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Iron Ore

Iron ore prices – Where’s the bottom? (Northern Miner Editorial – Novmeber 26, 2014)

The Northern Miner, first published in 1915, during the Cobalt Silver Rush, is considered Canada’s leading authority on the mining industry.

As the daylight hours shorten and winter chill takes hold of the iron ore mines and surrounding communities in the Labrador Trough, it’s as good a symbol as any of the deep freeze that is engulfing the global iron ore market, as spot prices continue to head south.

Back in October, Cliffs Natural Resources said it would permanently close its Wabush iron ore mine on the Labrador side of the Trough, after having laid off some 500 workers in February when it first idled the mine.

And now Cliffs says it has failed in its attempts to find investment partners for the US$1.2-billion expansion of its Bloom Lake iron ore mine on the Quebec side of the Trough — an expansion that the struggling major said was needed to make the Bloom Lake mine financially viable.

While Cliffs had been optimistic about finding such financial partners as recently as a month ago, layoff notices have been sent to some 400 workers at Bloom Lake ahead of the closure of the entire Bloom Lake complex, which will take affect in mid-December. Around 80 workers will be kept for care and maintenance.

Cliffs now states bluntly that it is pursuing its “exit options” for all its Eastern Canadian iron ore assets. Perhaps the biggest surprise in the announcement is the high price tag that Cliffs has put on closing shop and leaving Eastern Canada: up to US$700 million in the next five years.

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While Australian Miners Declare End of Massive Expansion of Iron Ore, Gina Rinehart Bucks Trend & Starts Export From New Mine – by Vittorio Hernandez (International Business Times – November 24, 2014)

 

http://au.ibtimes.com/

Gina Rinehart is the richest person in Australia and would likely remain that way for a long time. One reason behind her wealth, aside from inheriting Hancock Prospecting established by her father, Lang Hancock, is her bucking business trends.

Like her dad who dared invest in mining in areas that were considered outback, Rinehart will begin to export in September 2015 from her $8.6 billion iron ore mine despite prices of the commodity hitting a five-year low and bleak forecast for the next few months due to global oversupply and weak Chinese demand.

Rinehart told media that over 2 million metric tons of iron ore are stockpiled at Roy Hill where project construction is 67 percent complete. She said that since Roy Hill is a fast-schedule, major and really complicated projects, its being ahead of schedule is fantastic.

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COLUMN-BHP, Rio were right on iron ore demand, wrong on supply – by Clyde Russell (Reuters U.K. – November 24, 2014)

http://uk.reuters.com/

LAUNCESTON, Australia, Nov 24 (Reuters) – What was lacking at BHP Billiton’s annual meeting was an admission that what has effectively happened with iron ore is that the company’sshareholders are subsidising the profits of Chinese steel mills.

Instead, what Chairman Jac Nasser told the media after the AGM on Nov. 20 was iron ore prices were “not inconsistent with the expectations we had built into our long-term investment”. Both Nasser and Chief Executive Andrew Mackenzie were keen to emphasize the productivity successes at the iron ore business, saying it remains one of BHP’s main profit drivers.

That may well be true, but the message from the executives at last week’s AGM doesn’t quite tally with what BHP was saying in 2011, when it was approving the massive expansion of its iron ore operations in Western Australia.

It was around this time that BHP, its Anglo-Australian rival Rio Tinto, newcomer Fortescue Metals Group and top iron ore miner Brazil’s Vale were all making decisions to radically boost output of the steel-making ingredient.

This unprecedented capacity expansion was based on the two-pronged view that China, which buys about two-thirds of seaborne iron ore, would continue its rapid growth for decades to come, and that low-cost producers would be able to force higher-cost miners from the market.

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Go where it is darkest: When company, country, currency and commodity risk collide! – by Aswath Damodaran (Musings on Markets – November 20, 2014)

http://aswathdamodaran.blogspot.ca/

Aswath Damodaran is a Professor of Finance at the Stern School of Business at NYU.

You learn valuation (and find out how much you don’t know) by valuing businesses and companies, not by talking, reading or ruminating about doing valuation. That said, it is natural to want to value companies with profit-making histories and a well-established business models in mature markets. You will have an easier time building valuation models and you will arrive at more precise estimates of value, but not only will you learn little about valuation in the process, it is also unlikely that you will find immense bargains, because the same qualities that made this company easy to value for you also make it easier to value for others, and more importantly, easier to price.

I believe that your biggest payoff is in valuing companies where there is uncertainty about the future, because that is where people are most likely to abandon valuation first principles and go with the herd. So, if you are a long-term investor interested in finding bargains, my advice to you is to go where it is darkest, where micro and macro uncertainty swirl around every input and where every estimate seems like a stab in the dark. I will not claim that this is easy or comes naturally to anyone, but I have a few coping mechanisms that work for me, which I describe in this paper.

