Swimming in a sea of sharks

Markets are tough, but new Kami mine has government support

Ashley Fitzpatrick afitzpatrick@thetelegram.com
Published on May 29, 2014
Sea of sharks

When it comes to iron ore producers, Canada is a minnow in a sea of sharks, according to Alderon Iron Ore president and CEO Tayfun Eldem.

Speaking to an Atlantic Provinces Economic Council (APEC) gathering in 

St. John’s Wednesday morning, he said the country is producing about 45 million tonnes of iron ore a year, almost all from the Labrador Trough region on the Quebec-Labrador border. That production is about one and a half per cent of the total seaborne trade.

He compared this to the region of Western Australia, where mining companies are producing more than 450 million tonnes per year.

About 24 hours before his speech at the Delta Hotel, Alderon’s top man was signing a benefits agreement with the Government of Newfoundland and Labrador, based on the assumption the company’s Kami iron ore mine will be fully financed by the end of the summer — in a world where the sharks are always circling.


Significant employment, tax revenues

The Kami mine would mean $4 billion in tax revenues for the province, $2.6 billion by more conservative government estimates, and 400 long-term jobs post-construction, and would help keep Canada in the game globally as an iron ore producer.

However, in terms of fundraising, the Kami mine project is fighting the same elements already restricting Canada’s growth in the global marketplace.

Working here involves hard-rock mining, making projects inherently more expensive; lower grades make the work more labour intensive, adding to cost; labour costs are higher than in competitor countries such as Brazil; and transportation costs to reach key markets such as China are higher.

“Yet Canada’s Labrador Trough remains an attractive investment target for foreign investors,” an optimistic Eldem told his audience, after openly listing the challenges.

He said Chinese steelmakers — including Alderon’s main partner in Kami, Hebei Iron and Steel — are looking to diversify their sources of iron ore supply, moving away, where possible, from the “big three” of BHP, Rio Tinto and Vale.

“Getting their own sources of supply and thereby diversifying away from the big three is their way of controlling pricing,” he said.

He said Canada is politically stable, has an existing natural resources-fuelled economy, has invested in infrastructure like the new multi-user dock at the Port of Sept-Iles and produces a high-grade concentrate product, low in problematic impurities.


No secondary processing

As for the Kami mine specifically, it has the benefit of not having to set up secondary processing in the province. Alderon and its partners have been released from any obligation to establish a pellet plant here.

“This is not an emotional decision. This is one that’s based on facts and the business case,” said Derrick Dalley, the province’s minister of natural resources.

“We’ve gone through that looking at the details, both from the company and internally, taking a look at the product and what the global market demand is right now, and it was determined in that analysis that it’s not economic to proceed with secondary processing. So we’ve made a decision that, for the economic benefit for the province, the benefit to the people, to exempt from secondary processing.”

That position may come as a surprise to those recalling the heated debate around Vale’s nickel mine in Voisey’s Bay and former premier Brian Tobin’s comment to reporters that not one spoonful of unprocessed ore would leave Newfoundland and Labrador.

A deal was eventually reached allowing Vale to move ahead with establishing that mine, under the leadership of another Liberal premier, Roger Grimes.

The deal ultimately resulted in the construction of the $4.25-billion nickel processing facility in Long Harbour, with Vale being allowed time to process and sell ore elsewhere before having to start on the facility in Newfoundland.

Yet, according to the current government leadership, iron ore is not nickel.

As evidenced by the idling of the Scully Mine in Wabush earlier this year and layoffs reported in other Labrador Trough operations, a high cost of production has hurt Canada’s iron ore producers, making a new mine a tough sell.

“The mines in Western Australia are extremely low-cost,” said Patricia Mohr, a commodities expert and Scotiabank senior economist, who noted Australia and Brazil are also bringing new mines onstream, offering more supply.

“So it’s going to be a challenging environment for iron ore producers in Labrador and in northern Quebec, where the (production) costs are quite a bit higher.”

Add to that the fact that spot prices for iron ore in China have been on the decline in recent years.

The price, Mohr said, was US$115 per metric tonne in April, down from US$136 in December 2013 and US$187 in February 2011.

The global competition and challenging market conditions for the Labrador product are exactly why Liberal Leader Dwight Ball said he feels now is not the time to double down on Tobin’s famous demand of in-province processing.

“To me, it’s a project-by-project, almost case-by-case scenario, and sometimes when you try to restrict companies to certain business models, well in some cases you could actually lose the project,” he said following question period at the House of Assembly Wednesday.

He said Chinese producers are currently looking for iron ore concentrate, rather than pellets, to support that country’s continued urbanization. His position mirrored that of the Progressive Conservatives.

Only NDP Leader Lorraine Michael is taking issue with the secondary processing exemption.

“This is something we should be going for. This is what we should be trying to get,” she said.

“To think that they actually have a very clear agreement that they would never even go near Alderon for that doesn’t seem to be very smart to me. It shows that they do give away the shop, that they do give too much to corporations and they’re not there, I don’t think, for the full interests of the people, because if they were, they would be looking at processing as something that’s a possibility.”

Meanwhile, out of environmental assessment, with mining leases and a benefits agreement in hand, Eldem has expressed confidence in the ability of the Kami partnership to obtain the financing required to get the new mine into production.

“We’ve been working on that financing for nearly 10 months now and we’re approaching the finish line, and as soon as financing is in place, we’ll be able to start construction.”