Girt by Steel

Callabonna Resources (CUU)

THERE is broad agreement that despite what the collapse in iron ore prices might suggest, global steel production is going to grow at a compound annual rate of 2.5 to 3 per cent, out to at least 2030.

There’s nothing spectacular in that, other than taking on board that the growth rate points to an annual global output of a staggering 2.5 billion tonnes come 2030. The world is to be girt by steel.

A concern for the iron ore producers nevertheless remains. China is expected to account for about 1.1 billion tonnes of the global steel output, but how much of it is going to be accounted for by recycled steel?

China’s scrap use currently runs at only 15 per cent, well short of the 30-40 per cent in most other countries and massively short of the 80 per cent rate that the world’s best scrappers, the Americans, use to produce their annual steel needs.
Each tonne of scrap used by-passes the need for iron ore. So come 2030, will China’s scrap rate be at 30 per cent, 40 per cent, or something higher still?

It is something that keeps the iron ore producers awake at night, with the inevitable rise in China’s scrapping rate a potential demand killer in a market that is in surplus, and one that looks like staying that way for the foreseeable future.

The concerns about China’s scrapping rate are not shared by all in the steelmaking raw materials space. Manganese is a case in point.

Each unit of steel is 8-12 per cent manganese and there is no substitute for it in the steelmaking process. What’s more, manganese has to be added back to freshen up each tonne of recycled steel.

So while manganese consumption (about 26 million tonnes annually at the moment) remains a function of steel demand, manganese consumption is not threatened by China’s growth in scrapping in the same way that iron ore could be.

As a result, the best way to play the growth in steel production to 2.5 billion tonnes annually from 2030 could well be through gaining exposures to manganese.
BHP Billiton’s “NewCo” will make a big deal of that when it gets around to promoting the manganese assets that it is to pick up from the parent in its spin-out next year.
NewCo will also list with aluminium and nickel assets, diluting the manganese exposure.
Elsewhere, there is precious little pure manganese exposure to be had.

But a little thing called Callabonna Resources has caught the eye. And little is the operative word. It had a last sale at 1.8c a share for a market capitalisation of no more than $2 million.
Originally a uranium explorer, Callabonna has been taken under the wing by Broken Hill old boy Jeff Williams, which is kind of nice given the uranium hunt was out the back of Broken Hill in the Callabonna (geological) sub-basin.

Along with ex-BHP geologist Mike Raetz, Williams — a mining engineer of some fame because he led the development of both a mineral sands project and a gold mine in Senegal in a past life — have switched Callabonna’s focus to manganese with the Ansongo project in east Mali, West Africa.

West Africa is not the sort of place you would take the kids at the moment, and Mali itself still has security issues flowing from the 2012 coup, particularly in the northern regions where rebels were calling the shots until a French-led international force booted them out, sort of.
On a more positive note, there were democratic elections last year and the many existing mining operations in the country continued on through all the dramas. Mind you, a small production show at Ansongo was abandoned when the troubles in northern Mali were at their worst.

There are still bits and pieces of equipment lying around from that abandoned show, including today’s picture of a drill rig on top of one of the black manganiferous hills that stand some 100m above the desert plain in a cluster.
Cutting to the chase, Callabonna has cut a deal under which it can take up a 12.11 per cent interest in the permit, which covers the trend of manganese hills by spending $3.5m within three years.

In essence, Callabonna is picking up the running on the project, which has some serious steel groups, including Posco, as partners. It is assumed that if Ansongo lives up to its potential as a 500,000-1 million tonne-a-year producer of high-grade manganese ore, Callabonna would want a more meaningful share, ideally 51 per cent of the action.

It will be worth watching because high-grade manganese ore currently fetches more than $US210 a tonne in China, more in other markets. And when a group’s market cap is all of $2m, it does not take much to move the dial.