magnetite

Underlying force in iron ore
By Richard Roberts, 7 April 2008
THE ‘new force in iron ore’ arrived this month, with an Australian-flag waving Fortescue Metals Group (FMG) chief Andrew Forrest leading the charge – literally (see picture left) – to break Western Australia’s iron ore duopoly of BHP Billiton and Rio Tinto. But slightly behind FMG another new force is emerging. It’s undeniable, though as with FMG there have been plenty of doubts raised within Australia about the bona fides of WA magnetite projects.

Nevertheless, the magnetite bandwagon is on the move out west.

For the project developers most likely to follow CITIC Pacific and China Metallurgical Group Corporation (Sino Iron) into production, the `wagon’ won’t have far to go. They are all using close proximity to coastal shipping ports as a key selling point, with the lack of heavy transport infrastructure investment seen as a key capital expenditure exchange item for costly beneficiation of lower-grade iron ore into higher quality material, mainly concentrate.

Gindalbie, CITIC/CMGC neighbour Australasian Resources, Cape Lambert Iron, Grange Resources, Atlas Iron and others have all been eager to portray proposed multi-billion-dollar magnetite iron ore projects in WA as being competitive with the major hematite ore production expansions of BHPB and Rio Tinto, and FMG’s significant new Cloud Break operation, though transparency in cost projections and comparisons has been somewhat lacking.

The magnetite brigade is just as keen to point out the competitive advantages of WA magnetite over current and planned hematite iron ore production out of Brazil and Africa, and the possible $A10 billion or so of investment in WA magnetite projects by Chinese and Japanese companies seems to support this view. It is a massive concentration of investment, if it comes through, that is testament moreover to a perceived strategic emphasis the Chinese are putting on Australian resources.

And it is (again potentially) direct investment in physical assets – mines and production infrastructure - that makes the $A1.2 billion Sinosteel Corporation bid for Midwest Corporation currently generating a lot of foreign investment questions and increasingly emotive noise, look like a sideshow. To an observer watching from the sidelines, an obvious question that comes to mind is: why try to bang down the front door when the back gate is seemingly wide open?

It appears China is prepared to try both. Either way, it is clear investments are being made, and contemplated, with long-term strategic objectives in mind. With the cost of new projects naturally rising on the back of climbing raw material, energy, labour and finance costs, it is also probably no surprise to anyone that the Chinese believe current development costs are worth locking in given certain future escalation.

“It is our firm view at CITIC Pacific Mining that we are on a journey that has the potential to forge the way towards an enduring partnership between China and Australia that is more than commercial, more than personal, and much broader than what could be achieved within a single business or a single country,” CITIC Pacific Mining CEO Barry Fitzgerald said at a Perth dinner in February this year.

He proceeded to outline a project that, despite being almost invisible in Australia (and for which more than $US150 million of mining equipment is currently arriving on site), could ultimately represent the largest single Chinese investment in an Australian mining project.

“The project will mine magnetite, a form of iron ore not previously mined in WA, unlike hematite iron ore which has been mined for many years,” Fitzgerald said.

“The extracted material will be processed onshore and exported via a new port to be built by CITIC Pacific Mining near our mine site. Once production is underway, we plan to export 27.6 million tonnes per annum of a mix of magnetite concentrate and pellets for the next 25 years.”

At the end of last month, CITIC/CMGC awarded Vienna-headquartered Austrian Energy & Environment AG a contract to design and build a 450MW combined cycle gas fired power plant at Cape Preston, expected to start producing electricity next year. That’s a generation capacity equivalent to the current North West Integrated System. Fitzgerald said a 51-gigalitre water desalination plant would also be built. Port, mine, magnetite concentrator, slurry pipeline and pellet plant could be operational next year, though 2010 seems more likely.

Fitzgerald said product from Cape Preston would be used in CITIC Pacific’s three steel mills in China, where it was the country’s largest specialist steel maker, as well as other Chinese steel mills.

“Its goal in pursuing the Sino Iron project is to work in partnership with Australia to meet China’s growing demand for steel through a reliable source of high-quality iron ore,” Fitzgerald said. “But the partnerships established ... will also deliver substantial benefits for Australia [including] development of a large-scale magnetite mining and processing industry, in itself a significant event that signals that magnetite is a very valuable Australian resource. The benefits are magnified through the downstream processing of the magnetite resource here in WA, which more than doubles the economic benefit to Australia compared to direct shipping of hematite iron ore.”

