Despite the current rally in demand for iron-ore, the current price is not sustainable, as the market still requires restructuring on the supply side to support the higher price, says UK-headquartered online data, analysis and advisory services provider Timetric.

Timetric senior analyst Cliff Smee notes that too many high-cost operators are putting downward pressure on prices. “Many of these mines are terribly inefficient and low grade; however, they are owned by integrated Chinese steel manufacturers and, thus, have not been closed yet, as they are shielded from market prices.”

The company’s Mining Intelligence Centre (MIC) published its global iron-ore cost curve in June, providing fresh insight into the iron-ore industry. MIC provides critical, forward-looking market intelligence to support the company’s clients’ investment strategies and customer targeting. Delivering information on projects, buying behaviour, commodities and markets, the service enables clients to identify new opportunities, predict developments in their markets and adapt to customers’ future needs, states Smee.

He tells Mining Weekly that the benchmark iron-ore price outperformed expectations in the March 2016 quarter, averaging $48/t, compared with the $47/t average in the December 2015 quarter. He attributes this to improved sentiment about steel demand in China and some signs of high-cost capacity closures, which were further bolstered by less aggressive supply expansion expectations from the major iron-ore producers in Australia and Brazil.

Operating-cost Transparency
Smee says the iron-ore industry remains “very opaque” with regard to mine level costs.

In comparison, gold producers have been reporting their individual mine costs since the 1990s, when a cash-cost standard was introduced by Washington DC-based international industry association the Gold Institute and adopted by the industry. Iron-ore producers have not adopted such a standard, with Smee adding that, while they might provide guidance on company-wide operating costs, they do not provide a breakdown at mine-site level.

“This lack of mine-level reporting in the iron-ore industry makes comparison of individual assets virtually impossible . . . Timetric is uncovering a lot of the mystery about cost curves and enabling all companies in the mining sector to gain access to individual operating costs. Iron-ore producers have often been reluctant to divulge their individual mining costs, but Timetric’s cost-estimation models can provide much more transparency,” he asserts.

Company research into iron-ore mine costs entailed the development of a comprehensive database of operations through primary research over two years. This involved Timetric analysts contacting each mine site to gather specific details on, for example, heavy mobile equipment, strip ratios, recovery yields and mine plans. Once verified, the data obtained was used to develop proprietary cost-estimation models.

The company’s cost estimates provide a breakdown of mining cash costs for every ton produced by individual iron-ore operations, as well as production levels by company and country. The analysis covers 70 iron-ore operations, accounting for more than 1 300-million tons of iron-ore production globally – the majority of which is export production. Thirty companies were included in the analysis, ranging from large producers to one-mine companies and large steel producers.

Economic Feasibility
Significantly, the analysis further shows that low strip ratios ensure that most operations have low mining costs for every ton produced and are a powerful indictor of whether an iron-ore deposit is economically feasible. Smee explains that strip ratios refer to the ratio of the volume of overburden (or waste material) required to be handled to extract a volume of ore.

Globally, iron-ore strip ratios are on average greater than 2:1. Mining 1 m3 of ore will thus require mining more than 2 m3 of waste rock. However, Smee highlights that, for Anglo-Australian miner BHP Billiton, British-Australian miner Rio Tinto and Brazilian miner Vale, the strip ratios are close to 1:1. “This means that these producers have to remove only half the overburden to extract the same amount of iron-ore, hence, greatly reducing their operating costs.”

According to Timetric’s analysis, Rio Tinto, Vale and BHP Billiton account for the largest share of world production and also have the lowest-cost operations. Smee explains that these producers have operations with the best deposits, with lower strip ratios and a high-grade run-of-mine ore. Further, these producers have significantly ramped up production and have integrated port and rail facilities, which enable them to achieve significant economies of scale that are beyond the reach of any small producer, he notes.

The analysis also indicates that BHP Billiton’s Yandi iron-ore mine, in the Pilbara region of Western Australia, is the lowest-cost operation in the world, with an estimated free-on-board cost of $17.65/t in 2015, followed by the company’s Mesa iron-ore mine, also in the Pilbara. As hematite operations, both mines predominantly produce lumps and fines, both of which are direct shipping ores that decrease processing costs.

With regard to the South African iron-ore market, Smee explains that, unfortunately, the country is unable to compete against operations in Brazil and Australia. “While South African iron-ore is renowned for its quality, its operations have very high strip ratios. South Africa also suffers from a shipping-freight disadvantage, with higher freight rates than Australia when exporting to China,” he says.

Timetric will release its global coal cost curve later this year and Smee notes that this research is insightful amid an era when major producers want to sell so many coal and iron-ore operations.

“Timetric provides mine-level research with the aim of helping all mining market participants understand the industry at a micro and . . . macro level,” Smee concludes.