In ore - breaking into the iron ore market
A steep rise in iron ore consumption is forcing China’s steel industry to look further afield for raw materials. Michael Forrest talks to Tayfun Eldem, President and CEO of Alderon Iron Ore Corporation in Canada, about how the junior mining company is breaking into a market no longer restricted to the big players.
In today’s modern and increasingly tech-savvy world, we want more cars more often, faster upgrades on electronics, and bigger, better buildings – and we want them now. This requirement for materials, machinery and transport is pushing an already stretched steel industry to the peak of its production, and it’s not going to plateau any time soon.
Producing 45% of the world’s steel for such infrastructure and consumer goods is China, which in 2010 imported 618Mt of iron ore for the production of 810Mt of steel to meet this demand. Brazil and Australia accounted for the majority of global sea-borne iron ore trade, with imports also sourced from India, Canada and South Africa.
Until 2008, annual negotiations on the price of iron ore took place between Chinese steel mills and the three main sea-borne iron ore companies, Rio Tinto and BHP Billiton in Australia, and Vale SA in Brazil. Following significant price increases in the preceding years, these companies scrapped the annual system and replaced it with a quarterly price review based on published indexes from Metal Bulletin, Platts and the Steel Index – a move that made for more transparent pricing, but also increasing price volatility.
At the same time, Chinese iron ore consumption was rising rapidly at a combined annual growth rate of 10.8% over the past decade – nearly three times that of the past 70 years. The largest steel company in China and the second largest in the world, Hebei Iron and Steel, reflected on this supply situation and, like many Chinese companies, invested in overseas production to secure raw materials. One investment was the developing Kami project run by Canadian junior mining company Alderon Iron Ore Corporation. The deal, signed in April this year, has three facets:
- A US$88.3 million acquisition of 19.9% of the outstanding common shares in Alderon.
- The purchase of a 25% interest in a newly formed, limited partnership that will be established to own the Kami project for a purchase price of US$105.7 million.
- Receipt of the 25% interest will oblige Hebei to purchase, upon the commencement of commercial production, 60% of the actual annual production from the Kami project, up to a maximum of 4.8Mt of the first 8Mt of iron ore concentrate produced each year.
The price paid by Hebei for the latter will be based on the monthly average price per dry metric tonne for iron ore sinter-feed fines, as quoted by Platts Iron Ore Index (including additional quoted premium for iron content greater than 62%), less a discount equating to 5% of this quoted price. Hebei will also have the option to purchase additional tonnage at a price equal to the Platts Price without any such discount. The final part involves a commitment to fund 25% of the remaining capital. All of these facets require regulatory approval by the Chinese government, the Toronto Stock Exchange and the NYSE MKT Stock Exchange.
Yes, we Kami
Tayfun Eldem, President and CEO of Alderon explains, ‘The agreement with Hebei puts the project on a sound financial basis.’ The Kami project is based in the Labrador Trough, Canada’s iron ore host geology where 99.8% of the country’s production is mined. The area plays host to mines operated by the Iron Ore Company of Canada (IOC, Rio Tinto), ArcelorMittal – the world’s largest steel maker – and Cliffs Natural Resources, the USA’s largest iron pellet producer. The Trough, also known as the Labrador-Québec Fold Belt, extends for more than 1,200km along the eastern margin of the Superior Craton from Ungava Bay, Hudson Strait, to Lake Pletipi, Québec. Iron deposits occur throughout much of the length of the Labrador Trough, which measures around 100km wide in its central part and narrows considerably to the north and south. It is a component of the Circum-Superior Belt that surrounds the Archean Superior craton, which includes the iron deposits of Minnesota and Michigan.
