Hindsight is always 20-20 and, after something happens, it’s often far easier to see hints that have been left right out in plain sight.
And, looking back, it’s obvious that the Scully iron ore mine in Wabush was about to close and that 400 workers were about to be left in the lurch.
It’s not only warnings like a November 2013 news story in La Soleil that said the mine had 90 days to turn its finances around; if you read the corporate reports, the writing’s practically on the wall.
Cliffs Natural Resources owns the Wabush operation, and Cliffs has been in the financial media for months; its stock price has been dipping, underperforming its industry fellows, and that’s often a clear indicator that a shakeup is on the way.
Not only that, but the company has been dealing with a sizable minority group of activist shareholders who have been arguing the U.S. assets of the company should go into something like an income trust, while its foreign assets (including Wabush) should be spun off.
Cliffs was, in its own way, experiencing corporate warfare on all fronts.
But look at three different sets of financial figures from the company’s third-quarter records and you’ll see a clearer peril.
The company’s Asia-Pacific iron ore assets were producing ore at a cost per ton of US$59.44. (All the numbers from the report are in U.S. dollars.) Revenues per ton were $108.88. The company’s U.S. iron ore assets were producing ore at $64.81 per ton, and getting revenues of $112.67 per ton.
Wabush, meanwhile, was producing ore in the third quarter of this year at $108 per ton, and selling it for $109.52 per ton.
But that’s only the beginning. (Interestingly, it’s only Wabush and the company’s Bloom Lake assets where costs per ton are broken out by individual mines. Someone at corporate headquarters was being abundantly clear about where the costs were coming from.)
During the second quarter, when the Scully operation had to write off stockpiles of unsellable ore, the cost per ton ballooned to more than $200. In the news release announcing the mine’s closure, the company said the full-year average cost of ore production was $143 a ton.
Mine it for $143 a ton, sell it for $110. How many tons of $59.44 Asia-Pacific ore do you have to mine and sell just to break even?
A thinking person might also stop and ponder a couple of sentences from another part of Cliffs’ third-quarter report: “Looking ahead, the company continues to evaluate the long-term strategic fit of Wabush Mine and viability of Bloom Lake’s Phase II expansion project. Driven by this ongoing evaluation, the company will only provide its expected full-year 2014 sales volume for Bloom Lake’s Phase I of approximately 5.5-6 million tons of iron ore concentrate.”
When you’re not even going to forecast a mine’s output for the coming year, it’s pretty clear what’s going to happen: you’re not expecting much output.
It’s a huge blow for Wabush, and the loss of
royalties will hurt the whole province.
But the numbers don’t lie.