While I enjoy valuing companies with uncertain futures, there are cases where my serenity about valuation is disturbed by the coming together of multiple uncertainties, piling on and feeding of each other to create a maelstrom. In this post, I want to focus on two companies, one Brazilian (Vale) and one Russian (Lukoil), where bad corporate governance, a spike in country risk, currency weakness and plunging commodity prices have conspired to devastating effect on their stock prices.

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Cliffs Natural Resources retreats from Canadian ‘disaster’ – by Nicolas Van Praet (Globe and Mail – November 21, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

MONTREAL — The chief executive officer of mining giant Cliffs Natural Resources Inc. is taking aim at his predecessors for their decision to pump billions of dollars into Canada, saying every single investment it made here in recent years was a “disaster” that failed to produce any profit.

“I’m walking away from Canada big time – Canada for Cliffs has not been a good thing,” Lourenco Goncalves, the company’s chairman and CEO, said in an interview Thursday. “All these investments that the company made in Canada after the Wabush mine were a disaster.”

“I’m not the type of guy that’s too much of a Monday morning quarterback,” he said. “But these [decisions] are very clear. Misguided decisions all the way.”

Cleveland-based Cliffs, the biggest U.S. iron ore producer, has spent $6-billion (U.S.) in all on its Bloom Lake iron ore mine in northeastern Quebec over the past three years and “never made a penny” on the investment, Mr. Goncalves said. The company on Wednesday announced that it is “pursuing exit options” for its Eastern Canadian iron ore operations, evaluating its maximum exposure to close the Bloom Lake site at $700-million. The company will also close its mine in Wabush, Nfld., which had been in operation for more than 40 years.

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Richest Woman in Asia-Pacific Buys Iron as BHP Calls End to Era – by Jasmine Ng and David Stringer (Bloomberg News – November 21, 2014)

http://www.bloomberg.com/

Gina Rinehart, the Asia-Pacific’s richest woman, is set to start exports in September from her new A$10 billion ($8.6 billion) iron ore mine undeterred by prices trading near five-year lows and forecast to extend losses.

“We don’t like the ore price going down, but we’re in the lower quartile” of production costs, Rinehart, chairman of Hancock Prospecting Pty, said yesterday in an interview at the Roy Hill mine in Australia’s iron-rich Pilbara region.

She was talking just hours after Andrew Mackenzie, chief executive officer of BHP Billiton Ltd. (BHP), called an end to the era of “massive expansions of iron ore.” BHP and rivals Rio Tinto Group (RIO) and Vale SA (VALE5) are flooding the global market, spurring a surplus after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil.

“I don’t think next year would be ideal to be adding new supply,” Daniel Morgan, a Sydney-based analyst at UBS AG, said in a Nov. 17. phone interview. “The market is pretty well supplied for the next few years.”

BHP stock lost 4.7 percent in Sydney this week for the biggest weekly loss since March, while Rio shares fell 6.1 percent. Fortescue Metals Group (FMG) Ltd., the country’s third-biggest shipper, retreated 54 percent this year.

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RPT-Quebec’s ambitious Plan Nord mineral project goes south – by Allison Lampert and Nicole Mordant (Reuters India – November 21, 2014)

http://in.reuters.com/

Nov 20 (Reuters) – A plan by the Canadian province of Quebec to spend billions to develop the mineral riches of its northern region has been dealt a crippling blow by the pending closure of a major mine as iron ore prices sink and China’s interest wanes.

The Plan Nord project hopes to attract C$80 billion ($71 billion) of investment to the vast northern region, of which the iron ore-rich Labrador Trough is a major component. The French-speaking province is trying to sell the plan globally and is hoping miners will flock to northern Quebec after the government invests in the infrastructure necessary to open it up.

But Plan Nord took a big hit on Wednesday, when Cliffs Natural Resources said it is closing its Bloom Lake iron ore mine after struggling to secure funds to expand the mine and make it viable. Chinese steelmaker Wuhan Iron & Steel owns a minority stake in Bloom Lake.

Bloom Lake, one of three producing iron ore mines in Quebec, would have become a major customer for a railway line being considered under Plan Nord.

“Without Bloom Lake there’s no Plan Nord,” Cliffs Chief Executive Lourenco Goncalves told Reuters. “Without the mine, there’s pretty much nothing for Plan Nord to transport from point A to point B.”

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Rock-bottom prices forcing Cliffs to pull up stakes in Canada – by Bertrand Marotte and Nicolas Van Praet (Globe and Mail – November 20, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

MONTREAL — Cliffs Natural Resources Inc.’s Canadian adventure is winding down. The Ohio-based mining giant is preparing to shut down its money-losing Bloom Lake iron ore mine in northeastern Quebec amid rock-bottom prices for the mineral and high operating costs. It has already closed a Labrador iron ore property at Wabush and said it is looking to sell its chromite deposits in northern Ontario’s Ring of Fire.

