Editorial: The Cliffs Notes on the Ring of Fire – by John Cumming (Northern Miner – November 27, 2013)

The Northern Miner, first published in 1915, during the Cobalt Silver Rush, is considered Canada’s leading authority on the mining industry. Editor John Cumming MSc (Geol) is one of the country’s most well respected mining journalists. jcumming@northernminer.com

Dear Ontario, there’s been way too much off-base and irresponsible commentary in the province about Cliffs Natural Resources’ decision to shelve its Ring of Fire Chromite project. And so, in the spirit of afternoon reality TV and the very best perma-tanned psychiatrists with books to peddle, it’s time we both sat down and you got a little straight talk.

Cliffs is just not that into you — As with every breakup, Cliffs’ curt parting words masked so many true feelings and motivations. In all its various pronouncements this year regarding its work suspensions, Cliffs pinned all the blame on outside parties, and was silent on the biggest reason of all for the split: chromite is a lousy business to get into right now, and its Ring of Fire development proposal, as currently conceived, is uneconomic.

Who did Cliffs blame instead? The provincial government for “delays” in the environmental approval process and other agreements, and for its high energy rates. KWG Resources for daring to exert rights on its rival claims; Local First Nations for launching judicial challenges to development; and even the region itself, for being so remote and lacking in infrastructure.

And no, this work stoppage isn’t a ploy to get cheap electricity or have the government pay for the road. Cliffs isn’t coming back. Get a grip.

The power of ‘no’ — Cliffs’ project as it was outlined in 2011 needed a ferrochrome price of about US$1.40 per lb. to generate a decent, double-digit return — the standard minimum for most mining projects to proceed. Ferrochrome’s now trading slightly above US$1, with no recovery in sight.

Cliffs’ market capitalization was $15 billion in early 2011 when it was keen to develop the Ring of Fire, but it’s now at $4 billion after touching $2.5 billion in June. Cliffs owes $3.3 billion, has $300 million in cash and only a $100-million profit in the last quarter. There’s no way it’s going to tackle a project costing $3.3 billion (if you even believe that number) right now, especially when chromite would be a new business unit for Cliffs, separate from its core metallurgical coal and iron-ore units.

Secrets of closing the sale — Cliffs won’t admit the project is uneconomic because it wants to sell it. It’s already sunk some $500 million into it, and would be happy to recoup that money, and so is loathe to talk down the asset.

The secret of what a deposit is worth — Ontario, please stop saying the Ring of Fire is worth $60 billion. You sound like economic illiterates. If it costs $59 billion to generate $60 billion in mining revenue, the rock is worth $1 billion, not $60 billion. Worse, it gets people thinking they’re getting ripped off when they’re not, and creates false expectations, like former Premier Dalton McGuinty foolishly calling the Ring of Fire “Ontario’s oilsands.” Cliffs’ plans would have generated revenues of anywhere from $500 million to $1.5 billion annually, which is about the same as any single decent, large mine in Canada.

Build it and they may not come — Ontario’s policy-makers need to realize chromite is not gold or diamond, or even nickel — all large commodity markets where a new mine can be readily absorbed. Chromite is a tiny, stable market with established, low-cost suppliers in South Africa, Kazakhstan, India, China and Brazil.

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