Iron Ore Miners Strive To Avoid Past Mistakes As Prices Soar
Record iron ore prices are encouraging a wave of investment in mining companies, with companies hoping to avoid a repeat of the previous boom of a decade ago that ended with multiple shaft closures and abandoned developments.
Chinese companies are scrambling to build one of the world’s largest mines in West Africa, while a handful of small companies are developing new mines in Australia or reopening wells that were idle years ago when prices were low. Many are betting that demand for iron ore, used to make steel, will remain strong as governments around the world inject billions of dollars into their economies.
The benchmark iron ore price hit a record high of $ 233.10 per metric tonne this month, according to data from S&P Global Platts, as China’s steel industry ramped up production. The rally reflects price gains for commodities, including copper and crude oil, which are also in demand as the global economic recovery from the Covid-19 pandemic gathers pace.
New entrants to the iron ore business see an opportunity to prosper because the industry’s largest producers are behaving differently than a decade ago.
BHP Group Ltd.
and Rio Tinto RIO -0.35%
PLC, the world’s two largest mining companies, say they don’t want to produce much more iron ore in Australia, which accounts for more than half of the world’s raw material trade. The pair’s current investments, which are still worth billions of dollars, are aimed at replacing output from the old pits, and they expect better growth in demand for commodities like copper.
Another major iron ore producer, the Brazilian Vale HER,
is working on rebuilding production following two fatal spills from dams storing mine waste. Large Western miners also faced pressure to increase shareholder dividends after splurging on deals and big projects on multiple commodities during the previous boom, which were then slashed by billions of dollars.
The previous boom exposed the risks of investing in underdeveloped areas. Many companies that have raised billions of dollars to build mines, often in new iron ore regions devoid of the rail and other infrastructure needed to make projects viable, never produced a single ton of ore.
Few places better illustrate the cycle of growth to recession in commodities than the operation of Bloom Lake in Canada. In 2011, when iron ore prices hit an all-time high, Cleveland-Cliffs Inc.
paid approximately $ 4.9 billion Canadian, the equivalent of $ 4.1 billion today, to buy Bloom Lake. When prices plummeted five years later, the American miner closed the pit and accepted an offer of C $ 10.5 million to get rid of it.
Today, investments are flowing again into Bloom Lake. Current mine owner Champion Iron Ltd.
, restarted production in 2018 and is spending C $ 589.8 million to double the mine’s annual production capacity to 15 million tonnes of iron ore. The company is considering further expansion and recently purchased another nearby iron ore deposit.
Champion Iron, which this week announced a five-fold increase in annual profits, wants to sell more iron ore to U.S. steel mills and less to China, a different strategy from that pursued by Cleveland-Cliffs a decade earlier. The company is also producing more of a high quality 67.6% concentrate that can be used by electric arc furnaces to supplement scrap metal and can be sold at a high price.
“I want us to have product diversification [because] when the market turns, that could be a problem for us, ”said Michael O’Keeffe, executive chairman of Champion Iron.
Keen not to repeat the mistakes of the past, many budding iron ore companies target small projects that can start quickly and grow in stages. To reduce up-front costs, they rely on trucks rather than building railroads to transport the ore.
“We are seeing new entrants entering into flexible mining and infrastructure deals that allow mines to close without financial penalty if prices fall below their breakeven point,” said Rohan Kendall, analyst at consultancy Wood Mackenzie.
The consulting firm estimates that 20 new mines with a total annual capacity of 150 million tonnes will start this year – excluding all in China – a high capacity level for five years. Last year, only 5 million tonnes of capacity were added, up from 14 million tonnes in 2019.
Iron ore has seen a bigger rush for new entrants than many other mining products – which have also rallied – largely because companies don’t need huge amounts of cash up front to the infrastructure of mining sites as with metals such as copper. The deposits are relatively abundant and easy to extract, scraped off the surface of the Earth, crushed and transported to port for shipment.
But whether an iron ore mine can survive falling prices ultimately depends on costs, Mr Kendall said.
BHP and Rio Tinto benefit from owning existing railways and port infrastructure, making them more resilient to a sharp drop in prices. In 2020, Rio Tinto had an underlying profit margin of 74% on Australian iron ore which averaged $ 98.90 per tonne.
Rio Tinto must decide whether or not to participate in the development of the iron ore deposit of Simandou, in Guinea, in which it has a stake. Chinese companies are pushing to develop ore from Simandou, which would require a 400-mile railroad to the coast. However, the deposit is so large that some analysts believe the development could cut long-term iron ore prices by more than 10%, threatening to make Rio Tinto’s operations in Australia and Canada less profitable.
Many analysts believe that iron ore prices will drop soon. Capital Economics expects them to drop to $ 140 a tonne by the end of the year. A repeat of the previous boom in mining investment is unlikely, in part because miners will be aware of China’s plans to reduce carbon emissions in the steel industry, he said.
Eduardo Bartolomeo, Managing Director of Vale, expects this iron ore cycle to be different as the previous one was supported by a demand shock linked to China’s urbanization.
“What we are seeing now is a very hot market that we call ‘stronger for longer’,” he said. “We will bring back the offer, but we don’t think the market will soften in the next two years.”
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Write to Rhiannon Hoyle at [email protected]
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