Cliffs has spent hundreds of millions of dollars developing the high-potential Ring of Fire deposit and the existing Lake Bloom operations, but has run into a series of roadblocks, including a five-year low for iron ore prices, slumping Chinese demand and major delays in getting agreements with Ontario and First Nations over essential infrastructure for the Ring of Fire.

A shutdown of Bloom Lake would be a major blow to the local economy and to the provincial government’s multibillion-dollar Plan Nord economic development strategy pinned on natural resources extraction north of the 49th parallel.

Likewise, the Ontario government had made the Ring of Fire the centrepiece of its ambitious development plans for the mineral-rich region about 500 kilometres northeast of Thunder Bay in the James Bay Lowlands. And Cliffs had been the leading mining player in that plan.

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Cliffs’ massive closure costs at Bloom Lake stun analysts – by Peter Koven (National Post – November 20, 2014)

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

Three weeks ago, Lourenco Goncalves warned that shutting down the Bloom Lake mine in Quebec would not be a simple task. “Going away from [Bloom Lake] is not deleting it on a computer. It’s a pretty complicated process,” the chief executive of Cliffs Natural Resources Inc. told the Financial Post.

He wasn’t kidding. Cliffs announced on Wednesday that it plans to exit Bloom Lake. And if it can’t find a buyer, it expects to be on the hook for astounding closure costs of US$650-million to US$700-million during the next five years. The stock plunged US$2.04 or 20% to US$8.17 in New York on the news.

The Cleveland-based miner did not respond to requests for comment. But analysts said a key problem for Cliffs is the penalty costs involved in breaking a “take or pay” rail contract between Bloom Lake and the Quebec North Shore and Labrador Railway Company. If the mine shuts, there is no choice but to terminate that contract.

Citigroup analyst Brian Yu was forecasting US$360-million of care and maintenance and transport penalty costs over three years to close Bloom Lake, noting the company’s estimate is “obviously much larger.”

Cliffs said in a filing this month that if Bloom Lake were to close, “various commitments including rail minimums, royalties, and other ongoing costs could be incurred.”

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Lacking buyers, Cliffs Natural looks to exit Quebec’s Bloom Lake mine – by Bertrand Marotte (Globe and Mail – November 19, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

MONTREAL — Hobbled by an iron ore price plunge and high costs, Cliffs Natural Resources Inc. says it is “pursuing exit options” for its Eastern Canadian iron ore operations which may result in the closure of the Bloom Lake mine.

The U.S. iron ore producer, cut to junk status by Standard & Poor’s last month, said on Wednesday that a “potential investment” in Bloom Lake is not “achievable within a time frame acceptable to Cliffs.”

Closing costs at the mine, located north of Sept-Îles, Que., would be in the range of $650-million (U.S.) to $700-million over the next 5 years, the company said. About 500 people work at Bloom Lake.

The price for iron ore – a key ingredient in steel-making – has slipped to its lowest level in more than five years. It is now in the $72-per-tonne range and could fall to less than $60 as output continues to rise and global demand remains weak, Citigroup Inc. said in a report.

A slump in Chinese demand and a global iron ore glut as Australian producers ramp up production have pushed prices down. “The drop in the iron ore price is forcing the closure of some of the higher-cost ore mines,” Raymond James analyst Adam Lowe said.

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NEWS RELEASE: Cliffs Natural Resources Inc. to Pursue Exit Options for its Eastern Canadian Operations

CLEVELAND, Nov. 19, 2014 /CNW/ — Cliffs Natural Resources Inc. (NYSE: CLF) announced today that it is pursuing exit options for its Eastern Canadian iron ore operations which may result in the closure of the Bloom Lake mine.

Lourenco Goncalves, Cliffs’ Chairman, President and Chief Executive Officer said, “Despite the continued interest of the prospective equity partners in Bloom Lake and in its high quality ore, the potential investment is not achievable within a time frame acceptable to Cliffs. With expansion no longer viable, we have shifted our focus to executing an exit option for Eastern Canadian operations that minimizes the cash outflows and associated liabilities.”

The Company previously disclosed that to make Bloom Lake viable, the development of the mine’s Phase 2 was necessary. The investment was estimated to cost $1.2 billion. In the event of a closure, the estimated closure costs are expected to be in the range of $650 million to $700 million in the next five years.

Cliffs stated also that the Company’s subsidiary, Cliffs Quebec Iron Mining Limited, along with Bloom Lake General Partner Limited and The Bloom Lake Iron Ore Limited Partnership, recently lost an arbitration claim they filed against a former Bloom Lake customer relating to the August 2011 termination of an iron ore sales agreement. In November 2014, the arbitrators decided in favor of the former customer and awarded it damages in an amount of approximately $71 million as well as attorneys’ fees and accrued interest from the date of termination of the offtake agreement in August 2011.

