11 BILLION TONNES of Iron Ore ( M and I ) and 12 BILLION Inferred...
The New Player in Iron Ore
Message: BAY STREET-Steel slump puts crimp in Labrador Trough (ADI Noted)
* Iron ore price slump hurts development in region
* Shares of junior producers active in Trough struggle
* Resource analysts see value in shares of some players
By Julie Gordon
TORONTO, Dec 2 (Reuters) - "Strike while the iron is hot,"
the old saying goes, and a legion of iron ore miners setting up
in Canada's remote Labrador Trough want to do just that. But,
for now, they have to wait.
Iron ore, the main component of steel, has turned ice cold
in recent months, with the benchmark price
plunging to $86.70 a tonne in September from $149.40 in April.
It has since recovered to about $116 a tonne.
The downward spiral has jeopardized the viability of the
sub-Arctic region's vast iron ore deposits just as the first new
mines in decades were opening. Some projects are being put on
As a consequence, shares of junior miners such as Alderon
Iron Ore Corp, Champion Iron Mines Ltd and
Century Iron Mines Corp, have tumbled as projects that
looked rich at $150 a tonne suddenly lost their luster.
Still, analysts say the region's potential remains
compelling. They caution, though, that investors must look
closely at the contenders to judge which are best placed to ride
out the bad times and prosper over the long term.
"There's opportunity for the region, but there are
challenges and uncertainty," said RBC Capital Markets mining
analyst Robin Kozar. "Many companies will not succeed, but at
the same time, some companies will be successful."
The Labrador Trough, which straddles the border between
Quebec and the province of Newfoundland and Labrador, has
attracted a wave of foreign interest in recent years, as Chinese
and Indian steelmakers have scrambled to stake a claim in the
world's next big iron mining district.
The region currently produces just 3 percent of the global
seaborne supply, about 40 million tonnes a year. But that will
grow rapidly if even just a fraction of the dozens of planned
projects get off the ground.
For now, a sluggish steel market is weighing against that
potential. On Thursday, Chinese steel futures slipped to their
lowest level in more than two months, reflecting slower demand
in the world's top steel consumer.
The broader global outlook hasn't helped as the European
debt crisis and the looming U.S. "fiscal cliff" raise the
specter of another world recession.
With steel prices falling and many mills operating well
below capacity, steel consumers don't have any incentive to
build up inventories, said Kevin Stevick, chief executive at
Optima Specialty Steel Inc, a maker of steel products.
"Everyone is keeping their inventories at an absolutely
minimum right now," Stevick said.
"They can get it from the mills in relatively short order
because the order books are off compared to where they were last
year," he said. "So that certainly weighs down on the market."
In the Labrador Trough miners are already retrenching.
Labrador Iron Mines Holdings Ltd, a new producer in
the region, slashed capital spending and deferred projects to
2013. The junior said it won't restart operations in the spring
unless it feels prices will stay above $110 next year.
Cliffs Natural Resources Inc, a larger producer that
has struggled with higher-than-expected costs, has delayed an
expansion at its Bloom Lake project and cut its sales volume
targets for 2013.
STEELMAKERS TAKE CONTROL
The Labrador Trough has been pumping out iron since the
1950s, though many projects were shuttered during the 1980s and
1990s as demand slowed. As urbanization in China and India
started to drive demand earlier this century, major players such
as Rio Tinto Plc and ArcelorMittal, the
world's top steelmaker, moved in.
For steelmakers, long dependant on iron from Vale SA
, BHP Billiton Ltd and Rio Tinto, new
projects in Canada will help diversify supply.
China's Heibei Iron and Steel Group has signed a deal with
Alderon, while Wuhan Iron and Steel Co Ltd has agreements with
Century and Adriana Resources Inc. New Millennium Iron
Corp and India's Tata Steel started up their first
joint project in September.
But to bring more tonnes online in the region, and keep
operating costs manageable, new infrastructure is needed.
To that point, Canadian National Railway and Caisse
de Depot, the Quebec pension fund manager, are studying the
feasibility of building an 800-kilometer (500-mile) railway to
service new and existing mines in the region.
As well, a new multi-user port is already under construction
at Sept-Iles, Quebec. The government-backed project is expected
to be completed in March 2014.
"You've got a multi-user railway and multi-user port being
planned, studied or developed, all with the support of the local
government and other stakeholders," said Colin Healey, a mining
analyst at Haywood Securities.
"All those things support the potential for production from
several of the deposits being developed in the Trough."
That means while the volatile iron price is a challenge, the
region is not just going to roll over and die, say experts. In
fact, with many juniors trading at two-year lows, there are even
buying opportunities, Kozar said.
His top pick is Alderon Iron Ore, which has four "strong
buy" ratings, 12 "buy" ratings and one "hold", according to
Thomson Reuters I/B/E/S. Another popular choice is Champion,
which has five "strong buys", seven "buys" and one "hold".
Labrador Iron Mines and New Millennium, two new producers,
are also expected to do well over the longer term, though both
have more "holds" as they work out early hiccups.
For RBC's Kozar, picking the right company comes down to
three factors: the quality of its assets and products, easy
access to infrastructure and the financing to make the project a
"You could have infrastructure in place, you could have a
great asset," he said. "But you don't have any money to build it
- game over."
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