Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Cliffs Natural Resources (NYSE:CLF) said Wednesday it is “pursuing exit options” for its Eastern Canadian iron ore operations, which is likely to result in the closure of its Quebec-based Bloom Lake mine.
The announcement comes only weeks after the U.S. iron ore producer, cut to junk status by Standard & Poor’s last month, revealed that three “big steelmakers” were in talks to invest in the project.
The company’s chief executive, Lourenco Goncalves, said in a statement that the foreseen “potential investment” in Bloom Lake was not “achievable within a time frame acceptable to Cliffs.”
Goncalves, who took charge in August after the Cleveland-based miner lost a proxy battle with hedge fund Casablanca Capital, wants the company to narrow its focus to five iron ore mines in Michigan and Minnesota.
The mine closure, estimated to cost $650 million to $700 million over the next five years, would be a major setback to Quebec’s economy and its government’s Plan Nord project, aimed to fast-track the extraction of natural resources in the northern part of the province.
Cliffs obtained Bloom Lake after acquiring Consolidated Thompson Iron Mines Ltd. in 2011. As of the end of 2013, the mine employed 579 people, 40 of which were local.
In October the company notified the provincial government of Newfoundland and Labrador it was closing Wabush Mines, which had been idle since February.
Cliffs dropped 14% to $8.78 at 9:39 a.m. in New York. The stock is down 67% this year.
Image courtesy of Cliffs Natural Resources.
10 Comments
guest
Greed, stupidity, mismanagement – you pick the order.
Arthur
Let’s start with the “unions”. Thats real greed, stupidity and mismanagement. You wanted it, you got it.
LAMB
It wasn’t the Unions, it was MANAGEMENT right to the BOARD level that screwed up – as you said “GREED” – trying to make a quick buck.
Itabirite
It all starts with the resource, and it is a lousy deposit. The acquisition wasn’t worth $500 M, let alone almost $ 5 B. Corporate ego, CEO arrogance and Board complicity should top the order.
Fermont
it’s all about culture and management vision which lead the mission to disaster. this is the most business waste money in mining industry to not even see the bottom of the ocean, now you are sinking. congratulation!
LAMB
CLIFFS Board of Directors and the Chairman are to blame for allowing the former CEO to pursue projects that were not going to hold up to financial analysis. With the price of Iron Ore down to $70/ton, CLIFFS may disappear altogether unless they get their act together. Right now, it is putting out “brush fires” to appease Investors, but the main BLAZE coming down the pipe could destroy this company and leave Investors without any return.
The statement that referenced a “time frame acceptable to Cliffs” indicates that this company has no reserves that could hold out until the price of Iron Ore returns to higher levels.
Larry Southwick
Labrador Trough iron mining blues
I think what is happening along the Labrador Iron Trough needs to be kept in
perspective with the fall in prices from $135 per ton average in 2013, to $75
in September, 2014. That is a 45% drop in price in nine months. So it should not be surprising that Cliffs has closed their idled Wabush Mine, is thinking of doing the same to their idled Bloom Lake Mine, that LIM has not shipped ore the last seven months and is on the ropes financially, and that IOC (Rio-Canada) found no buyers for their operation (including a couple of Chinese companies).
Further, what Labrador Iron Mines said regarding their 2Q 2014 results applies to the others as well:
“To compete globally with the rest of the world, it will be necessary to bring down
costs of Canadian iron ore production. Canada is on the opposite side of the
world from the main iron ore market in China. Australia not only has a huge
ocean freight advantage shipping to China, but Australian operating costs are
generally lower than Canadian costs. It is difficult to compete globally if more than two thirds of operating costs are incurred on power, transport and ocean freight. To operate economically in this market environment, iron ore projects in Canada, including the Company’s projects, need to reduce costs to be competitive.”
Thus, while it might be good for the soul to bash management, unions and the
government, the only entities that could have made a real difference are the
Chinese iron ore markets. Face it, reality is that eastern Canada iron mining is not competitive in today’s market. They have been in the past, but not at today’s low, low prices. They will be again when prices rise.
Other Cliffs iron mines ship mainly to the States, where they are competitive. One could advocate throwing the baby out with the bathwater, but it probably makes more economic sense to keep both the baby and the bathwater. Besides, no one wants the bathwater (eastern iron mines), even fires sale prices could not make them competitive.
If the quality of the ore bodies have proven less valuable than originally thought, or the operating costs too high, then those are relevant points to consider and on which to make adjustments in what to do going forward. But remember that a rising tide floats many ships, and rising tides also raise the sales price of idled mines.