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Small Brazilian iron ore miners soldier on amid low prices – by Stephen Eisenhammer and Marta Nogueira (Reuters U.S. – November 12, 2014)

http://www.reuters.com/

Nov 12 (Reuters) – Small Brazilian iron ore miners are proving resilient in the face of low global prices, pushing ahead with expansion projects even as that reduces the chance of a quick rebound in prices.

Interviews with five iron ore “juniors” operating in Brazil showed players in this section of the industry, helped by cheap development bank loans and the flexibility to sell locally or abroad, are not being forced out of business at the pace larger rivals hope.

The price of iron ore has fallen 40 percent this year as new capacity from major Australian mining companies entered the market just as Chinese demand growth slowed.

The “big three” in iron ore, Brazil’s Vale, Australia’s BHP Billiton and Rio Tinto, argue the self-inflicted price drop will drive higher-cost producers out of the market, making it possible to retrieve market share and for the price to rise.

But such a process is complicated. Many predicted a similar process when coal prices dropped last year, but coal mines have been slow to close, keeping prices down.

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As China demand slows, Indian iron ore imports surge to record – by Manolo Serapio Jr (Reuters India – November 11, 2014)

http://in.reuters.com/

SINGAPORE, Nov 11 (Reuters) – India’s iron ore imports jumped to a record 5 million tonnes in April-October, industry data showed, as a deepening shortage at home forces steelmakers to turn overseas for the raw material.

Gathering momentum in Indian imports should absorb some of the global surplus of iron ore and help stabilise prices that have been hammered by slowing demand from top buyer China.

But analysts warned that shipments to India, a country that holds vast reserves of iron ore and which was once the world’s No. 3 supplier, would not wholly make up for the drop in Chinese appetite or fuel a sharp rebound in global prices from their lowest since 2009.

India imported 5.06 million tonnes of iron ore in the first seven months of the fiscal year ending in October, according to data emailed to Reuters by industry consultancy SteelMint. The firm tracked shipments from 17 major ports.

Data collected separately by consultancy OreTeam puts April-October imports at 4.9 million tonnes. Official government data only covers April-August, with imports totalling 2 million tonnes.

Mining curbs due to court action against illegal mining have constricted iron ore supply in India.

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NEWS RELEASE: Labec-century-awarded-the-2014-explorer-of-the-year-award-cim-newfoundland-branch

TORONTO, CANADA–(Marketwired – Nov. 10, 2014) – Century Iron Mines Corporation (“Century” or the “Company”) (TSX:FER) is pleased to announce that its 60% owned joint venture, Labec Century Iron Ore Inc. (“Labec Century”), received the “2014 Explorer of the Year Award” from the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”) – Newfoundland Branch at its annual awards banquet in St. John’s on November 8, 2014.

The award recognizes the significant advancements in iron ore resource development and exploration at the Joyce Lake DSO (“Direct Shipping Ore”) deposit, which is 100% owned by Labec Century and located in Newfoundland and Labrador.

“Receiving this award is a great honour. Labec Century is proud to have discovered the Joyce Lake DSO deposit from early stage prospecting in a previously unknown DSO area in the Labrador Trough. It means a lot to us, coming from this prestigious professional association, and we are truly grateful for this recognition,” said Sandy Chim, Chairman of Labec Century and President and CEO of the Company.

The Joyce Lake project is the first DSO discovery in the area in three decades. Century and Labec Century together have invested almost eight years of work and approximately $30 million to bring the project to its current advanced stage of feasibility and environmental studies, which are expected to be completed in the first quarter of 2015.

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Iron ore and the dangers of living by the sword – by Andy Home (Reuters U.S. – November 11, 2014)

http://www.reuters.com/

LONDON – (Reuters) – The price of spot iron ore has sunk to $75.50 per ton this week, its lowest level since 2009. The scale of the price collapse has been breath-taking. Iron ore has dropped by over 35 percent since the start of the year, a significantly worse performance than any other industrial metal.

But what’s really shocking is that the price is now at a level that until recently was collectively deemed impossibly low. It was only in April that José Carlos Martins, executive officer of ferrous and strategy at Vale, the world’s largest producer of iron ore, told analysts that “one thing is for sure, the price will not go below $110 on a sustainable basis”.

This was not irrational producer exuberance. Martins was only voicing the prevailing consensus view when he went on to argue that “we have many times seen the price going below this level but recovering very fast”. Well, here we are with the price trading not just below $110 but a lot lower still. And sustainably so.

That tells you that something has gone very wrong with the iron ore narrative. This market is in a place it was not supposed to be.

And while big producers such as Vale, Rio Tinto and BHP Billiton are sticking to that narrative, they are now facing the unpredictable consequences of a pricing war they collectively started.

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