Asian steel giants flexing muscle in Canada’s Labrador Trough

28th February 2014 By: Mariaan Webb - Creamer Media Senior Deputy Editor Online

Asian steel giants flexing muscle in Canada’s Labrador Trough

Photo by: Bloomberg

The booming commodity prices of the last decade have sparked considerable interest in the Labrador Trough – Canada’s main iron-ore district which extends through northern Quebec and Labrador – and while dozens of the junior developers that have flocked to the region are now struggling to finance their projects, international steel giants continue to flex their muscle in the region.

Steelmakers are increasingly investing in iron-ore mining assets and the resource of Canada’s main iron-ore production centre is a favourite among steel producers, which are seeking to reduce their reliance on the traditional centres, such as Brazil and Australia.

“Whereas many of the mining companies are struggling, we are seeing steelmakers from around the world, particularly Asia, investing in the Labrador Trough,” says Toronto-based analyst Adam Low, of Raymond James.

The Canadian iron-ore district has attracted investment from all the major Asian steel-producing countries.

“You have one of India’s largest steelmakers, China’s first- and third-largest steelmakers, the world’s largest steelmaker, one of Japan’s biggest trading companies, Korea’s largest steelmaker and Taiwan’s largest steelmaker all investing in the Labrador Trough. That’s pretty impressive,” he says in an interview with Mining Weekly.

Steel producers that have invested in Canada include India’s Tata Steel, Chinese firms Wuhan Iron and Steel and Heibei Iron and Steel Group (HBIS), Taiwan’s China Steel, Japan’s Mitsubishi and South Korea’s Posco.

Low states that Canada offers Asian steelmakers, which are seeking to diversify their sources of supply, political stability, good rail and port infrastructure, which can cater for the current production volumes and for some expanded volumes, as well as a higher quality product.

Whereas head grades for Canada’s iron in the ground are typically lower than those of the key producing regions, such as Brazil and Australia, where direct shipping ore (DSO) has a grade of 55% to 58%, the country’s iron-ore producers are concentrating their ores to pellets and concentrates with an iron content of 65% to 66%.

“Once the ore leaves Canada, it is competing with products from other regions of the world that are now of lower grade. Canada has to put more money in on an ope- rating cost basis to improve its product, but once it has created the product, the product is actually of higher quality,” he says.

Not only is the iron content higher, Canadian producers can also attach a premium to their product. Having to upgrade the iron-ore also means that producers are removing deleterious elements – predominantly phosphorus and alumina.

The Labrador Trough, which has been in operation since 1954, accounts for virtually all of Canada’s mining output and is home to mines owned by Iron Ore Company of Canada (IOC), ArcelorMittal, Cliffs Natural Resources, Labrador Iron Mines and a joint venture (JV) between Tata Steel and New Millennium.

The Trough churns out about 45-million tonnes a year of iron-ore concentrate or pellets, which Low expects to increase to about 75-million tonnes a year, when expansions at the two major mines, IOC and ArcelorMittal, as well as other projects are completed.

Numerous smaller players are developing projects in the area, but Low cautions that only the ones that are close to existing infrastructure are likely to advance in the current market, where mining finance is hard to come by.

The vast majority of Canada’s iron-ore production is exported from the country’s second-largest port, the Port of Sept-Îles. A series of railways connects the mines in the Trough to the port. ArcelorMittal exports its output through Port Cartier, which is linked to the company’s mines by its wholly owned Cartier Railway.

At one stage, Canada National Railway studied the feasibility of building a third major new railway line in northern Quebec, which would have linked some of the projects planned in the Labrador Trough to markets. However, the company shelved the study early last year, over uncertainty regarding the completion of various mining projects by junior companies, whose stock prices have hit multi-year lows.

Low believes the Tata Steel and New Millennium JV, known as Tata Steel Minerals Canada (TSMC), and Alderon Iron Ore are among the few new entrants that will be able to successfully bring on line new production capacity in the Trough. Both companies have access to existing infrastructure.

TSMC advanced its DSO project to production stage in 2013 and sent off its first shipment from the project to Tata Steel’s plants in September last year. Alderon is developing the Kami project, in which HBIS owns a 25% stake. The project was released from provincial environmental assessment in January.

Iron-ore prices will have to be “much higher and possibly retest historic highs of between $180/t and $190/t” to get the market interested enough to help finance many of the juniors that are hoping to develop projects in Canada.

“For most of them, it will just not get high enough in order to make them viable or to elicit interest from the investing public,” says Low, adding that there is a “huge” investor distaste for mining stocks at the moment.

Modest declines have been forecast for iron-ore prices in 2014, owing to new mine production expected from Australia, Brazil and other iron-ore producing countries, such as Canada.

Low expects the price of concentrate fines at 62% iron delivered into China to be priced at $115/t this year, compared with an average price of $135/t last year.

“The consensus among the market has been that iron-ore prices will have to fall, but iron-ore prices have also shown a great deal of resiliency and have been trending towards a pattern of staying stronger for longer,” he adds.

At current iron-ore prices, Low believes that many juniors will struggle. “I don’t think that a lot of them are going to make it,” he concludes.