Just think of Doc Martin’s Port Isaac tides, from beached ships to floaters, all in
a few hours. If your ship is a leaker, then find a way to fix it while the tide is out. A leaker at low tide can be worked on, a leaker at high tide may still end up under water.
Larry M. Southwick
Larry Southwick
This game of chicken could end badly
Iron ore price in Feb. 2013 was $159/mt, iron ore price Nov. 2014 was $76/mt. New capacity added in 2013 was 156 mmt, another 47 mmt in first half of 2014.
Project pipeline has 515 mmt through 2016, and 91 mmt more in 2017. These increases were initiated in 2010 and later when ore prices were peaking (Bloom Lake was purchased in 2011 when iron ore price was over $185/mt).
So what are analysts as well as the three main companies driving this production increase and price decrease having to say about what is being wrought?
“BHP, The world’s largest mining company said it plans to continue ramping up iron-ore production despite tumbling prices and a glut in supplies” (July 23)
“Everyone is nervous about the iron ore price, admits Vale” (Sept 23)
“Vale loses iron-ore production race, stock falls” (Sept 24)
“Canadian iron ore company (Alderon) Executive Chairman accuses Rio Tinto of predatory tactics” (Oct 10) (Example of little guy getting hosed. EC further stated “”they’re attempting to drive higher cost production out of the market, put them right out of business and attempting to keep new entrants like us from entering the market. Quite simple.”)
“Fortescue chief executive joins iron ore war” (Oct. 17)
“Rio chief hits back at Fortescue boss over iron ore production” (Oct. 18)
“Iron ore race to the bottom not in the interests of Australians” (Nov. 9) (Two of the “Three” have their largest production in Western Australia)
“What was lacking at BHP Billiton’s annual meeting was an admission that what has effectively happened with iron ore is that the company’s shareholders are
subsidizing the profits of Chinese steel mills” (Nov. 24)
“Iron ore massacre: below $70 for first time in five years” (Nov. 25)
“Aussie miners working harder for less money” (Nov. 25) (study focuses on mining professionals)
“Axoim analysts: Sell Rio Tinto amid painful iron ore pricing, 40% downside” (Nov. 26)
“Heads roll as BC Iron forced to cut costs amid weakest price in years” (Nov. 26) (Includes cutting three outside directors, one of whom was managing director when company was founded – another little guy getting hosed)
The iron ore business is not well and getting worse. Even the big guys are saying it. That being the case, now may not be the best time to pour money down the Quebec iron ore pits.
HOWEVER. At the end of October Nucor and two Japanese mills were in talks with Cliffs about investing in the Bloom Lake mine. Well, why would they want to do that? Because Nucor, like several other electric mills, want to increase the quality of their steel strip by using more virgin iron units and less scrap.
So how do you feed iron ore to an electric furnace? Well, you don’t. But you can make high quality DRI (direct reduced iron) from the ore, which works just fine in minimill furnaces. And lo and behold, Nucor even has their own DRI plants, one which started up this year in Louisiana, using a relatively new technology.
But why Bloom Lake?
Well, firstly, its ore can make the kind of high quality DRI Nucor needs. Secondly, if the old Phase II expansion to 13,5 mmt/year were to be completed (cost tag $1.2 Billion), then it could produce concentrate at as low as $50/mt. This does not include rail to Sept. Isles or pelletizing. Thirdly, the new partners would help
Bloom Lake by taking it out of the bleak aspects “who’s on first” in China.
An added thought. DRI normally uses pellets, which require high temperature firing. But it may be possible to use self-reducing extrusion briquettes and avoid the cost of building and operating a normal pellet plant. More potential economic
savings.
But wait, wait, there’s more! The above announcement was made Oct. 31. On Nov. 2, Nucor’s Louisiana DRI plant shut down, and will be down for at least 6 months. So what, after that the new plant just gets rolling again. Right?
Well, maybe not. Being a newer technology and with a considerably larger size, there could still be basic issues with the process. The problem that shut down the plant had been ongoing for three months. A “step too far” has been endemic in the alternative iron field. It has been systemic when scrap melters try to MAKE iron.
As the world turns.
