TORONTO (miningweekly.com) – The collapse of iron-ore pricing since the start of 2014 is making life difficult for smaller producers, as the major miners pushed out more of the steelmaking ingredient to leverage economies of scale in the low-price environment.

As a result of the down market, Eastern Canada-focused miner Labrador Iron Mines (LIM) on Friday said it would be forced to file for protection under the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act, should it fail in securing additional financing and completing a restructuring.

At December 31, LIM had a working capital deficit of $62.2-million compared with a working capital deficit of $8.7-million as at March 31. Current liabilities, consisting of accounts payable and accrued liabilities, finance lease obligations, rehabilitation provisions, a rail construction advance and deferred revenue totalled $65.7-million.

At the end of 2014, LIM also had a deferred revenue liability of $20.6-million, due to RBRG Gerald Metals, secured by a charge on certain stockpiles, but had no current or long-term bank debt.

LIM had current assets of $3.5-million, consisting of $2.1-million in unrestricted cash and cash equivalents, inventories of $100 000 and accounts receivable and prepaid expenses of $1.3-million.

The seasonal iron-ore producer needed to secure additional financing and complete financial restructuring in the near term to continue as a going concern.

LIM was currently negotiating a potential support arrangement with RBRG Gerald Metals, an existing creditor and offtake customer, that, if successful, was expected to provide working capital financing on a debtor-in-possession basis to fund LIM's ongoing corporate and standby activities and, as a separate component, potential future project development financing.

In pursuing longer-term strategic initiatives aimed at reducing its operating costs and revenue deductions, LIM was considering only dry processing its direct shipping ore projects, maintaining product quality, improving recoveries, alternative port arrangements at Sept-Îles, sharing facilities with other companies and developing alternative destination markets with lower freight costs for LIM's products.

In response to weak market conditions, the company had to take some hard decisions to preserve the long-term future of its iron-ore assets and operations.

LIM had significantly reduced staff levels, implemented pay cuts and waived directors' fees. All nonessential capital expenditure had been deferred and no significant exploration or development activity was currently being undertaken, other than on the Howse project, which is currently fully funded by Tata Steel Minerals Canada.

LIM was currently seeking to negotiate revised commercial terms with its major contractors and suppliers.

IRON-ORE COLLAPSE
The price for 62% grade iron-ore had declined more than 50% to about $60/t currently, compared with an average price of $135/t in 2013.

Simultaneously, iron-ore exports from Australia to China rose significantly. The world's ‘big four’ iron-ore producers significantly lifted output production in 2014. Vale, Rio Tinto, BHP Billiton and Fortescue together produced 15% more iron-ore last year, adding about 130-million tonnes of product to the market and increasing the size of port inventories in China to more than 100-million tonnes.

The immediate market outlook for iron-ore was uncertain. Robust steel production and iron-ore demand from China had underpinned the iron-ore price over the past seven years. Despite an economic slowdown, it seemed that Chinese steel output continued to increase and China would need to import more iron-ore to replace reduced domestic output, which should help iron-ore price stability, LIM advised.

Owing to its financial condition, LIM expected to no longer meet the minimum continuing listing criteria of the TSX and to save the substantial listing costs and maintain restructuring flexibility, the company had filed an application to voluntarily delist its shares and warrants from the TSX, effective immediately. LIM would seek a new stock exchange listing on either the TSX or an alternative stock exchange at the appropriate time. 

The company did not undertake any mining, processing or railing activities during the quarter or nine months ended December 31.

LIM was currently focused on the development of the Houston project to be in the position to start mining when market conditions improved. This was subject to completing a financing and negotiating major contracts.

The development plan for Houston was relatively simple. The significant component consisted of constructing an 8 km gravel road, including a bridge over a river crossing. The new road would connect to an existing road near the Redmond mine that led to the Silver Yards facility. The overall one-way distance by road from Houston to Silver Yards was about 20 km.

Including initial mine development, the capital investment to develop the Houston mine was expected to be about $20-million.

When in full production, the Houston/Malcolm deposits were expected to produce about two-million tonnes to three-million tonnes a year, with an initial mine life of eight to ten years.