Like Sino Iron/Cape Preston, Australasian’s Balmoral South resource is close to the coast (23km from the Indian Ocean), as is Atlas Iron’s Pardoo magnetite deposit (70km from Port Hedland), Cape Lambert (5km from the coast and 10km from Rio Tinto’s Cape Lambert port facilities), and Grange (100km from Albany Port in southern WA).

Andy Caruso, managing director of Australasian, told HighGrade the company’s planned $US2.1 billion Balmoral South project adjoining Sino Iron was only 30km from the coast and therefore a low-capital intensity transport solution – a conveyor – could be used. However, despite the advantage the company and its Chinese partner Shougang Corporation appear to enjoy over rivals, Caruso doesn’t believe transport costs will make or break WA magnetite projects.

“Magnetite projects with relatively higher transport costs may still be viable if they have other attractive fundamentals, such as a lower mining strip ratio, simple beneficiation characteristics or good access to power,” he said.

“Transport costs are important [but] they form a part of the overall cost for the project and in some cases may represent less than 10-20% of total costs. The transport solution and cost is just another of the key elements to be considered in the overall project evaluation [and] therefore rail transport is not necessarily a basis alone to dismiss the overall merits of a project.

“As I’ve said, rating individual projects on their own merits is more important and what matters is the amount of mineable iron units in the ground, the cost to get those iron units onto a ship, and the ability to fund the project to start.

“The Chinese are taking a longer term, strategic view in my opinion to ensure iron ore supply to fuel their requirements for modernisation and urbanisation over the next 50 years. This may influence decisions about investing in individual projects, however, the primary determinant you would think is the cost competitiveness and value of the project and its products in relation to available alternatives.

“Currently, Australian producers of iron ore on a dollar-per-tonne-of-iron basis are highly attractive against Brazilian sources [due mainly to the freight differential], Indian sources [exports attracting internal tax], and Chinese internal sources [low grade, high mining costs]. Predictions suggest that China’s magnetite imports will increase on the basis of falling domestic supply and grade, and investment in overseas magnetite projects.”

Caruso and others wouldn’t be drawn on direct comparisons between front-running WA magnetite projects. However, in terms of being next past the start-up post, Gindalbie has its 50% joint venture partner, China’s Anshan Iron & Steel Group Corporation (AnSteel) locked in and has finalised a subscription agreement with AnSteel for the $A534 million equity funding component of its proposed $A1.8 billion project. Gindalbie/AnSteel are targeting 2010 for start-up of an operation producing 8Mtpa magnetite concentrate for export to a new AnSteel pellet plant in China.

Stockbroker BBY said in a recent report Karara’s biggest hurdle was the WA Mid West region’s poor infrastructure, including rail and port capacity “which is hampering the development of key resource projects in the region”.

“Karara project operating costs FOB Geraldton and before palletisation are forecast at $A52.20/t of which rail and port costs represent 19%,” BBY said. The JV partners planned to barge concentrate to Cape-size ships outside the Port of Geraldton, though a new port at Oakajee would provide a second option. “It is our view that logistics is the key operating risk for the project,” the broker said.

A 1.43 billion tonne indicated and inferred resource grading 36.3% Fe, and 497Mt probable ore reserve at the same grade, low mine strip ratio, projected magnetite concentrate grade of 68.2% Fe with low impurities, and excellent palletisation characteristics are among the positives for Karara, with Dixon picking up his counterpart’s line about individual projects being judged on their merits and adding that he believed Karara stacked up well against WA and other hematite iron ore projects.

“There is a large amount of planned hematite development occurring in the world today, however, what we are seeing is declining grades of hematite,” he told HighGrade.

“Basically the best stuff has mostly been mined and traditional 63-64% hematites are making way for those with Fe grades in the high-50s. Hematites with lower Fe grades naturally contain more contaminants – and contaminants are the enemy of the steel mills.

“What this means is that steel mills buying lower-grade hematites also require higher grade/lower contaminant materials, such as magnetite concentrate or pellets, to lift the overall grade and produce the type of quality steel that is required for global consumption. Magnetite concentrate is basically a manufactured product.”