Kami, which sits in the southern part of the Trough, is affected by the billion-year-old Grenville Orogeny, a long-lived Mesoproterozoic mountain-building event that has metamorphosed and strongly folded the host rocks. This metamorphism varies from greenschist to high-grade amphibolite/granulite, upgrading the ore and re-crystallising both iron oxides and silica in the primary iron formation to produce sugary-textured quartz, magnetite and specular haematite schist or gneiss. Through mapping over the Kami property, Alderon has identified two iron oxide basins – the Rose, containing most of the resources and continuing 9km to the north, and the south-extending Mills Lake basin. The iron ore is classified as Lake Superior type, with banded iron oxides, magnetite and haematite with quartz.
Alderon had drawn upon past exploration in the district dating back as far as 1914, but it was not until 2006, when Altius Minerals Corporation adopted modern exploration methods including a helicopter-borne, high-resolution airborne magnetic survey, that the company effectively identified the extent of the iron formations. Alderon acquired the property from Altius (which retains a 25% shareholding) in 2009 and has since completed an intensive diamond-drilling programme of over 57,300 metres. This has allowed the calculation of a resource estimate totaling 490Mt of indicated resources at 30% total iron, and 598Mt inferred resources at 30.3% total iron.
Non-reserve mineral resources do not have demonstrated economic viability. Alderon is modelling the results of its fi nal drilling campaign that was completed in April 2012, and expects to issue an update that will see a large portion of the resource upgraded into measured and indicated categories.
‘These are large resources by any consideration, and support the project,’ says Eldem. Test work on recovered drill core reveals that gyratory crushing and primary grinding provides material for gravity separation through spirals, which amounts to 78% of the final concentrate by weight. The remaining 22% is recovered using magnetic separation, which gives a final concentrate grading 65.5% iron, 4.5% silicon dioxide and 0.6% manganese. Overall, some 82.9% of the iron is recovered.
‘These results, although it is still early days, are based on the preliminary economic assessment study (PEA) completed last year,’ notes Eldem. The test concentrate has very low deleterious alumina and phosphorus, making it ideal as a sweetener for those with higher levels – such as western Australia ores that range from 2.14–1.36% alumina and 720–230ppm phosphorus, compared with 0.2% and 40ppm at Kami respectively.
Although iron ore prices are currently high at more than US$130/t, it is nevertheless a bulk commodity and requires extensive infrastructure for successful development. Surrounded by operating mines and infrastructure, including the all-important rail link to deep-sea ports some 400km away, Kami seems to tick all the boxes. Within 15km of Kami sit two rail lines (one private, the other multi-user) as well as low-cost electrical power, and the site is only 2.5km from a paved road. At present the multi-user rail, which extends through Labrador and Quebec to Sept Iles-Pointe Noire on the St Lawrence seaway, has some 47Mt per year of spare capacity, with only 33Mt per year currently in use. What’s more, the federal government has announced an investment of US$55 million to upgrade the Pointe Noire port to take cape-sized vessels weighing up to 300,000 tonnes, complete with compatible loading facilities.
The timetable for development indicates final resource definition and publication of the feasibility study later in 2012, with permitting expected in 2013 and commercial production planned to commence late 2015. The PEA indicates a plan for 8Mt per year of concentrate grading 65.5% Fe, based on resources at Rose central. Capital expenditure is forecast at US$989 million with an operating cost of US$44.87 per tonne of concentrate, giving the project a very robust NPV (8%) at US$3.1 billion. As the PEA is preliminary in nature, its inferred mineral resources are considered too geologically speculative to be given the economic considerations that would enable their categorisation as mineral resources. As such, there is no certainty that the conclusions reached in the PEA will be realised.
That said, the outlook is certainly bright. Alderon has an experienced team, many of whom have worked for IOC and other producers in the region. There is also a precedent for new mines in the Trough. Consolidated Thompson, whose 2006 bankable feasibility study was acquired by Cliffs Natural Resources last year for US$4,900 million, just 12 months after its first ore shipment.
Despite being in its early stages of development, the Kami project has the potential to help overcome the supply-demand challenges currently faced by the steel industry and particularly China, which is seeking to diversify its imports of iron ore and to ensure security of supply.
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