the Quebec-Labrador border region hints at the massive iron ore riches that lie below, and the construction activity around Schefferville (along with much larger booms in nearby Wabush and Labrador City) points to the huge investments to come.

A small army of mining companies are moving ahead with iron-ore projects that could pour tens of billions of dollars into the region. Since most of these firms are juniors and could never finance these projects on their own, they have secured Asia’s largest steelmakers as backers. Iron-ore giants Rio Tinto Ltd., Cliffs Natural Resources Inc. and ArcelorMittal are also in the midst of production expansions.

The Trough only churns out about 40 million tonnes of iron ore a year right now — a pittance in a global market bigger than one billion tonnes. Both the Asian steelmakers and Canadian investors are counting on those numbers to rise substantially in the years to come.

Which is why they were so stunned at what just happened. With virtually no warning, the iron ore price fell off a cliff in August, plummeting about 30%. It was below US$85 a tonne by early September, compared with almost US$200 a tonne in 2010.

It was due to events in China, where iron ore demand vanished overnight as steelmakers went on a buyer’s strike and liquidated their inventories. This was the first major blow to the iron-ore market since the 2008 financial crisis, and it provided a hint of what a prolonged Chinese slowdown could mean for this sector.

The drop rattled investors in the Labrador Trough. At what point, they wondered, would this price volatility become a threat to the billions of dollars of planned investments in the region?

They didn’t have to wait long to get one answer. Labrador Iron Mines Holdings Ltd., a junior that is already in production, halted all capital spending in early September and stopped operating one of its processing plants.

“It was something that we had to do, and we did it quickly and decisively,” chief executive John Kearney says. “The month of August was surreal.”

Mr. Kearney was relieved to see the price rebound in the last couple of weeks: it is back to almost US$100, which is viewed as an unofficial floor price that makes Trough projects viable. His company will turn on the spending taps again if the bounce continues.

But Labrador Iron Mines is a small producer. For the companies planning much bigger operations, the current price is well below what they anticipated. There is already speculation about deferrals if the market does not pick up.

“If you see a prolonged period of prices in this range or lower, you will see deferrals. There’s no question,” says Allen Palmiere, CEO of Adriana Resources Inc.

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