Karara concentrate at 68.2% Fe with low contaminants, including 0.01% phosphorous, compared favourably with a Rio Tinto Pilbara ore grading 62.5% Fe and 0.1% P, and FMG’s 60% Fe/0.5% P.

“Low phos levels are extremely important in making quality steel because high levels make the steel brittle,” Dixon said. “Magnetite concentrate does cost more to produce. In Karara’s case it is approximately $A12/tonne. However, because we produce a premium product the steel mills will pay a 10% premium over the fines price for our concentrate.

“It is also a very consistent product. While hematite grades and contaminants vary over time, Gindalbie will produce a product with the same grade and contaminant specifications for the life of the project, again making it an extremely attractive product for steel mills.

“Another way to look at it is to just talk Fe units and cost and compare our project to a hematite project a further 400km inland. Rail costs approximately 3c/tonne/km. Therefore the imaginary hematite project has an additional $12/t operating costs. However, he puts a 60% Fe product on the rail line, and at the other end (after paying $12/t) it is still grading 60%. Gindalbie pays an extra $12/t to process, but we put a 36% Fe product in at the start, and end up with a 68% Fe product.”

Former Hamersley (Rio Tinto) executive and now executive chairman of Cape Lambert Iron Ore, Ian Burston said natural-gas fired pelletisation of iron in Australia made more sense in an era when steel producers wanted to reduce their energy requirements for cost and environmental reasons.

“What we are doing is taking the energy cost of removing alumina from hematite from the steel producers and giving them a high iron content product which requires them to use less energy to process into steel. For them it is highly attractive,” he said last month.

Cape Lambert, which is trying to sell its namesake deposit (1.56Bt grading 31.2% Fe/0.03% P) to China Metallurgical Group Corp for $A400 million, believes the resource can support a 15Mtpa ($US1.5 billion) magnetite concentrate operation for at least 20 years. London-based broker to Cape Lambert, Collins Stewart said in a February research note CMGC was sufficiently financed and well position to “execute this national priority".

“The recent iron ore price negotiations have seen increases of 65-71% year-on-year and we suspect the Chinese authorities are anxious to secure independent supplies,” it said.

Australasian, which expects Shougang to decide on providing finance for Balmoral South and taking up a 50% stake by the middle of this year (see HighGrade March 24-31 edition), hasn’t decided whether to follow Gindalbie/AnSteel’s lead in shipping concentrate to China for pellet production. Caruso said it was too early to comment on the cap-ex/op-ex cost differential between making pellets in WA versus China. Switching pellet production to China would mean 12Mtpa of magnetite concentrate would be exported from Balmoral South.

Grange Resources is similarly planning to send concentrate from its Southdown project via a 100km slurry pipeline to Albany, from where it would be shipped in Cape-size vessels to a proposed new pellet plant at Kemaman in Malaysia.

Grange has engaged Japan’s Sojitz – a company with long-term iron pellet trading relationships with steel producers in Asia and the Middle East – as its prospective 30% JV partner in the $US1.37 billion Southdown/Kemaman project, with 2010 being targeted as the start-up period for a 6.6Mtpa (69% Fe) magnetite concentrate plant and 7Mtpa pellet plant. A previous study had the project’s FOB (Kemaman) operating cost for iron ore pellets as $US42.90/t.

Southdown has 479.1Mt of indicated/inferred resources grading 37.3% Fe, with plenty of scope for resource expansion.

Grange managing director and CEO Russell Clark told a Perth iron ore conference last month Brazilian iron ore pellet market leader SAMARCO expected global seaborne pellet demand to double by 2015 to 200Mtpa. He said no Australian iron ore was currently sold into Indonesia, Malaysia or the Gulf region, which were being targeted by Grange/Sojitz for niche supply of high-grade (direct reduction, or DR grade) pellets.

Sojitz had reported a 220% increase in pellet demand in SE Asia/Gulf region between 2006 and 2008, and was predicting a further 70% rise by 2012.

“Demand in this market is growing much faster than the China iron ore market,” Clark said.

He said Grange’s shipping costs would be in the order of $US15/t, compared with current spot market freight charges between Brazil and China of more than $US100/t. “Kemaman has distinct freight advantages over South American pellet producers.”