Larry M. Southwick
Larry Southwick
Technical competence to judge value of iron ore mine
Regarding the pre-feasibility study Consolidated Thompson had performed on the Bloom Lake property, the following announcement is offered:
“Feb. 26, 2007) – Consolidated Thompson Iron Mines Limited (TSX
VENTURE:CLM) (“CLM” or “the Company”) is pleased to announce that it has received the final report of the Pre-Feasibility Study (“the Study”) on the expansion of the Bloom Lake Iron Ore project to a rate of production of 7.0 million tonnes of concentrate per year commencing late in 2008. The Pre-Feasibility study was completed by Breton Banville & Associates (“BBA”), an international engineering firm based in Montreal with expertise in mining and mineral processing. The principal author of the report is Mr. Andre Allaire, Eng., M.Eng., Ph.D. and Mr. Patrice Live, Eng, was responsible for the update of the mining and the financial evaluation. They are both qualified persons as defined in National Instrument 43-101.”
Further, check the remainder of the press release to read a summary of the findings of this study.
All this was done under Canadian regulations using the NI 43-101 procedures. It seems a bit churlish to assume that whatever was done by Consolidated Thompson and later Cliffs was by unqualified personnel without at least checking the facts. And the requirements for NI 43-101 might also be referenced. They are quite demanding and were developed to prevent misleading statements being made regarding mining property. These standards and personnel should be compared to those of other countries to determine if in any way Canada may be falling short.
Also, why not check with Breton Banville & Associates whether they have more than enough qualified professional engineers and geologists to properly assess the deposit? It might also be possible to learn what mining/geology computer software is used. I am sure Dr. Allaire can further and competently advise on this subject.
If anyone is having trouble in other countries obtaining qualified professional assistance determining size and yield of mining deposits and the associated processing plants, perhaps BB&E can be of assistance. They are a well known international engineering firm.
Larry M. Southwick
Larry Southwick
Bloom
Lake’s bald realities
Posted elsewhere regarding closing of Bloom Lake, someone suggested that “Cliff’s should gift or sell the project at a nominal price to the First Nations.” However, this move would not address the realities of Cliff’s choices, unsupportable operating costs or closing the mine, which itself will cost on the order of $700 million.
Unless a First Nation group can put the mine into production, this still leaves Cliffs with a substantial transportation penalty costs, a substantial part of the $700 Million. (A separate railway was built from Bloom Lake to the QNS&L railway, which then hauls concentrate to Sept Isle. There is also a separate railroad that then hauls concentrate to the loading docks at Pointe Noire. These branch line operations entail minimum service payments and “take or pay contracts”.)
Further, if the First Nations can’t operate the mine, then Cliffs still has to pay
closure costs, the rest of the $700 million (these include a variety of remediation efforts and water runoff control and treatment).
And still, what are the First Nations supposed to be able to do with a big mine
losing lots of money that Cliffs has not? Based on Cliffs Bloom Lake fact sheet, concentrate revenues at a $70 selling price do not appear to cover production costs.
There are about 600 employees, only 40 of whom are local, the rest fly-in/fly-out. Probably some are already First Nation. But unless the First Nations have a cadre of unemployed miners standing by, they will still then have to employ some additional workers. However many there are, they are still not local and have to be FI/FO. Employee costs are about $115,000 per, and presumably their transportation costs are separate.
These costs probably fall within Services and Supplies, which are nearly $500 million (presumably excluding concentrate rail haulage). Yet with production at 7 MT/yr, and a $70/MT price, the revenues are gone even before the miners are paid. So you can fly them in and fly them out, but they don’t take home paychecks. Hmmm.
Additional costs are perhaps small change, a bit over $ 20 million covering taxes,
permits, electric power and community support. So you can’t keep up permit payments, the regulators cometh. Next the tax man cometh. And before long the power man cometh to shut off the lights. Lastly, the locals lose their revenues. Being First Nation, there may be some diminution of these charges, but you get the idea.
There is still the rest of the story – why Bloom Lake got into trouble in the first
place. While their rail and sail (through Suez Canal) costs would be billed to the ore buyer, he has a cheaper alternative. This is sail from Western Australia to China, versus rail and sail from half way round the world. Not hard to understand the ore buyer’s decisions there.
Hard to see how deeding the facility to the First Nations will keep the mine open. In which case, Cliffs will have to formally close the mine (it is already shut down). Then all the FN’s will have is a hole in the ground surrounded by empty buildings, no milling and processing machinery, no haul trucks, no shovels, no load out contracts and so on. No one around to show them what to do with that iron mine at the bottom of that hole. All of which has been officially closed (and being
remediated).
Larry M. Southwick